- Tax Planning
|  by: Waxman, Neil
In Part 1 of this blog, I covered the probability of wholesale tax code revisions occurring, and proposed increases in personal income tax. Now, let’s look at capital gains tax: the current top long-term capital gains tax rate is 20% plus the 3.8% Medicare tax added for single households with more than $441,451 in taxable income ($496,601 for married-filing-jointly). President- elect Biden’s proposal would only effect those with incomes over $1M: instead of getting a preferential tax rate of 2o% plus the 3.8% Medicare tax they would instead be taxed at 39.6%.
Mr. Biden’s proposal raises taxes on higher income households both in life and at death: in his proposal, for those who die with appreciated assets, their estates would not receive a step up in basis and would consequently owe income tax on the gains in addition to estate taxes. It remains to be seen whether there will be a credit to estate taxes for income taxes paid on gains. By the way, the same taxation would apply to lifetime gifts, too. (with possibly a $100K exclusion plus principal residence up to $5o0K). The loss of step up in basis has been in numerous proposals over the years and has never gathered much steam.
Some of the other main points of the Biden plan are as follows:
- Temporarily expand the child tax credit to $3,000 from $2,000 and add another $600 for children under age 6. He is also proposing targeted tax incentives for caregivers, child-care expenses, and first-time home buyers.
- Because the individual income tax is progressive, the value of a tax deduction rises as income increases. Biden’s proposal to offer a flat 26 percent tax credit for retirement contributions seeks to equalize this treatment.
- End tax deferral on like-kind exchanges for real estate transactions. I believe this has a very slim chance of gaining traction.
- Reinstatement of Pease limitation which reduces the value of itemized deductions on Schedule A by 3% for, in this case, incomes over $400K which may not be a big issue for most unless the next thing happens.
- While not in his proposal, Mr. Biden is considering repealing the $10,000 cap on the state and local tax deduction, a move that would be a tax cut for high-income households, particularly in high-tax states such as New York and California. Recently, a campaign aide said Mr. Biden would work with Congress to address this issue.
- On the spending/distributional front, much of these tax increases would be directed to some of Biden’s primary initiatives, starting with a new stimulus package, green technology, infrastructure, climate change, education, and child-care. Some think green technology can lift our economy in the same fashion as internet/technology did in the 90’s.
Political Parties and the Markets
Last, I will leave you with some perspective on political party’s effect on the markets. This can be summarized very succinctly: which party is in the White House or the one which has control over the Senate or the House or even if one party or the other has control of all three has seldom mattered.
According to one analysis, from 1926 through 2019, the S&P 500 produced an attractive average annual return of 9.12% under a Republican presidency. Under a Democratic presidency, the result was even better with a 14.94% return. The Dems advantage can likely be traced in part to timing: Harry Truman’s presidency post WWII, Bill Clinton’s ride on the technology wave of the ‘90’s and Barack Obama’s last 7 years of market recovery post-great recession. Taken on whole and for all the cocktail party conversation which takes place about it, who sits in what seat has made little to no difference.
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