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How Do We Process The Next Surprise?

By January 7, 2021May 26th, 2021No Comments

By now you are undoubtedly aware of the unprecedented turmoil in our nation’s capital related to the election. These events are troubling, and clearly, we as a nation will be grappling with the repercussions for some time. Somehow we need to come back together as Americans.

Regardless of your political affiliation, the results of the election are final. The process of governing and legislating will resume. And with the change in administration, we may very well see tax legislation introduced that may affect you. Accordingly, we believe it’s important to share our views on how the new leadership in Washington may affect you and your household on a financial level.

As of January 20th, the day Joe Biden is to be sworn in as president, Democrats will control not just the presidency and House of Representatives, but – after their surprising sweep of both Georgia runoff elections – the Senate as well. Democrats’ control of Washington for the first time since 2011 is important because it will ease the passage of some of Biden’s legislative agenda.

In terms of what that may mean for your personal wealth, we believe the answer is two-fold. In the near term, little is likely to change. The Biden administration is expected to prioritize pandemic relief and economic stimulus in its first year.

But Biden’s agenda also includes raising taxes on corporations and on individuals with more than $400,000 of annual income and slashing estate tax exemptions. All of that is potentially concerning for business owners, investors, and wealthy households. But there are two mitigating factors.

First, it’s widely assumed that tax reform isn’t an immediate priority for Biden and the Democrats. Raising taxes in the midst of a fragile economic recovery is considered to be politically risky.

Second, while Democrats will control Washington, they will do so by the thinnest of margins. Once Raphael Warnock and Jon Ossoff, the victors in Georgia’s Senate race, are seated, the chamber will be evenly split between Democrats and Republicans, with 50 seats each. Democrats will rely on incoming Vice President Kamala Harris to cast tiebreaking votes. The bottom line: It’s likely that inter-party compromise will be required to pass any major legislation, which could moderate tax increases.

It is also worth noting that the Trump administration and the Republican party—immediately after the 2017 inauguration—controlled the White House, the Senate, and the House of Representatives. Even with this level of influence, it still took Trump until December of 2017 to effect the Tax Cuts and Jobs Act of 2017.

So what should you do now? As an investor, the answer may very well be to do nothing. Basing investment decisions on changing headlines has a rich history of backfiring since no one knows precisely how markets will play out. If you have a solid financial plan and maintain a long-term, diversified investment portfolio that’s based on the plan, you’re likely in good shape. Naturally, you’ll want to check in with your advisor for regular portfolio reviews.

And as always, it’s critical to control fees by using low-fee investments, avoiding frequent trading, and building a tax-efficient portfolio. It’s not what you earn, it’s what you keep.

We encourage you to consult with your advisor and your accountant to ensure you’re making smart decisions from a tax perspective. And remember that creating and updating your estate plan is critical to keeping as much wealth as possible within your family over time. Even if Biden’s suggested plan to reduce the estate tax exemption does not come to fruition, the estate tax exemption increase is due to sunset at the end of 2025.

It’s been said that uncertainty is life’s only certainty. The past year has borne that out in spades. At AdvicePeriod, we continue to believe in our country and the character and ingenuity of its people. The future is full of opportunity, and it’s ours to harness. Please reach out to the AdvicePeriod team if there’s any way we can help.