The ‘ol Politics-Finance 2-step.
Headline: A Financial Two-step Follows any Political shuffle.
Date:11/181/2020
Body: I found a very interesting article on Yahoo Finance. I know that I promised to not get political, but, in this case, several facts are facts and should be clearly stated, because, these facts have consequences. The link is below:
No matter where you sit on the political spectrum, there is a seismic change taking place in DC, and these shocks are transmitted all across the country. Just as night always follows day, when there are huge political tremors, the financial aftershocks will follow. Most of the experts cited in this article seem to suggest that the changes will be mostly in the regulations enforced by the IRS and an increase in staffing at the agency. An increase in audits, especially concerning higher-income individuals seems a likely outcome.
Regulation Changes are also possible
The pandemic has been terrible by any metric, but, it has also underscored the need to have some supply chain capability for vital equipment (such as PPE) within the U.S. So, some experts expect new regulations to promote the production of such supplies by domestic companies. The experts in the article also suggest the likelihood of enhancing both the Child Tax Credit and the Dependent Care Credit, both aimed at improving the lives of people in the lower SES strata of our society.
There are other probable changes too
Capital gain tax
Most normal households (like mine and likely yours) make the lion’s share of their income by the sweat of the brow, and the occasional, “Ow” at a job. But, higher-income individuals and families, though they have good jobs, make a lot of their money on capital gains. (To simplify, think of buying and selling stock.) The attractive feature of this is that there is a preferential tax rate for capital gains that is appreciably lower than the taxation on “ordinary income.” So, there appears to be a desire of the President-elect to alter the tax rate on capital gains for people over a certain threshold of income in such a way as to make it more equivalent to ordinary income. This proposed change could be argued as either “good” or “bad” based upon your point of view. I prefer to just see it as a reality, and ask how the behavior of taxpayers will change. And, I think I can see stocks that offer dividends becoming even more popular: This might be an investment opportunity.
Charitable donations
There is some talk that the President-Elect will change the tax attributes related to charitable giving. Under current tax law (allowing deduction of income from AGI), you are effectively “earning” a 37% tax benefit if you donate under rules promulgated now. Insiders expect that the President-elect might be thinking about changing the deduction to 28% for high-income taxpayers. Would this change be good or bad? I don’t know, but I can make a few educated guesses. The likely effects I can think of, are:
- In the near future, in order to obtain the maximum deduction possible, high-income individuals may be motivated to accelerate their charitable giving.
- In the longer-term, because they derive less benefit, high-income individuals might be less motivated to make charitable donations to not-for-profit causes and organizations.
Estate Taxes
Sorry, most people dislike talking about taxes, and even fewer want to think about death. But, with the estate tax, these two go hand in hand. Estate tax is the tax charged to the estate after a taxpayer passes. You have likely never thought about this tax, because, as of this writing, there is an $11.58 Million exemption on the federal estate tax. Reportedly, the President-elect is considering changing this and decreasing the exemption down to $3.5 Million. (I would like to emphasize here, that this is NOT a tax-planning strategy being advocated. Offing your elder relative early for tax-planning purposes is both ghastly and illegal.)
Please note that the states are all different. Many have an inheritance tax where the donee is taxed when he/she receives the asset. So, it is indeed possible that there is no Federal Tax Liability, when there is still a state-level tax liability.
REFERENCES
5 Ways Joe Biden’s Presidency Will Affect Your Money – and How to Act Now | NextAdvisor with TIME
It’s a tough year for year-end tax planning – Journal of Accountancy
What You Need to Know About Your 2020 Taxes (investopedia.com)
Explaining Biden’s Tax Plan (investopedia.com)
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.