Click here to watch intro video (<2 minutes)
Only a few things in life are guaranteed. The first is, if you have kids, you will never sleep again. Sorry parents of babies, you lose a different kind of sleep when they are older. The second is that you will eventually take your final breath. Death is a fact of life. The third is you will pay taxes. Taxes are a key concern every election. Will they go up? Will they go down? When will they go up or down? How will I be affected?
The 2020 presidential election season has been fraught with worry about taxes, and here’s a brief side-by-side comparison of the ‘Big Four’ taxes, and each candidate’s proposal:
The debate usually starts with the impact to paychecks, but focuses only on the highest marginal rate, not the weighted average to which individuals’ earnings will be subject.
A simple, hypothetical example: If you earn $100,000, and the hypothetical tax schedule is 20% up to $50,000 and 30% from $50,001 up to $100,000, then the weighted-average tax rate you actually pay is 25%—NOT 30%. Earnings aren’t taxed at the highest marginal rate in full, because a portion
will be taxed at the lower rate first.
So, while a Biden victory would increase the highest marginal tax rate (timing for the increase is TBD though, more on that later…), all earnings wouldn’t be subject to this rate.
How bad is 39.6%?
Before 1980, the highest average marginal personal tax rate, was 75%! Since 1980, the average has been 39.75%. So, historically speaking, an incremental increase to a high of 39.6 is still (just slightly) below average for the past 40 years.
To reiterate our stance on taxes, we believe an increase is imminent, regardless of who is elected in November. Given the income needed to service our country’s ballooning debt, increased tax revenues will be necessary. The good news is that there is long-term precedent for economic growth and strength, even if rates must increase to pre-1980s levels.
Tax rate increase don’t equate to market declines!
As we noted in our recent blog (you read it, right...mom?), an increase in the highest marginal tax rate- even a dramatic increase- does not spell doom for your investment portfolio. After WWII, the corporate tax rate swelled to 50%, and the highest marginal rate for personal income spiked above 90%, yet the S&P 500® still returned a hefty 467.40% cumulatively during the 1950s.
Tax increase timing
The major elements of the Tax Cuts and Jobs Act passed by the Trump Administration in 2017 is set to sunset in 2025. With a Trump reelection, this expiration date is expected to sustain. With a Biden win, changes prior to 2025 are expected, but it will depend on the economy’s performance. Biden’s advisors are likely to push for no changes to tax rates if the economic recovery from COVID is stalled.
The bottom line is that Presidents come and go, and tax rates go up and down. And, the American motivation to wake up every morning, go to work, save, and spend on the people and things you love will persist. Keep a balanced perspective on the tax discussion. You should always work to reduce your tax bill within the context of your financial plan. It’s one of the key elements you can control! If you’re not already doing this, call us! We can help!
Sources: taxfoundation.org, smartasset.com, wsj.com, irs.gov, Zacks Investment Management “What Does the Election Mean for U.S. Markets?”
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. 994 Group does not offer legal or tax advice. Please consult your CPA or attorney regarding your individual circumstance.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends
Index definition: S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.
Services offered through 994 Group, a Registered Investment Adviser. This website is solely for informational purposes. Advisory or Financial Planning services are only offered to clients or prospective clients where 994 Group and its representatives are properly licensed or exempt from licensure. Past performance provides no guarantee of future returns. Investing involves risk and potential loss of principal capital. 994 Group is a DBA of MJR Financial LLC. No advice may be rendered by 994 Group unless a client service agreement is in place.
994 Group does not provide tax or legal advice. This material is prepared for informational purposes and is not intended to provide or be relied upon for tax or legal advice. Consult your tax or legal professional before guidance.
994 Group occasionally provides links to websites produced by other providers or industry related material. Accessing these links may direct you away from 994Group.com. 994 Group is not responsible for errors or omissions in the material on third party websites, and does not necessarily endorse all information provided. Users who access third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume the corresponding risk.