What to Know About Your Finances and the Biden Administration
The ushering in of a new presidential administration can have a variety of effects on the investing landscape. This is particularly true when a different party takes control of the executive branch: the markets often hold their breath to see if the policy promises made on the campaign trail show early signs of coming to fruition.
Investors may also wonder what the portfolio implications are when a new president takes office. When president-elect Joe Biden assumes the oath on January 20, many might ask what his incoming administration will mean for their personal finances and investments. Much was made of the proposed changes to tax rates that Biden’s administration would pursue, particularly as they pertain to those making more than $400,000 in income per year. It’s also more likely that substantial policy changes will be pushed through with a Democratic-controlled Congress.
Here’s what you need to know about how the incoming Biden administration may impact your income, investments, taxes, and major life purchases.
Potential Changes to the Tax Code
Throughout the campaign, Biden made references to several changes to the tax code that he would pursue as president. Chief among them is a repeal of the tax cuts observed under the current Trump administration. For high-income earners, currently estimated to be those making $400,000 a year or more, the federal income tax rate would return to its previous rate of 39.6%, up from the current rate of 37%.
Social security taxes could also see an increase under the new administration. Those who make $400,000 or more per year could see an additional 6.2% in Social Security payroll taxes for both employers and employees. Those making $137,000 to $400,000 would not see an increase, however.
Income and payroll taxes aren’t the only changes one could anticipate from the incoming administration. Biden is expected to propose changes to tax laws regarding estate and wealth transfer. The incoming administration is said to be eyeing changes to current estate tax exemption, which would be cut by about half. Currently, the estate tax exemption is $11.7 million for individual filers and $23.4 million for married couples filing jointly. This change is set to last through 2025, although the Biden administration could either pursue legislation that reinstates the previous $5 million rate earlier than 2025 or let it lapse if elected to a second term in 2024.
There is also talk of a change to the “step-up in basis” rule that applies to taxes on inherited assets. Put simply, the current rule minimizes capital gains taxes on inherited assets. The basis of the item changes to the current fair market value price once inherited, which narrows the gap between the existing price of the good and any increase in value it receives once in the hands of the inheritor. Without the “step-up in basis” rule, the inheritor would be liable for any capital gains taxes that could come from the difference in original versus fair market value. Changes to estate tax exemptions and the step-up in basis rule could have major ramifications for estate planning and gifting.
Investing During the Biden Administration
One of the more common concerns, when a new administration comes to power, is its potential effects on the markets. Wall Street reacted favorably to Biden’s win once the race was called on November 7. The election results, in tandem with news of potentially viable COVID-19 vaccines in trial, created a record day for the S&P 500 as it closed at 3,580.84.
Early market reactions to a new administration taking power isn’t enough to invest on, however. There are plenty of other ramifications that Biden administration policies could have on the investing landscape for the next four years. After passing a much-debated second stimulus pandemic package (Consolidated Appropriations Act, 2021), will the administration provide any additional relief to those impacted by COVID-19—and will doing so result in any gains in the markets?
The Georgia senate races put two Democrats into the congressional chamber, which created a 50-50 split along party lines within its composition. In the event that a vote is split on partisan lines, the tie-breaking vote goes to the Vice President. This provides Vice President Kamala Harris with the ability to cast a vote in favor of reform efforts or changes to the tax code during the Biden administration. This may result in more oversight of Wall Street, alterations to current tax codes, and a different environment for investors. In general, Biden is considered to be moderate in terms of fiscal policy. While investors should be prepared for changes that may impact the market, many observers do not expect fundamental alterations to the way the U.S. financial system operates.
Impacts on Retirement Planning
The Biden administration has plans for policy changes regarding retirement as well. Many of the proposed policies are likely to benefit the majority of Americans who are saving for retirement, with a particular emphasis on lower- and middle-class savers.
One of the major changes proposed is an end to upfront tax breaks for contributions to 401(k) plans. Instead, contributions would receive flat-tax credits based on every dollar saved. Although specifics about the plan have yet to be announced, experts suggest that the proposed policy would simply provide low-income earners with the same tax incentives that higher-wage earners currently enjoy. For example, an individual making a five-figure salary would obtain the same tax credit for their $1,000 contribution as a six-figure earner.
These changes won’t negatively impact high earners, but the advantages they receive by way of 401(k) contributions may be diminished. Tax credits would change how tax incentives work for higher earners, however, and may make Roth retirement accounts and other, non 401(k) plans more attractive.
The Biden administration might be a mixed bag in terms of finances for high earners and those with significant holdings in trusts and estates. All told, the general market consensus is that Biden’s centrist policies and Wall Street-friendly track record foretells an administration that will be light on reforms and heavy on measures aimed at keeping the economy afloat in the wake of COVID-related disruptions.
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