Many of us are concerned about how the upcoming election might affect our financial plans. Here are some high-level considerations:
Investment Portfolio Management:
1. Elections can trigger an impulse to time the market. They are an event we can see coming, unlike a surprise pandemic or natural disaster. An attempt to time the market might be prudent if we knew the outcome, in advance, and more importantly if we knew the timing and effect it would have on the financial markets. Unfortunately, no one knows, which means any attempt to win-more or lose-less around an election is questionable. It is also mostly unnecessary for long-term investors as short-term market moves smooth-out over time.
2. Short-term volatility is the price we pay as investors to “earn” the expected higher returns offered by stocks. In other words, you must be in the market all the time to deserve the returns it promises. Once you start going in/out, you have broken the “deal” with the market and your outcome will no longer be as reliable as it would have been if you stayed invested.
3. While not generally recommended, it is not irrational to set aside an extra cash reserve or tilt your portfolio one way or the other if not doing so will cause excessive stress or worry. If you feel strongly about playing an extra degree of offense or defense, then here are some considerations:
- Define the adjustment in terms of equity exposure. Begin by adding or subtracting 5%. If not enough, go +/- 10% and try to stop there.
- Have a plan for when you will return to your normal investment strategy.
- Adjust holdings in IRAs or other retirement plans first, where there will not be any tax cost.
- If you must act in taxable accounts, do so as tax-efficiently as possible.
- Avoid hedging products and option strategies. The explicit costs can be high, and the approach can only cover part of the risk, just like any insurance policy.
Income Tax Planning:
1. Possible changes to income tax law, as suggested by various candidates and commentators:
- Top rate on ordinary income may rise from 37% to 39.6% or higher.
- Top rate on long-term capital gains may increase from 23.8% to 43.4%.
- Repeal of limit on itemized deduction for state and local taxes (SALT).
- Earned income over $400,000 may be subject to 6.2% social security tax.
- But, given the state of the economy, any changes might not be enacted until 2022 or later.
2. Planning ideas:
- Shift some ordinary income expected next year into this year, which could include making extra IRA withdrawals for next year’s cash needs.
- Defer SALT payments, deductible business expenses, and charitable contributions from this year to next year.
- Consider accelerating long-term capital gains in 2020, but only if such gains will be recognized anyway over the next few years.
3. Fortunately, consideration of most tax planning strategies can wait until after the election outcome is determined, provided that happens before year-end.
1. Possible changes to taxation of gifts and estates include the following:
- Reduction of the estate tax exemption from $11,580,000 to as low as $3,500,000.
- Increase of the estate/gift tax rate from 40% to 55%.
- Elimination of the ability to step-up the tax basis of assets at death.
2. Planning ideas:
- Review your estate plan in terms of your current objectives. Estate planning is mostly about who, what, and when, not taxes.
- If you have pending wealth transfer objectives, consider accelerating those into this year to some extent.
- Be aware, though, that to use or preserve your $11,580,000 exemption “before losing it”, you effectively must use all of it.
3. Here again, action can probably wait until the election outcome is settled. Be careful to keep tax planning in perspective relative to your big-picture goals. A higher future tax cost may well be worthwhile to keep your options open.