The upcoming presidential election brings with it much speculation about the tax policy and market implications of the outcome. We don’t recommend changing your plans based on educated guesses about how tax policy may change once the election is behind us.  However, it does make sense to consider how changes may affect your planning so that you can prepare.  Of course, it is not just the presidential election that will dictate these changes, but House and Senate majorities.

Potential tax policy change

The following changes have been floated as possibilities:

  • The reduction of the estate tax exemption, and annual lifetime gift tax exclusion (currently $11.58 million) likely by at least half. The exemption is scheduled to revert to $5 million in 2025 in any case.
  • For family business owners, the removal of the valuation discount on transfers, a tax break that allows families to transfer their business at a discount from fair market value.
  • Reductions in the step up in tax basis on assets upon death, which currently allows for no capital gains taxes on investments and other assets transferred at death.
  • Increase in the capital gains tax rates for taxpayers with over $1 million in income from 20% to the ordinary income tax rate, up to 39.7%
  • Increase on corporate tax rates from 21% to 28%
  • Social Security payroll tax pay increase, applying it to the first $400,000, up from $137,000 of base pay.

Being informed of these potential changes can help with the timing of decisions, especially if there are legacy transfers or the transition of your family business under consideration. Using your lifetime exclusion is often a good idea, if you can afford to do so, but there may become some more urgency to this to use it before you lose it.

There are other policy-related items that may also have a direct effect on our financial lives, including how the next administration and Congress will address the post-coronavirus economy, US- China trade policies, and policy changes in the tech and healthcare sectors.

How the election may affect the markets

As for the election and the movement of financial markets, evidence from the past indicates that the markets generally ignore elections. In fact, market volatility is historically lower in the 100 days leading up to and right after a presidential election. And, history shows no statistical difference in market performance in election vs non-election years.

While 2020 has given us plenty to concern ourselves with and there will certainly be changes on the horizon based on the results of the election, they are nothing we can’t prepare for and manage well.