Good riddance to a profoundly tragic year. Investors need not be reminded of the cacophony of unease and discord that have made the year unforgettably bad for most of society. In spite of this, passive US equity investors who simply held the market not only experienced a 30% drawdown early in the year but escaped the year remarkably well-off, with most major indexes returning greater than 15% for the calendar year. Tax-managed investors mindful of relative risks fared even better, since opportunities for tax-loss harvesting were plentiful in the first half of 2020.
Investors should be under no illusion that with a new calendar year comes an elixir to what ails us, although the timely rollout of a vaccine may assist. All political eyes have been on the January runoff elections in Georgia, which determined the balance of power in the upcoming 117th US Congress. The January 6 result means Democrats have achieved their best outcome in light of earlier election results: a split Senate with the tiebreaking vote going to Vice President-elect Kamala Harris. Despite this slim advantage, there’s no room for votes outside of party lines, highlighting the importance of centrist and moderate policy proposals.
How will Joe Biden’s tax policy differ from Donald Trump's?
President Donald Trump’s 2017 Tax Cuts and Jobs Act (TCJA) ushered in a new era of tax policy that lowered taxes for the majority of Americans from the Obama era. The major aspects of the law will stay alive until sunset at the end of 2025. The law included many provisions pertinent to the individual taxpayer, including a reduction of individual income tax rates and increased child tax credits, standard deductions, and alternative minimum tax (AMT) exemptions. The law also increased the estate tax exemption level significantly and decreased the corporate tax rate.
Highest federal tax rates, 1954-2020
Source: Tax Policy Center, 12/31/2020. For illustrative purposes only.
President-elect Joe Biden plans to reverse most of the changes put into law with the TCJA, hoping to go even further in some cases. These changes present investors with a different set of tax considerations, likely changing incentives and behavior for many. His tax policy includes the following:
- Reversing the highest marginal tax bracket to pre-TCJA levels
- Lowering the level of income to which the tax rate would apply to individual incomes over $400,000
- Taxing long-term capital gains (LTCG) for earners over $1 million as regular income
- Reducing the estate tax exemption to pre-TCJA levels
- Eliminating the cost basis step-up on inherited investments
- Increasing the corporate tax rate to 28%
Estate tax rates and exemptions, 1954-2020
Source: Internal Revenue Service, 12/31/2020. For illustrative purposes only.