2021 is off to a start! It seems like we are picking up right where we left off in 2020. Although we have political turmoil setting the stage for 2021. As of this podcast, the markets are shrugging off all of this drama.

However, I’m sure many of you listening are worried about what the future holds not only for the country but also for your finances.

So on today’s show, we’re going to go through some common questions that we have been receiving in our office. Hopefully, we can alleviate some of the concerns and put folks’ minds at ease a bit.

Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s just common sense.

(0:50) Practical Planning Segment:

Welcome to the show, Nicholas Craven, CFP®. Nick tells us a little bit about himself and the process of becoming a CFP® professional, and what it means for the firm.

(3:50) Question #1: Now that the democratic party controls the executive and legislative branches of government, what does the future hold for taxes?

It is true that President Biden has slender majorities in the House and Senate so the slender majorities may limit some dramatic policy changes which require 60 votes, but tax policy is likely to change in some significant ways.

Congress can use some special budget procedures to pass tax hikes without needing 60 Senate votes. It is a process called budget reconciliation and has been used by President Clinton, President Bush, President Obama, and president trump to pass the tax cuts of 2017

(6:00) Likely changes are the following:

• increasing the top tax rate on regular income back to 39.6%. It was lowered to 37% with the Trump tax cuts.
• Secondly, the corporate tax rate will probably go to 28% from the current 21%. Neither of these moves will help the economy grow but it’s important to note that the US had a top personal tax rate of 39.6 and a corporate tax rate of 35% from 1993 to 2000 and then again from 2013 to 2017 with no recession during those times
• The limit on state and local tax deductions may actually increase from the current $10,000 limit to at least the $20,000 limit. This is the popular SALT deduction that was very controversial from the trump tax cuts. So, this could help things a bit.
• The Biden campaign proposed eliminating the step-up in basis at death for inherited assets. My personal feeling is this is very unlikely to pass. It would be an accounting nightmare. It would force people to sell assets that they may not want to sell just to pay taxes. So, my personal feeling is this is not going to happen.
• We do however expect the estate tax exemption to fall from the current 11.6 million down to around 6:00 or 7 million as an exemption amount.
• Another possible change may come in the capital gains tax rate. The current top capital gains tax rate is 20%. Biden has proposed capital gains be taxed at ordinary income rates so for those in the top brackets that would be 39.6% because that would be raised as well. Slender majorities should make this virtually impossible. I would instead look for a tax rate hike to 24% from the current 20% at present. In capital gains
• The one big proposal that will likely fail is applying the Social Security tax to earned income above 400,000. Changes to Social Security benefits cannot be done through budget reconciliation and raising the tax probably won’t have the 60 Senate votes needed to break a filibuster.

(15:00) Also, we have received questions about when these potential tax hikes could take place? Some investors fear that they could be retroactive to January 1st, 2021. Our current feeling is that with unemployment rates still high and recovery slowed by the resurgence of COVID-19, we think they will more likely be delayed until January 1st of 2022.

We will be addressing the tax environment on more podcasts as we find out more information moving forward.

(17:00) Question #2: I skipped my RMD in 2020 because I could as part of the Cares Act.  Will I be allowed to do this again in 2021? And If not Is there anything I need to do regarding my RMD in 2021? Will our custodian automatically restart my RMD’s for me?

It’s a little too early to tell if they will allow an RMD to be skipped again. I will say that they are going to most likely pass some type of additional bill regarding stimulus a $2000 per month payments. It could be attached to that bill. But that would be speculation only

Regarding the last of the question, you should definitely check with the custodian to see if they automatically restart the required minimum distribution. Most custodians have initiated an automatic restart for 2021. But it is good to check. Just as a reminder you have all the way through the end of the year to satisfy the required minimum distribution. So, it’s only January of 2021 right now so you have plenty of time to get this in order.

(19:40) Question #3: Should we make changes considering the onslaught of taxes, estate penalties, and an expected decline in the stock market with democratic control? Several members of our family are putting their funds into bonds and “getting out” before the crash.

So, we addressed a lot of the tax concerns in the first question. But let’s talk about the second part which really is relying on a huge assumption. And I find this assumption quite common and the facts do not bear it.

The assumption is that the stock market crash is under Democratic control. It’s actually the opposite. In your recent coaching class that we put out to our clients, you demonstrated how the stock market performs during Democratic presidents, Democratic-controlled Senate, and Democratic-controlled House of reps. The data you provided goes all the way back to 1926.

The facts are the facts, the numbers do not lie. That’s why I like finance so much because the numbers are there, and the numbers tell the story. It is simply not the case that the market drops during Democratic-controlled executive branch and the legislative branch. As a matter of fact, if you really got into the numbers it outperforms.

But as I have mentioned before the market has way too many components and variables to make any correlation with who is in office. Does it have some impact over the short term? Of course, it can over the short term but those are usually quick and dramatic changes which often course-correct very quickly as well.

The fact is when you have an extremely well-diversified portfolio owning many different companies in the thousands, over many different asset classes, and not 100% in stocks with some fixed income as well, the fact is that these companies do not operate in a vacuum and do not keep doing the same things when things change, they adapt, and they survive, and they maintain their bottom line.

And by the way, looking at 2021 we’re not saying that it could be a dramatic year for stocks and stocks are going to increase greatly, that would be speculating in gamboling, we just don’t know. When you look at the fact that most likely there will be another stimulus package, there may be a very large stimulus bill, it’s a very slim majority in the Senate and the house, combined with a massive vaccine rollout. 2021 could be an epic year for stocks I emphasize could be we’re not making any predictions here

Final Disclaimer:

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“Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”