As we get further into the election cycle, I have been receiving inquiries from clients about what impact the election results may have on the stock market, the economy, taxes, and most importantly their portfolio.  Recently, the Wall Street Journal had a piece detailing several different scenarios that Biden has proposed and I want to provide a summary of them.  To get a sense for Biden’s tax plan, it makes sense to look at the broad strokes and then dive into specific scenarios.  Essentially, Biden is proposing higher taxes on wages, ordinary income, business income and capital gains for people at the top end of the income spectrum (which he describes as households making $400,000 or more annually).  In addition, he is proposing a repeal of the cap on state and local tax deductions (SALT), broader limits on deductions and a new tax credit for childcare expenses.

While I do not believe one issue should be taken in isolation when picking a political candidate to vote for, I do find that taxes tend to be high on the list of investor and voter concerns.  Keep in mind that any proposed tax plans are just that.  It is a proposal to voters.  Whether tax proposals eventually become law, and for that matter whether Biden becomes our next president, are unknowns at this time.

In digging into the specifics of Biden’s plans, I want to first look at a typical middle-income pre-retirement household.  In this scenario, we are looking at a married couple earning $80,000 in wages, one child, property taxes of $2,000, mortgage interest of $8,000, SALT of $4,000 and $2,000 in charitable contributions.  In this scenario, they would pay $12,240 in payroll taxes and an additional $4,149 in income taxes for an effective tax rate of 19%.  Current law and the Biden proposal arrive at the same exact tax so effectively there would be no change in this couple’s tax burden.

In this second scenario, we are considering a married couple earning $50,000 in wages, one child (with childcare expenses of $7,000 annually), SALT of $2,500 and $500 in charitable contributions.  Under current law, this couple would receive a $51 refund of payroll taxes paid of $7,650, for an effective tax rate of 14.1%.  Under the Biden proposal, this couple would receive a refund of $2,951 of payroll taxes paid for an effective rate of 8.7%, which is a significant reduction in tax burden.

Now moving to the other end of the spectrum, we are considering a single tax payer at the top of the income scale with no children,  $1.5 million in long-term capital gains, SALT of $75,000 and $45,000 in charitable contributions with no wages, property taxes or mortgage interest.  Under Biden’s proposal, this person would be subject to a higher proposed capital gains rate top of 39.6% instead of 23.8% under current law.  He or she would owe $309,650 under current law but would see a significant increase in taxes owed of $375,290 under the Biden proposal.  This represents an increase in effective tax rate jumping from 20.6% to 25%.

The next scenario highlights the impact that Biden’s proposal to expand taxation of payroll tax on Social Security (which now caps at income earned over $137,700) could have on a high earning couple (over $400,000).  Specifically, this is a married couple with two children, wages of $1 million, property tax of $10,000, mortgage interest of $20,000, SALT of $50,000 and $45,000 in charitable contributions.  Income taxes paid under current law are $284,765 with payroll taxes of $64,414 while under the Biden proposal this couple pay $292,777 in income tax and $88,268 in payroll tax. Combined taxes would increase from $349,179 to $380,545 for an effective rate of 36.9% up from 33.8% currently.

Lastly, I want to focus on a business owner who at present benefits from the 2017 tax law that provides a 20% deduction on business income.  Biden’s proposal would eliminate the 2017 deduction and drive a roughly 13% increase in overall tax burden.  Specifically, we are considering a married couple with two children, wage income of $800,000, S-Corp profits of $500,000, $10,000 in property taxes, $20,000 in mortgage interest, SALT of $65,000 and $45,000 in charitable contributions.  Under current law, this couple would pay $361,120 in income taxes and $58,615 in payroll taxes.  Under the Biden proposal, they would pay $417,094 in income taxes and the same amount for payroll taxes.  Combined taxes would increase from $419,734 to $475,708 for an effective rate of 35.8% up from 31.6% currently.

These scenarios cover a variety of different types of investors, but not everyone’s situation of course.  And remember these are proposals, which we do not know will become law at some point in the future.  As we get beyond the election, we will have a better idea of whether these proposals should be given more serious consideration.  I certainly would not recommend anyone take action with their portfolio or income at this time to adjust to these policies.  For certain, if Biden were elected president and these proposals eventually became law, those at the higher levels of income may benefit from shifting what income or capital gains they can into the 2020 tax year, but at this point, it is too early to recommend that kind of action.  For households in the middle-income brackets or below, there will likely not be much benefit to income or capital gain shifting strategies regardless of the outcome of the presidential election.

We will continue to follow what is sure to be an exciting election season and provide further updates on policy and tax matters as practical.