Brian Perry
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In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Published On
October 22, 2020

Decision 2020: Your Vote and Your Money

Welcome to Decision 2020: Your Vote and Your Money. This special series will examine the outlook for November’s elections, the potential impacts on markets and taxes, and steps you can take now to election-proof your finances. Make sure to check back often so that you don’t miss any of this special series, in which we’ll cover topics including:

Part 4

Are Your Taxes Heading Higher?

Welcome to the fourth part of this special series, Decision 2020: Your Vote and Your Money. In the first installment, we examined the race for the White House, as well as where the candidates stand on some important economic issues. Part Two focused on the legislature and took a closer look at the outlook for the House and Senate races, while Part Three evaluated the historical record to see if elections even matter to markets.

Here now, in Part Four, we’ll turn our attention to one question that is always front and center of people’s minds: Are your taxes heading higher? This common concern tends to get even more attention during election years when candidates float different proposals on the campaign trail. In 2020, the two presidential candidates have different views on where taxes should go. However, it seems likely that, regardless of who wins in November, the longer-term trend for taxes is higher.

There are a couple of reasons for this. First, the current tax rates are a function of the 2017 Tax Cuts and Jobs Act, which reduced ordinary income tax rates across the board. However, these tax cuts did not pass the Senate with more than sixty votes, which means that they are not permanent tax cuts. Instead, the current tax rates are scheduled to expire at the end of 2025 and will, at that point, be replaced with the old, higher tax rates.

Here are the current and future tax rates under existing law.

Again, absent an act of Congress, taxes are scheduled to increase after 2025 regardless of who wins the upcoming elections. However, if tax rates do change in the future, which way do you think they are headed?

Sure, President Trump has talked about lowering taxes further, but there seems to be limited support for that in Congress. And in the long run, the United States faces this:


As a reminder, that debt has skyrocketed lately, in large part due to the government’s response to the coronavirus pandemic and the accompanying economic shutdowns. Those measures were appropriate to ease the financial shock to the country and its citizens, but eventually that $27 trillion national debt will need to be paid down. And the most likely way to accomplish that is through higher taxes.

So, in the long run, it seems likely that taxes might head higher.

But what about in the short run?

Well, as mentioned above, Trump has proposed lowering taxes further if he is reelected, though the odds of that actually happening may not be that high. But what if Joe Biden gets elected? What tax proposals has he put forth?


Joe Biden’s Tax Plan

As of this writing, the Biden campaign hasn’t put forth a coordinated “tax proposal.” Nevertheless, they have laid out a number of agenda items related to taxes. Here is a summary of several of the key proposals:

Individuals, Self-employed and Rental Real Estate

  • Restore the top individual income tax rate to 39.6% immediately
    • Under current law, the 39.6% rate is scheduled to be restored in 2026
  • Phase-out the Qualified Business Income (QBI) Deduction for business income over $400,000
    • Those making under $400,000 would maintain the deduction
  • Tax capital gains as ordinary income for individuals and couples earning more than $1,000,000
  • Eliminate the “step-up” in basis on appreciated assets at death
    • Still uncertain if the gains would immediately be taxable income or if the prior basis just transfers to the beneficiary
    • Still some details to work out, but the campaign has said it should not apply to beneficiaries with income below $400,000
  • Cap the value of itemized deductions for high earners
    • The tax benefit from all itemized deductions would go against ordinary income as usual, but the maximum benefit would be 28% (meaning 28 cents on the dollar)
    • For example: A taxpayer in the new 39.6% tax bracket would normally get a 39.6 cent tax break on each dollar of charity above the standard deduction – With the limitation, however, the benefit would be capped at 28 cents for each dollar of charity
  • Reinstate the “Pease Limitation,” which is the 3% itemized deduction phase-out
    • Applies to those with income over $400,000
  • Increase the Social Security Earnings Cap
    • 2020 Earning Cap is $137,700
    • Any earnings over $400,000 would continue to be subject to the 12.4% payroll tax
    • Any earnings between the current Cap of $137,700 and $400,000 would be exempt
    • As the Earnings Cap increases each year, the gap would get smaller
  • Eliminate certain tax preferences in the real estate industry
    • $25,000 special allowance on passive rental operating losses
    • Accelerated depreciation of rental housing
    • Deferral of capital gains on 1031 like kind exchanges
  • Tighten the rules for classifying independent contractors
  • Make forgiven student loans exempt from taxable income
  • Increase tax preferences for middle-income taxpayers’ retirement contributions

Tax Credits

  • Establish a new Savers Credit for taxpayers making pre-tax contributions to employer-sponsored retirement plans
    • Replace the tax deduction with a tax credit
    • First proposal is a 26% credit (still unclear if refundable or non-refundable)
  • Re-establish and expand the First Time Homebuyer’s Credit
    • Original credit was $7,500 or $8,000 and expired after two years
    • New credit would be $15,000 and be permanent
  • Create a new Refundable Renter’s Credit
    • The credit would work like a subsidy to help low-income families keep the total of rent and utilities to 30% of monthly income
    • The budget for the credit is supposed to be capped at $5 billion per year
  • Increase the Child and Dependent Care Tax Credit
    • Current credit non-refundable and is worth up to 35% of up to $3,000 of qualified expenses for one dependent and $6,000 for two or more dependents, but phased down to 20% for those with higher incomes
    • New law would make it refundable and would be worth up to 50% of up to $8,000 of qualified expenses for one dependent and $16,000 for two or more dependents
  • Establish a new Manufacturing Communities Tax Credit
  • Restore and make permanent the Energy Investment Tax Credit
  • Automatic 401(k) and retirement plan tax credits for small businesses
  • Restore the full Electric Vehicle Tax Credit
  • Extend the Earned Income Tax Credit to childless workers age 65 and older
  • Create a $5,000 tax credit for informal caregivers
  • Reinstate the Residential Energy Efficient Property Credit
  • Expand the Low-income Housing Tax Credit
  • Expand the New Markets Tax Credit 

Corporations and Banks

  • Increase the corporate income tax rate from 21% to 28%
    • 2017 Tax Cuts and Jobs Act reduced it from 35% to 21%
  • Institute a new 15% minimum tax on “book” profits for corporations
    • Applies to corporations with at least $100 million in annual income
    • Can still deduct losses carried forward from previous years and foreign taxes
  • Establish a Financial Risk Fee on large banks
    • Applies to banks, bank holding companies, and non-bank financial institutions with over $50 billion in assets
    • Details are still unclear but are probably close to the proposal by the Obama Administration in 2015 – 7 basis point fee on all covered liabilities
    • Covered liabilities = total assets minus tier 1 capital and FDIC insured deposits
  • Eliminate tax preferences for fossil fuels
  • Enhance tax incentives for carbon capture, use, and storage
  • Eliminate the pharmaceutical companies’ tax deduction for advertising expenses


While the list above contains many items, it is important to keep a couple of things in mind. First, these are only proposals. Even if Biden is elected, it is likely that some or all of the proposals would be altered or abandoned. Furthermore, the President can only propose laws. Congress needs to initiate and pass legislation, which is then approved or vetoed by the President. So, a Biden Administration would work with Congress on tax legislation they can both agree on.

Finally, even if the proposals above are all implemented, the impact would be mixed. Sure, taxes for some Americans would move higher. But others might keep their current tax rates or even receive enhanced tax benefits. Plus, even for those whose taxes go higher, Biden’s proposals would still leave taxes lower than they have sometimes been in the past and might be again in the future.

So, with that in mind, let’s look briefly at what steps you could take if you wanted to potentially protect yourself against higher future taxes.


How to lower your future taxes

If you want to reduce your future tax burden, you’ll need to accomplish a couple of things. First, you’ll need to manage the amount of any required minimum distributions (RMDs) you’ll face. This can be accomplished through having some level of tax diversification, which means you’ll need to position assets in your tax-free (Roth) and taxable accounts (non-retirement), as well as tax-deferred accounts (IRA, 401K, 403b.) You also want to be as efficient as possible with the income you generate in your taxable accounts since that is the only pool of money where the tax treatment can vary depending upon how the funds are invested.

Let’s take a closer look at each of those strategies in turn.

Reducing future RMDs through tax diversification: If you want to reduce your future RMDs, you’ll need to move some money out of your IRA or other tax-deferred accounts. This can be accomplished by making retirement contributions to Roth IRAs or a Roth 401(k). It can also be accomplished by saving after-tax dollars to a non-retirement brokerage or savings account. But, in a lot of instances, the best way to get large sums of money out of a tax-deferred account and into a tax-free account is through Roth conversions.

A Roth conversion involves taking some of the dollars you have in your IRA and moving them into a Roth account. Once the dollars are in a Roth, all future growth is free from taxes, and you can take distributions tax-free. There are also no required minimum distributions from Roth accounts. The catch, of course, is that you must pay taxes on the conversion amount at the time of the conversion. Because of that, it is extremely important to be strategic in planning any potential conversions by considering your current and future tax brackets. You can also be tactical with Roth conversions and process them in years when your income is lower or when markets have declined, and you can move more shares at lower prices.

And therein lies the opportunity you now have in front of you. Maybe your income is down this year. Or maybe markets will decline, and it might make sense to process a Roth conversion (as of this writing, markets have been performing well, but with COVID-19, a weak economy, and the election, volatility could spring up at any moment.)

Imagine the following scenarios:

  1. You have 100 shares of a mutual fund that was trading at $100 a share two months ago but is now trading at $80 a share. So now you decide to process a Roth conversion of those shares. You transfer 100 shares of the mutual fund to your Roth, just like you would have two months ago, and so the long-term potential of the Roth account and its tax-free growth remains the same. However, due to the decline in the market, you are only “converting” $8,000 now, whereas two months ago, you would have been converting $10,000. In other words, you get to transfer the same number of shares to your Roth account, where those shares can forever enjoy tax-free growth, and you can pull tax-free income in the future. But your additional taxable income this year, based upon the amount you convert, has dropped by 20% (from $10,000 to $8,000.) The bottom line is that, because the market has fallen, you may now have the opportunity to process a Roth conversion with less tax impact.
  2. Here’s another scenario. Let’s say that overall, your finances are in decent shape, and you have some savings, some investment accounts, and solid long-term employment prospects (if you aren’t already retired.) However, you’re also one of the millions of people whose income this year will be negatively affected by the economic impact of COVID-19 and shelter-in-place restrictions. Well, Roth conversions are taxed as ordinary income, and that tax rate is based on all of your income, so if you are experiencing a temporary decline in income, 2020 could be the perfect year to process a Roth conversion and to do so at a potentially lower tax bracket than you had in the past or may have in the future.

By the way, here’s one last scenario. Let’s say that you are over age 72, and you’ve been taking RMDs. You’ve always wanted to move some money into a Roth, but it’s been difficult because once you take your RMD, there isn’t a lot of room left in your tax bracket to process a conversion. Well, the IRS has suspended RMDs for 2020. So, since you don’t have to take an RMD this year, maybe instead you use that room in your tax bracket to do that Roth conversion you’ve been wanting to do.

Having as much money as possible in tax-free accounts can be one of the keystones to a prosperous future. And Roth conversions can be a powerful means of getting money into a tax-free pool. And a decline in the value of your assets or your employment income could make 2020 an ideal year to process a Roth conversion.

But keep in mind that Roth conversions do have tax consequences and that they are irrevocable once you process them. Because of that, it often makes sense to get assistance from a qualified tax or financial professional prior to processing a Roth conversion.

Tax-efficient investing in your taxable accounts: The taxable pool of money (non-retirement accounts) is the only pool in which your investments are subject to different tax rates depending on how you invest your money. If your investments generate long-term capital gains or qualified dividends, you can get special tax rates. Under current law, those rates are 0%, 15%, and 20%. Depending on your income level, you might also be subject to a 3.8% surcharge to pay for the Affordable Care Act. Short-term capital gains, as well as non-qualified dividends and most forms of interest, are ineligible for these special rates and are instead taxed as ordinary income. Under current law, those rates range anywhere from 10% to 37%.

Importantly, your ordinary income tax bracket is always higher than your tax rate for long-term capital gains.

So, to be tax-efficient, the first step is to focus on investments that will qualify for the special tax rate and avoid those investments subject to ordinary income tax rates. From there, though, there are a couple of things you can do to potentially reduce your tax burden even further.

For starters, if you have gains in your taxable portfolio, you are always going to be subject to taxes when you sell those investments. But what you might do is consider selling some of those securities in years when your income is lower so that your subsequent tax burden is reduced. For instance, let’s say you usually make $200,000 a year and are married and file taxes jointly. That income level would generally put you in the 15% long-term capital gains bracket. But what if you’ve been out of work due to COVID or have otherwise seen your income fall this year so that your earnings are only $75,000? Well, at that level, the tax rate for long-term capital gains is zero. In other words, by strategically choosing when to harvest those gains, you’ve reduced your tax bill from 15% to zero.

Here’s another scenario. What if market volatility returns leading into or after the election? Well, at that point, you might consider tax-loss harvesting (TLH.) Tax-loss harvesting involves taking advantage of market volatility to sell your holdings. By doing so, you realize a loss for tax purposes. However, you then reinvest the proceeds in a similar security to maintain a consistent portfolio allocation.

Here are a couple of things to keep in mind about this technique:

  • Tax-loss harvesting only applies to investments held in your taxable pool, which are all the non-retirement accounts. You would not want to TLH a Roth account or a tax-deferred account (IRA, 401(k).)
  • The key is that you are not trying to change your portfolio. Although you will be selling investments, you will not be staying out of the market.
  • The IRS is aware of this strategy, and they put rules in place to prevent you from doing it. These rules are easily avoided, but you need to be careful.

Here is how tax-loss harvesting works. Let’s say you own a mutual fund in a taxable portfolio. The market falls, and your fund falls with it so that now you are sitting on a loss. You have three choices:

  • You could panic and sell and lock in a loss – generally speaking, you don’t want to do this!
  • You could hold on to the fund, waiting for its eventual rebound – this is better but not ideal
  • You could sell the fund, realize a loss, and then replace the fund with a similar one

In case you couldn’t guess, that third choice is the way to go. You sell your mutual fund, which causes a “loss” for tax purposes. You then buy back a fund that is similar but not identical, which allows you to avoid IRS restrictions. Because the new fund is very similar, you haven’t really changed your overall portfolio, and you are still set up to meet your long-term investment goals.

However, and here is the important part, because you sold the first fund at a loss, you have now generated two tax benefits:

  1. You can take up to $3,000 in losses each year and write them off against ordinary income on your tax return
  2. Any remaining losses are stored up (they never expire) and can be used to offset any future gains. So, when markets recover, and some of your investments have gains you’d otherwise be taxed on, you offset those gains with your accumulated losses, which allows you to generate tax-free income.

If done correctly, tax-loss harvesting could turn your taxable, non-retirement account into a gigantic Roth account, set up to generate tax-free income well into the future.

And guess what? Volatile markets like those we might see around the election or due to uncertainty about COVID-19 are the perfect backdrops against which to do tax-loss harvesting. And the actions you take when times are tough can set you up for a tax-efficient future down the road.



The outcome of the election might have a significant impact on tax rates in 2021 and beyond. But regardless of what occurs this November, it seems likely that future tax rates will move higher. With that in mind, you might want to analyze your current taxes and compare them to a projection of what your future tax rates might be. Then, if you find that you’ll be in a similar or higher bracket in the future, you can begin taking steps to correct the situation and regain some level of control over your future taxes.

Once you settle upon appropriate strategies for managing your taxes, you can then keep a close eye on the election and any associated market volatility to see if it presents you with an opportunity to begin taking steps to reduce your future tax burden.

Remember to check back soon for Part Five of this special Decision 2020 Series, where we’ll examine steps you can take to election-proof your investment portfolio.



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