Election season is now upon us and the debates are ramping up. As each new presidency changes hands so do the countries tax policies, investment volatility, and savings opportunities. For instance, new laws passed due to shifts in the political party in power have changed how we invest for retirement, how money is passed to heirs, and how income taxes are handled. Here are some of the financial issues at stake come election day in November.

Corporate income tax rates

In 2017 the Trump administration reduced corporate tax rates from 35% to 21% in an attempt to improve global competition. Biden is looking to revert the tax rate to 28% to generate an additional $1.3 trillion in tax revenue.

Tax rate caps

Tax rate caps for the wealthiest Americans were as high as 92% during the 1950s, reducing every decade until they hit a bottom rate of 28% during the Regan administration. Currently the highest tax bracket is 37%. Biden’s plan is to roll back tax cuts and increase the top rate for high-income earners to 39.5% where it stood during the Obama and Clinton years. While it seems high, this rate only affects individuals earning more than $518,401 and married couples with a combined income of $622,051. While most Americans are nowhere close to making that much money in a year, increasing taxes on the wealthy often means lower job growth, and smaller incomes for paid workers.

Capital Gains Tax Rates

Capital gains are the profits earned on the sale of property or other investments. Americans currently pay 1-20% (based on income) on capital gains. Biden wants individuals making more than $1 million/year to pay up to 37% on income from the sale of investment properties. Raising capital gains on the super-rich could result in a slower stock market.

Management of the Federal Reserve.

The Federal Reserve is the central bank for the U.S. It performs five main tasks.

• Promotes maximum employment, stable prices and long-term interest rates.
• Monitors global engagement and promotes stability by minimizing risks.
• Monitors the safety and stability of individual financial institutions.
• Offers services for the banking industry to facilitate dollar transactions and payments.
• Promotes consumer protection by watching financial trends, economic development and new laws.

The head of the Federal Reserve is chosen by the acting administration and is often changed when a new president takes over. This year both Trump and Biden are likely to nominate a new person for the position. A new Chair will directly influence interest rates which in turn affect loan availability, stock markets, unemployment, inflation and the future cost of personal and government debt.

Social Security

It is projected that the Social Security Trust Fund will run out of money before 2035, resulting in a large reduction of benefits. The republicans favor pushing back retirement age rather than cutting benefits starting now or by increasing taxes. The Democrats plan to address the shortfall by increasing payroll taxes on people making over $400,000 while also boosting benefits for low-income earners and retirees. It’s not clear if this solution would fix the problem long-term.

Medicare

The Republicans have promised to avoid cutting Medicare benefits as one of their main platform issues focused on senior voters. The Democrat’s plan reduces the required starting age from 65 to 60, increasing government expenditures while possibly lowering medical costs for many people in that age bracket as well as their employers paying for health coverage.

Changes in Congress

In addition to the presidential elections, keep in mind that there are also elections for congressional seats this year. Even if the president remains the same, changes in the House and Senate could have a real impact on policies and new laws passed, including tax policies and healthcare. For instance, in 2018 Trump previously proposed a 10% tax cut for the middle class which he may attempt to pass in a new term, but current power conditions in the House and Senate would most likely table the bill. That could change if the balance of power is offset in this election.  Other policy talking points include universal health care, student loan forgiveness, free higher education, and paid family leave for new parents with each party pushing for different benefits.

Retirement accounts

Changes in tax policy could also affect retirement accounts. If worker’s pay more in income tax the amount of money available to move into tax-deferred accounts like a 401(k) or traditional IRA goes down. On the other end, increased taxes also take more from retirees who are taking money out of those accounts. If this is a concern in your situation consider looking into doing a Roth IRA conversion which would mitigate loss for higher future tax rates by locking in today’s tax rate on the investment.

It is also projected that if the Democrats were to take over the presidential office and both houses of congress this year they may to try to pass a mandated universal retirement savings plan similar the state plans currently in place in Oregon, California and 8 other states. This would require all citizens to have a retirement account in place to help with future social security losses.

Investments

Markets do tend to fluctuate widely during an election year and the event of Covid-19 issues on top of that has not helped the financial situation of the country. While the exact impact of the election in the current economic and political atmosphere is anyone’s guess, the best way to prepare for the changes that are coming is to make sure that you have a diversified, long-term investment portfolio, adequate savings, and have a budget goal of living below your means.

Careful planning around spending and saving money is necessary this year more than ever. If you could use some help getting control of your budget, debt or would like some information on how to build a strong financial future give one of our certified counselors a call at 877-789-4172.