And should that factor into your planning and investing today?


Many of our clients are asking us how the U.S. presidential and congressional elections may impact tax policy, and what actions they might take now to position themselves for the future. 

While it may be tempting to plan proactively—we suggest waiting to make major changes to estate plans. Election day is not the deadline for planning decisions, but rather its starting gun. Most serious planning discussions should begin only once we know the next government’s composition and get a sense of 2021’s legislative agenda.

Nevertheless, if you’re inclined to take action now, consider:

  • Consuming your lifetime gift tax exclusion (currently $11.58 million)—Using your exclusion is always a good idea, if you can afford to do so. The fact that Democrats may reduce the exclusion adds some urgency to what is already a sound estate planning idea.1
  • Speak with your J.P. Morgan team—Discussions now should be holistic: Refine what you hope to achieve with your wealth in the near and long terms, for you and your family. Then, around mid-February of next year, make sure you and your advisors have an important strategy discussion to decide what might be done to help you achieve your goals.

Meanwhile, regarding your investments: COVID-19 crisis dynamics and the U.S. election may both bring volatility in the months ahead. So it’s important to make sure you’re practicing good financial hygiene. Potential tax changes could affect markets, but we continue to believe an investor’s unique financial profile and goals should be the predominant drivers of asset allocation decisions.

First, we suggest looking at your big picture: Is your liquidity bucket sufficiently full? Does your portfolio align with the amount of risk needed to reach your goals? Does it have too much exposure to any one sector or industry? Are these sectors/industries acutely exposed to potential policy changes? 

If you take significant new stances in your portfolio because you anticipate a particular election result, you could be unpleasantly surprised. Whatever the polls may be showing this week, there continues to be a wide range of possible election outcomes.

Without a Democratic sweep, significant changes to the income and estate tax regimes are unlikely. On the other hand, if Democrats take control of both houses of Congress and the White House, changes to tax law are probably on the horizon.  

Democratic presidential candidate Joseph Biden’s proposals would increase many tax rates. Those hikes would likely generate more revenue for the U.S. government when federal and state cash flows are both strained due to the drop-off in economic activity attributable to the coronavirus pandemic. However, the rise in revenue may be somewhat offset if taxpayers’ ability to deduct payments of state and local taxes are restored.2

Still, taxpayers should be cautious: It’s impossible to correctly predict which proposals would actually become law—and when. Even the best-laid plans are often derailed by such factors as a new Congress’s and new president’s priorities, developments with (and in) foreign countries, and prevailing economic conditions.

Also, while a president proposes, Congress disposes: Legislation that is ultimately enacted may not bear much resemblance to initial proposals. 

So what do we know about Trump on taxes? And what are the Joe Biden tax policies? Here, we provide a high-level overview of former Vice President Biden’s proposals and compare them to the current laws under President Donald Trump:

What might U.S. taxes be under...

Sources: IRS, TaxFoundation.org. As of August 4, 2020.
Table summarizes various different tax scenarios under a Trump presidency versus a Biden presidency.

If the presidential candidates’ tax proposals actually lead to changes in the tax law, these changes are unlikely to come before the spring of 2021. Congress will be sworn in on January 3, 2021. The president will be inaugurated January 20, 2021. The 535 members of Congress, regardless of party, have priorities they would like to see enacted, and the process of turning bills into law can be slow.

How slow? In the past 30 years, one party or the other has controlled both houses of Congress and the presidency in the first year of a new president’s first term four times (1993, 2001, 2009, 2017). In none of those years was tax legislation enacted before June. Also: Only in 1993 were tax rates (and only tax rates) increased retrospectively to the beginning of the year.

It’s possible but very unlikely that potential tax law changes might be made retroactive in effect, perhaps to as early as January 1, 2021.

See how long it’s taken to enact historical tax changes

* Initial provisions implemented retroactively for all of 2001, and the remanining provisions phased in over six years.

** Tax legislation passed and went into effect on January 2, 2013.  Additionally, 3.8% Medicare capital gains surtax from 2010 Affordable Care Act also went into effect on January 2, 2013.

Source: Congress.gov. As of August 7, 2020.

Chart shows the timelines of historical tax changes for Clinton (1992), Bush (2000), Obama (2008) and Trump (2016)—showing the date of the election, inauguration, the date tax legislation was passed and the date tax changes went into effect. The chart highlights that for Clinton and Bush, tax legislation went into effect fairly quickly (6–12 months after inauguration. For Trump, slightly later (between 12 and 18 months after inauguration), and for Obama, the longest (between 48 and 54 months after inauguration).

Assume Democrats take all in a “blue wave” and enact Joe Biden’s tax policies. How might that affect the economy?

While it’s true that higher taxes generally translate to lower economic growth, other features of the Democratic platform could provide an offset. For example:

  • Spending—Higher levels of government expenditure could help counter the tax drag. For example, Biden has proposed a $2.5 trillion green infrastructure plan that could boost economic productivity and employment, and directly benefit certain companies.
  • Trade—Biden has a “tough on China” mentality, but might choose to express that stance through means other than tariffs. He may even choose to roll back President Trump’s tariffs to a degree that would be a positive for markets.

Still, if we look only at taxes, our general rule of thumb is that every percentage point change in the S&P 500’s effective corporate tax rate has about a $2 impact on earnings per share (EPS). So, if we assume the corporate tax rate is lifted to 28%, S&P 500 EPS could take a hit up to $14.

A higher federal statutory rate would negatively impact sectors with higher levels of domestic revenues that don’t have pass-through structures (i.e., Financials, Consumer Discretionary, Healthcare and Communication Services).

Tech, which derives 56% of revenues from outside the United States, would get hit by Biden’s proposed increase in the U.S. global intangible low-taxed income (GILTI), which functions as a sort of minimum tax on income from intangible assets (e.g., patents, trademarks, copyrights) generated by an affiliated foreign corporation. But these impacts alone don’t change some of our highest-conviction views. For example, we still expect innovation and digital adoption to continue driving earnings growth for many Tech and Tech-adjacent companies.

Outside of stocks, the fate of qualified dividend income (QDI) taxation could have implications. Right now, an exclusion allows QDI to be taxed at a better rate than ordinary income. If the QDI advantage were lost for assets such as preferred equities, the market would need to adjust to the new regime—perhaps with lower prices and higher yields.

Whatever the election results may be—and whether we wind up with a Trump tax plan or a Biden tax plan, our best advice to clients for right now is: Focus and clarify your personal goals. Decide what it is you want for your life and your family. Make a plan to speak with your J.P. Morgan team about how your wealth plan supports these goals, now and after the New Year. Have a discussion now about how your goals can best be supported by a diversified portfolio. And stay invested. 

History tells us that equity markets increase in value over time—regardless of which policies are adopted or who gets elected to the federal government. Active investment management can help you navigate near-term dynamics by tilting portfolios toward equities that will benefit, and away from areas of the market that will be negatively impacted. And, should the status quo change, a diversified portfolio will help mitigate risks. 

The manner in which your portfolio should be managed may change as you experience life’s many potential events, such as getting married, having children, buying a house, moving to a new state or planning retirement. But the impetus for making fundamental changes to your investment approach should come from the inside, not by external events that, in retrospect, will often seem unimportant when compared to preserving, growing and managing wealth for you and your family.

1 The U.S. Treasury Department recently confirmed there will be no future adverse tax consequences for using your exclusion now, even if the lifetime exclusion is later reduced.

2 The so-called SALT (state and local tax) deduction was capped at $10,000 by the Tax Cuts and Jobs Act of 2017 that President Trump signed into law.