Understanding How Potential Tax Changes Might Impact Your Portfolio

Understanding How Potential Tax Changes Might Impact Your Portfolio

Tony Zabiegala, COO & VP of Wealth Management

Recently, we’ve received several questions from clients about how developing changes in tax legislation might impact their portfolios. While the specifics of the final Biden-Harris tax plan have not yet been released, it is important for investors to understand the potential implications, particularly as it relates to their investment portfolios.

With that in mind, I’ve outlined several of the most-likely – and possibly most impactful – changes below:

• Capital gains: The current administration has proposed increasing capital gains taxes for the wealthiest Americans by bumping the current 20% (+3.8%) tax to 39.6%. We are waiting on additional clarity regarding which taxpayers this would specifically affect, but we expect this will cause some investors to rethink re-establishing their highly appreciated stock positions.If you have a non-qualified investment account with highly appreciated stock positions, you may need to make significant changes come year-end. Consulting with your financial professionals will help determine whether it is best to hold or sell certain positions to take advantage of the friendly tax environment in 2021.
• Corporate tax: Currently, the corporate tax rate is 21%. However, the new administration is proposing an increase to 28%. This will likely have a negative impact on earnings growth of approximately 6% to 2022 S&P earnings per share (EPS).What this really means is that corporations will need to allocate more money to taxes and thus, have less to spend on capital improvements (e.g. upgrading machinery and technology, real estate, etc.), job growth, investing in business development, etc., and not to mention, dividend distribution to shareholders. All of these, in turn, will likely have a negative impact on stock prices.
• Movement in marginal tax rates: There have also been murmurings that President Biden will make adjustments to the current marginal tax rates and increase the 12.4% payroll tax threshold for Social Security OASDI (Old Age, Survivors, and Disability Insurance) from $142,800 (2021’s capped wage base) to $400,000. Regardless, this is something we are monitoring very closely as it could have a “trickle-down” effect on your portfolio.You might be wondering how. Well, consumer spending makes up about 70% of Gross Domestic Product (GDP). The more money individuals allocate toward taxes, the less they are out spending in the economy. This will “trickle-down” and adversely affect corporate earnings because consumers are spending less. Ultimately, this will negatively impact the equity positions you hold in your investment accounts.

Forward-thinking financial planning is key, regardless of what is on the horizon! If you have concerns about your personal finances as it relates to upcoming tax changes, reach out to a financial advisor to see how it will impact your specific situation.