The upcoming election this November will be highly consequential on a number of policy fronts, including tax policy. While the outcome won’t be known until after November 3, given the degree of potential changes, it would be prudent for investors to begin anticipating what a Biden Administration might look like in terms of federal tax policy, and to consider any tax-saving strategies that investors could utilize to mitigate the impact.

First, should President Trump win re-election, particularly along with Republican control of one or both Houses of Congress, tax rates are likely to remain low for several more years. Currently, the lower federal tax brackets implemented in the 2017 Tax Cuts and Jobs act (TCJA) are scheduled to expire in 2026, and will revert to the higher (pre-2018) levels without additional congressional action. It is likely that President Trump would move to make these tax cuts permanent during his second term, especially with a sympathetic Congress in tow. Investors (and corporations) would continue to enjoy relatively low rates of taxation, particularly on capital gains, as well as a step-up in basis on inherited taxable assets.

However, should Joe Biden win the Presidency, and especially if Democrats sweep both Houses of Congress, we are likely to see a swift reversal of the TCJA rates, particularly for higher income individuals and corporations. Biden has already released the following elements of his proposed tax policy:

(1) Restore the top federal income tax bracket to 39.6% (from 37%) for individuals with taxable income above $400,000 / year.

(2) Raise the payroll tax from 7.65% to 12.4% on earned income above $400,000.

(3) Tax all capital gains as ordinary income on incomes above $1 million.

(4) Eliminate the step-up in basis on inherited [taxable] assets for purposes of calculating capital gains owed by heirs.

(5) Cap the rate of tax savings from itemizing deductions at 28%, regardless of an individual’s actual marginal tax rate.

(6) Reduce the unified gift and estate tax exclusion amount (currently $11.58MM / person).

It is unclear if (4) above would apply to all taxpayers or just those in the highest tax brackets. In any case, this would amount to a significant change in tax policy, requiring an immediate update to estate plans, account titling choices and gifting strategies across a wide swath of savers and investors.

High earners may be able to mitigate the impact of some of these changes through a determined strategy of Roth conversions and tax loss harvesting / loss carryforwards.

Firstly, under a President Biden, Roth conversions will become even more valuable – if you can convert a portion of your IRA balances to a Roth account at today’s lower rates, a more aggressive conversion strategy may be warranted. All else equal, higher future tax rates reduce the after-tax value of future [traditional] IRA balances, relative to future Roth account balances.

Secondly, if long-term capital gains will be taxed at ordinary rates of income, tax loss carryforwards become much more valuable as well. (In general, capital losses not used in the current tax year can be “carried forward” to future years). “Harvesting” taxable losses for future years may become an effective method to shield future capital gains from high tax liability.

Of course, all of this remains conjecture today; none of these policies have been debated in Congress or finalized in any form. Also, a Trump victory would render them moot. But should Biden win in November, there would be a scant few weeks left in the year to consider the optimal Roth conversion amount for 2020. (It might be larger than you think.) Being prepared for that possibility now could help many investors make quick choices that will save on taxes in the long run.

Disclosure: The opinions expressed herein are those of Vickery Financial Services (“VFS”) and are subject to change without notice. VFS reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product.  VFS is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about VFS, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.