by Bryan Perry

June 23, 2020

President Trump is in for the dogfight of his life if he is to retain the White House for a second term.

Democratic candidate Joe Biden is estimated to have a very strong chance of beating President Trump in November. A model run by The Economist, updated every day, combines state and national polls, as well as economic indicators. As of June 19, it puts Biden’s chances of winning the White House at 86%, down a notch from the 87% of the previous two days, the highest chance the model has given Biden so far, as polling in several key swing states shows Biden either leading Trump or within the margin of error.

Six key battleground states will likely determine the election: Arizona, Florida, Michigan, North Carolina, Pennsylvania, and Wisconsin. The margins are tight in each with Biden gaining a recent edge in all six.

Bidens Edge

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So, what does a Biden win mean to investors regarding potential changes to income taxes and capital gains? Investors will very likely face major changes in how their stock investments are treated.

In 2019 and 2020, the capital gains tax rates are either 0%, 15%, or 20% for most assets held for more than a year. Capital gains tax rates on most assets held for less than a year correspond to the ordinary income tax brackets, which are 10%, 12%, 22%, 24%, 32%, 35% or 37%.

Depending on the outcome of the November election, investors of all income levels need to be on notice that there could be sweeping changes that will reduce net income derived from selling stocks held over a year and on dividends that fall into the “qualified dividend” category.

Those that pay income tax rates greater than 12% and up to 35% (for ordinary incomes of up to $425,800) have a tax rate of 15% on qualified dividends. The tax rate on qualified dividends is capped at 20%, which is for individuals in the 35% or 37% tax brackets and with ordinary income greater than $425,800.

Assuming Democrats retake the House and possibly the Senate, there is almost 100% consensus from the Democrats (Biden on down) that capital gains will be taxed as ordinary income, so you should count on it. Biden has said: “We have to start rewarding work, not just wealth. I would eliminate the capital gains tax — I would raise the capital gains tax to the highest rate of 39.5%” (source: Daily Wire Oct. 17, 2019).

If anyone in the press is reading this, you might ask Biden: “Investors already paid federal and state income taxes on money earned from work. Then they put those after-tax dollars at risk in stocks, where they risk loss. Doesn’t taxing gains at their highest marginal rate seem like double taxation on steroids?”

One of Biden’s candidates for VP – Elizabeth Warren – has an even bolder plan – “Mark-to-market” accounting annually on capital gains and taxing at ordinary rates for the top 1% of households. But what if the market drops the next year? Does that mean investors get a refund on their losses? I don’t think so.

Warren’s wish list also includes lowering the exemption threshold from the current $5 million to $3.5 million for inherited assets, adding a wealth tax of 2% to 5% for the top 1% and eliminating basis step-up for inherited assets, and raising the inheritance tax rates by an unspecified amount – yet to be determined.

Joe Biden

Seeing as how the Fed, Congress, Treasury, and White House Administration have collectively gone all in on deficit spending, the Treasury Department announced that it intends to borrow $3 trillion during the current quarter to cover the massive cost of the federal government’s response to the coronavirus crisis.

That number only accounts for the legislation that has been passed to date, however, and it will grow dramatically if the “Heroes Act” (or any other piece of major stimulus legislation) becomes law. This only begs the question of how the government intends to take back the stimulus at some future date.

If the Democrats win, higher marginal tax rates and the elimination of preferential tax treatment for capital gains and qualified dividends will be the solution. I don’t see how this scenario can be avoided. And here’s my bold prediction: Even if President Trump is re-elected, I think he too will decide to raise taxes on income, capital gains, dividends, and the transfer of wealth, blaming the cost of the pandemic.

President Trump’s Tax Cuts and Jobs Act (TCJA) that was supposed to deliver a huge spike in tax revenues has been effectively torpedoed by COVID-19. With this year’s annual deficit already projected to exceed $3 trillion (source: Congressional Budget Office), the ballooning debt will require more revenue from businesses and individuals while the Fed does all it can to keep interest rates near zero.

At the end of the day, the stock market will likely hiccup hard, but ultimately regain its footing because the economy will continue to steam ahead and capital flows into U.S. equities will continue because the U.S. will remain the greatest storehouse of wealth. However, if the election goes to Joe Biden, it might prove timely to book some long-term capital gains in 2020, while the max rate of 20% is still in effect

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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