Almost all federal elections cause anxiety over taxes. But this year's contest offers an unprecedented divergence of policy and wrong planning choices could wind up being painful, advisors say.
“Not only from a capital preservation but a tax exposure standpoint as well,” said James N. Mohs, associate professor of accounting at the University of New Haven in West Haven, Conn. “The two parties have diametrically opposed positions on tax policy.”
Among issues at the forefront is whether to renew the 2017 Tax Cuts and Jobs Act (TCJA) or let many of its provisions, including rules influencing tax rates and estate taxes.
“With the sunsetting of many of the TCJA provisions coming at the end of 2025, there will likely be significant tax legislation next year and of course the results of our elections this fall will have significant impact on those efforts,” said Chris Murray, practice leader in tax services and partner at Aspiriant in San Francisco.
“The upcoming election raises significant concerns, particularly regarding the expiring tax exemptions for bonus depreciation and the estate tax exemption,” added Paul Miller, CPA and managing partner at Miller & Co. in New York. The current bonus depreciation law, for example, allows businesses to immediately deduct a large percentage of eligible property costs. “This provision is set to phase down ... to 20% by 2026,” he said.
“Given the political uncertainty, taking some steps now to help mitigate tax implications is important,” said Todd Neal, client management partner with Callan Family Office in West Palm Beach, Fla. “Prior to the TCJA, there were seven federal income tax brackets ranging from 10% up to 39.6%. These rates were lowered, with the top rate set to 37%, and the brackets widened, which has reduced federal income taxes significantly for many taxpayers and brought higher tax refunds. Old 2017 federal tax brackets will be reinstated after 2025.”
The two front-running presidential candidates, in general, stand behind their parties’ familiar priority for taxes: business encouragement versus social programs and greater income equality. Investors can’t help but be concerned. A recent survey by the U.S. Chamber of Commerce showed that most voters believe that higher taxes will lead to higher prices and that most also think that federal taxes paid by American families and businesses is already too high.
“Many clients and investors see the tax increase platform to be deleterious to the economy,” Mohs said. “In particular, the increase in corporate tax rates will have a trickle-down effect on profitability, which in turn will be passed along to the consumers or potentially cause investor capital erosion. History has shown us that you cannot tax your way out of an inflationary economy unless you also cut costs or services.”
“Wealthy clients are becoming increasingly aware that the results of this year’s election could have a profound impact on their taxes. The tax uncertainties inherent in this election cycle are disruptive and definitely can cause anxiety,” said Mark Baran, managing director at CBIZ MHM’s National Tax Office. Clients “want to know tax-planning options relating to various tax legislative scenarios, whether it involves a continuation or expiration of TCJA, broad-based tax reforms that target wealthy individuals and corporations or piecemeal legislation to address primarily bipartisan priorities.”
Whatever clients’ concerns, there’s still time to tax plan.
“Clients may want to consider gifting while the higher exemption amounts remain in effect or accelerate income if they believe their tax brackets will rise,” Baran said. “Clients shouldn’t wait until the last minute to undertake tax planning. This year, year-end tax planning discussions with tax advisors should be occurring earlier and more frequently.”
“Since the tax platforms are changing almost daily as the presumed candidates campaign, it may be too early to make any strategic tax moves,” Mohs said. “Investors in general would probably be well advised to hold off until both conventions select their candidates and [formally] announce their respective platforms.”