Taxes were a theme of President Biden’s first address to a joint session of Congress in April, as well as his campaign platform throughout 2020, which included plans for an infrastructure bill to be paid for with higher taxes. As a result, taxes are expected to play a significant role in driving the markets and economy in the months ahead, according to IMG Chief Portfolio Strategist, John J. Canally, Jr., CFA.
“This should not be a surprise to the markets,” Canally said. “This platform has been out there for nearly a year, and the markets are up roughly 15% to 20% 1 since the election in November.”
In late April, the Biden administration unveiled two proposals that could have significant implications for taxpayers. These include the American Families Plan and the American Jobs Plan, which the administration describes as “once-in-a-generation investments in our nation’s future.” 2 The proposed plans come on the heels of the American Rescue Plan, which was signed into law in March and continues to provide immediate relief to American families and communities.
However, Canally emphasizes that what a president proposes is just a proposal until Congress creates and passes legislation, which can take some time. While the consensus is that legislation will be brought to a vote sometime in late summer or early fall, the timing and passage of one or both of these plans remains uncertain.
“Right now, there is a lot of discussion about raising both corporate and individual tax rates.” Canally said. “Conversely, we may not see any tax increases at all.”
There have been several proposals that could impact everything from the estate tax exemption amount and estate tax rate, to the step-up in basis rules. We are also looking at possible changes to specific long-standing strategies such as Grantor Retained Annuity Trusts (GRATS) lifetime gifts, as well as income and capital gains tax rates. Even if none of the currently proposed legislation passes this year, many of the 2017 individual income and estate tax cuts will sunset in 2026, so we can expect an increase in taxes by then.
Since it’s in the “shopping” stages and too early to know what exactly will happen, Canally believes it’s a mistake for investors to guess at tax policy or make investment decisions based on proposals or legislation that may not materialize until much later in the year, or never.
For markets, the waiting is the hardest part, due to the uncertainty and the debates yet to come in Congress and the media.
“This uncertainty is likely to drive increased volatility until legislation is passed and we’re able to determine the clear winners and losers across companies, sectors and industries,” Canally said.
“That not only speaks to the importance of a diversified approach to investing, but to the benefits of professional investment management.”
That’s because, while federal taxes matter, when it comes to investing, everything else matters more. That includes economic growth, inflation, earnings growth, interest rates, etc.
“Taxes are important, but they aren't the key driver of investment returns,” Canally said. “When we look at historic trends, there is essentially no relationship between taxes and equity market returns.”
However, Canally believes taxes should always be considered from a planning perspective.
“Managing your tax exposure is critical when it comes to planning,” Canally said. “It’s why in our advisory programs we offer both taxable and tax-managed investment strategies and engage in tax loss harvesting on a regular basis at the individual account level.”
Canally urges investors who are concerned about the potential impact of the tax proposals or other tax matters to reach out to their TIAA advisor.
“Our advisors and wealth planning teams are here to help you locate your assets in the right accounts and assist with proper tax planning relative to your income, estate planning, and legacy goals,” he said.
“The reality is that tax policy is forever changing, that is the only certainty. That’s why we encourage clients to revisit their financial plan regularly,” says Dan Keady, TIAA’s Chief Financial Planning Strategist. As the details become known, we update our planning software and the implications of any tax law changes can be understood at the client level – which is where it really matters.” Tax law changes are often targeted, as is the case with many of the ideas being discussed by the new Administration. “When you update your plan you learn what it all means to you, and often times it means very little, and perhaps nothing,” said Keady.
TIAA will continue to expand on these themes and share information and insights to assist you in making important planning and investment decisions in the months ahead. To learn more about optimizing your planning to remain on course toward your important financial goals, schedule time to meet with your TIAA advisor.