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Biden’s Tax Plan & Your Portfolio

Many of you just filed your taxes within the last month, and during your discussions with your accountant, things may have turned toward the topic of Biden being president. His tax plan isn’t finalized yet, but if it gets through, we have addressed some strategic changes in the way we steward your assets. 

In fact, the number one question I’m getting in client meetings right now is, “Have you thought about Biden being president vs Trump, and how it affects my financial plan?” The answer is yes. I started thinking about that at 2 a.m. on November 4. 

Clients who’ve worked with us for years can see we started making changes into companies that had reduced or cut dividends because of the pandemic, but are strong American companies who can play the game at hand for the next four years, at least. 

Under the new Biden plan, capital gains would go up and match the ordinary income tax rate. Dividend income would become more attractive to investors, as it’s taxed at a lower rate. Just last week, Amazon issued a huge amount of debt, some as long as 40 years. Now, you may be wondering, why is Amazon issuing debt? I believe that Amazon’s accountants happen to be forward-looking enough to prepare for Biden’s proposal – this initiation of debt allows a corporation to write-off the interest payments. And, keep in mind corporate profits used for buy-backs are a tax liability. If Amazon were to use the funds raised by the debt issuance to buy back company stock, and then pay shareholders a dividend out of their corporate earnings- the tax liability is now passed to the dividend recipient. Corporate tax efficiency 101. I suspect we will hear of many more companies increasing their dividends over 2021-2022.

With Biden’s plan, it’s likely that this will become standard practice. Every four to eight years, something like this happens as our presidency changes over. We just have to pay attention. 

Recognizing the game and recognizing how the game can affect investment portfolios is of great importance – the tax game will change, and it’s important that you’re working with a financial planning team that knows how to help position you. 

How do we take advantage of all this? Covid created a bear market and a new bull market. With these new changes, you’re likely going to want to build a portfolio that is more Rip Van Winkle than Robin Hood. Ever since last fall, I’ve been looking at all of your portfolios and thinking about what stocks we’d still feel comfortable with if we all went to sleep for five years. Do they pay dividends, and do they generate cash flow that’s passed on to investors? Take a look at the stocks in your portfolio – I believe some are truly in better financial shape than the US government. 

All companies (stocks) benefit from business. Some benefited from people staying home, and some are benefiting now that we’re reopening. We’re always on the lookout for opportunities to add companies that are 1) in a sector where there is demand for their products of services 2) best of breed in their particular marketplace 3) selling at a discount to what we believe is their fair value.

My belief is that over the next four years, unless a company comes out of left field, there will be less turnover in your Envestnet portfolios as these tax changes go into effect. We are actively working on ways to take advantage of this administration that are different from the past. 

If you’re a current client, we’ll be talking about these changes with you once the Biden plan is approved. If you are not working with us yet, let’s chat. First meetings are always complimentary, and we’d love to give you a second opinion. Give us a call. 

Please consult with your tax professional for additional guidance regarding tax-related matters.

For advice appropriate to your specific situation, please consult a financial professional.

Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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