In today's episode Nicholas Olesen, CFP®, CPWA® shares thoughts on financial planning for 2021 given the likely changes due to President-elect Biden's policies.
Nicholas talks about:
- GA runoff election has given Democrats complete control for the next two years
- The next large stimulus plan - where will the focus be and how much will it be fore
- Student loan debt forgiveness
- Affordable Care Act changes - "Bidencare"
- COVID vaccine rollout
- Cabinet selection under Biden
- Corporate tax increases to 28%
- SALT deductions to be brought back
- Additional tax, like NIIT or additional Medicare tax, coming for high income earners
Please send us feedback and any topic or questions you would like us to cover. Email us at: email@example.com
Hi, thanks for tuning into A Wealth of Advice. My name is Nick Olesen, Director of Private Wealth at Kathmere Capital. Today, I want to touch on 2021 planning and beyond looking at it from a financial standpoint. The new administration and President-elect Biden have announced a lot of policy of what they're going to try to do in their first hundred days and what they're kind of tackling.
Some of them were very similar to what we heard on the campaign trail, which we knew was going to. Come out. And then other ones are a little bit different. And most recently we had the Georgia runoff election that has solidified the democratic party to have control over, the government for the next two years.
So what is going to happen? I mean, one of the biggest things that we know, and this was talked about in a quote from President-elect Biden, he said "it is necessary to spend the money now.... the price tag will be high." And what he's referring to is another stimulus package or a plan. Now this one is. It had been talked about of doing both stimulus as far as infrastructure spending, but then also increasing the unemployment benefits and small business benefits and things that can kind of get us through whatever this next wave in the winter is of COVID and also just for those businesses that cannot, be in business or have had huge reductions in their revenue and their, their income. Wanting to help take care of them. With the Georgia runoff, really pushing towards the Democrats, or kind of tipping everything to the Democrats for full control of the government, the House, Senate and Presidency, we know that a lot of the plans that were kind of on the fence for about two months there in December and early January are now kind of back on the table. And what I mean by that is, is tax increases, rollbacks on corporate taxes, something with student loan debt. We have heard a lot about the student loan debt.
He, President-elect Biden mentioned that he does want to freeze interest rates or continue to freeze interest rates on federal student loans. And possibly forgive up to $10,000 for anyone who has federal student loan. Not really sure how that's going to go through, not sure, really kind of how they're going to tackle that as far as paying for that but that is one of the big topics that they are continuing to drive home about. And has been on the campaign trail for a while. The other really kind of main two topics that I would say that, that they're tackling or have talked about a lot, especially in most recent press conferences, has been continuous continuing to expand the affordable care act. This was a really big topic for both parties and president like Biden does not want universal healthcare, has not talked about that, like some in his party, but he does want to expand the coverage and benefits. He's joked that it's going to now be called "Bidencare" versus Obamacare and with the goal of kind of expanding that to a higher income that can qualify for it. You know, there are some income restrictions on it and so they want to make it so it's more affordable for most Americans to get healthcare, if you don't get it through your employer.
The other thing in the big one that they focused on a lot in this, this came before, while he was campaigning, and this also has been talked about ever since, almost daily I feel like, which is the vaccine rollout of for COVID, understandably. So that, that is a primary focus for the administration saying, "we will be in office in about a week and a half now," you know, I'm recording this on January 12th.
And so for them, they know that that is one of their top things that they need to tackle is getting the virus under control, getting vaccinations out there so that therefore we can get back. And without the vaccinations back then you are just continuously, you know, stimulating or adding more, to the debt to, to allow the economy to continue moving forward.
The other thing that's not talked about or really kind of hasn't hit the news headlines as much. But I think it's, it's one to think about as you're thinking about the policy, moving forward, one of the things that's going to be different from what we've experienced the last few years here and what is probably going to be the next four years here is, there's probably not going to be as many newsworthy headlines coming out of Twitter or other announcements that take people by surprise. Given that President-elect Biden has a lot of history in politics, we kind of had a well-known figure. We know what he is. I really don't think we're going to get surprises. I think this calm and this kind of structure is going to be positive for both policy and for those of us that are in the industry and looking at financial planning and looking into investing, to know kind of what to expect. They're not going to give you a very quick, drops on Twitter that's going to hurt, kind of the markets or, or flip flop, or where they're going to be a positive for the market. You know, these kind of spur, announcements.
The other thing that we find interesting, and we're starting to see, as he's forming his cabinet and pulling together individuals to help with the administration, is he's nominated those that we know a lot about. And some that we're very thankful that are coming in. For example, the one that I was interested in, I thought this was great is that he nominated former, Federal Reserve Chair, Janet Yellen, to be the Treasury Secretary. So this continues to kind of solidify and grow that coordination between the Fed and Treasury, which is going to be critical for Biden and a lot of his stimulus plans, you know, in order to write the check and have them go the right places, have those two working hand in hand.
Now there's a whole other topic we could talk about, which is, and it's been, talked about a lot, but, but we've never addressed it, which is, is what the Federal Reserve is doing for interest rates negatively impacting the world. Is it, is it hurting the growth of the economy longterm? Is it also hurting the income and the wealth disparities between, and that's a topic for another day. but when you look at it, look at kind of the, who he's nominated. It is going to be very good to see someone who has, a lot of knowledge and has, you know, obviously being the Federal Reserve Chair, she did a lot, to be able to work as the Treasury Secretary now and work with the Federal Reserve on what the next stimulus package and all of their plans are going to be.
So, what does that mean for us as investors? I only wanted to take a couple minutes to talk about policy. I really want to spend just a few more minutes here on what is, what do we believe is going to happen as, as investors what should you do then? You know, a lot of this is really kind of expectations.
You know, we don't have a solid plan as of right now about what that's gonna look like. We might, you know, a week from now this, this podcast could be irrelevant. I doubt it because I think that a lot of these, these policies and plans are going to be a work in progress for the next few months here. But what do we expect?
You know, one thing that we expect and they've gone after this is that the corporate tax cuts that were put into place a couple of years ago, they do want to roll back. So go from 21% today in corporate taxes back to 28%. Now that's going to negatively impact some small businesses, but there's some other ways they want to make that up. But they're really trying to go after the very large corporations that have very low taxes, at least, you know, in relation to taxes here in the US versus internationally. And that was one of the arguments when they first rolled out these cuts to the corporate tax rate is that kinda got us back in line with the rest of the world for corporate taxes.
But we do believe that they are going to go after that and, and cut those I'm sorry, increase those rates from 21% to somewhere around 28%. It is interesting. It is something as investors that we do look at because obviously that 7% differences is, pretty significant for corporations. So I don't really, expect that they're going to be able to go full 21 to 28% immediately might go 21 to 24 and then 28, the following year. But when that announcement comes out, we're not forecasters here now. I think, especially if you look at 2020, if I told you all the events were going to happen in 2020, you probably still would not have believed the stock market was up. So you never know what the stock market is going to do with these type of reactions, but something to keep aware of something, as you're looking at companies that have large revenues that have these, you know, going from 21 to 28% in taxes, does hit the bottom line, obviously.
The other thing we expect is a lot more regulation, that has been frankly, reversed or deregulation that we've seen recently, in the last few years here, there was a lot of deregulation, a lot of rollbacks on some of the policies that were put into place over the past two decades. And we expect some of those things to come back on. Again that might hit the bottom line for corporations, with new regulations, new taxes, things like that, something to be aware of, as far as kind of, headwinds for the markets. Not that they will react negatively to it. That's the one thing that we've always seen as is you never know how that's going to be.
As far as individuals taxes. There's a few things that we expect. We do expect the SALT deductions with the state and local tax deductions to be brought back. If you recall, in 2016, they created a cap on that, that it was $10,000 as your cap for being able to deduct that. It's incredibly controversial because it is mainly benefit the wealthy but there's a lot of, lower income earners that do have a higher SALT tax deduction. Think of those that live in California, in New York, some other large, or higher state taxed areas. And they did not, they, you know, they were negatively impacted when they took away the SALT tax deduction. So I think they're going to come bring that back. They're probably going to do that in line with other announcements of tax increases on the wealthy, again the discussion early on from President-elect Biden was that we will not be raising taxes on those that are under $400,000 in income. We don't know exactly where the nuances of that is, is that just tax rates will not go lower, I'm sorry, won't go higher for those at 400,000 or is it because of SALT deductions? You really don't know exactly what that's going to look like until the policy comes out, but we expect the SALT deductions to be brought back. And one of the biggest reasons why is a large amount of democratic voters are in California and large amount are in New York. And so you look at these large states with a large voting and a large democratic Individuals. And you're going to have that as kind of a big topic for them to talk about, for those of us to pay more than $10,000 in taxes for your state and local, you know, all of those, you're really excited about this because this will help when you go to file your taxes. Again, this was taken away slightly as far as, an advantage because of the large, standard deduction that came out. But it's still something that has negatively impacted some again, mainly benefits the wealthy. So that's why it is a little controversial here.
The other thing in relation to taxes that we do expect is some type of tax increase on high income earners, whether they create another bracket, think of it right now that you know, 39% or 37% is the highest bracket as of right now. They can increase, go back to kind of the 39.6% they had previously. That could be a possibility where they just kind of carve out and say, if you, if you make X dollars or more, you're going to receive that. increase.
The other thing that I think is kind of more likely, you know, yes, I think that's, that's fairly likely to happen. The other one that I expect, to happen would be if they do something similar to what they did in 2013 with a net interest income tax, they added 3.9% towards any income that you I'm sorry, any investment income that you earned if you made over a certain threshold of income. They also then, when the affordable care act was passed, they also added a 0.9% additional Medicare tax for those with higher incomes. So. When you look at that, that's kind of an easy way to tack on a tax without affecting tax brackets, where they can just kind of carve out these one or two offs.
And if you look at it, it's, you know, one or two or three or even 4% is in relation to the net investment income tax. And that drives a lot of revenue for the tax system. So I think that's most likely where they're going to start adding some on is, whatever they call it, adding some form of tax on towards the highest income earners, while also rolling back and bring it back the salt deductions.
As far as what the market does we don't know. I mean, that's one thing that we talk about all the time and forecasting is so hard. Go back and look at the forecast of what people expected in 2020 and what was going to happen. Look at what people were writing about in March and April of the market and expecting that maybe we'll eat out a gain for the stock market. And then we had, frankly, this kind of K shape recovery, out of 2020. You had the largest corporations in the US, the top, I think it was five from a chart that I looked at, top five stocks on average around about 50% return for the year. Kind of insane when you think about it. But the bottom 100, or I'm sorry, the bottom 400 from the, of the S&P 500 earned, just very low single digits.
And that was this very big difference that we saw those that, we're doing okay were able to save a whole lot. And so therefore, you know, we had very high, investment in interest. We had high savings rates. It's always hard to say what's going to happen. So I just want to end it with, look, these are all of our planning topics that doesn't mean we know what the market's going to do.
So what we look at is we're waiting to see policy that what's going to come out, but these are our expectations if you will, where they're going to be focusing and therefore where we as investors need to be thinking about. You know, when you look at taxes, could they roll something out in late 2021 for this calendar year? They could. That's definitely happened before. Most likely and more probable though, is that they're going to announce it in 2021 for 2022 and beyond. so. When you look at capital gains tax, when you look at income tax, you know, 20, 21 should be a year, very similar to 2020. but I would expect that it, by 2022, we have some differences in our tax code.
The other thing that we haven't touched on that's in here, that, that I wouldn't be surprised that they go after is the estate taxes. It affects such a small percentage of the population. that that might be one that they go after. It's not a huge revenue number, to be honest with you. So I don't know if they will, but that is definitely one that has been talked about a lot.
So I just want to end it there again, trying to keep these to about 15 minutes so that they're nice and easily to digest and we can touch on some good topics. We have a great lineup for the rest of this year, coming up with some guests, also some interesting topics for small business owners and executives where we're really going to dive into in some more details.
So we, took a little bit of a break, about a month off of recording. We're going to be back to doing the weekly podcast here.
So if you have any questions or topics, you'd love us to cover, please do reach out, let us know. the email is in the show notes and if you need anything, we'd love to talk.
Thanks again for tuning in. Have a great rest of your day. Take care.