What tax changes matter most to you?

With the possibility of adjustments ahead, not all changes will impact everyone equally.

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Every 4 years, we take a look at how the presidential and congressional elections may impact your personal finances: taxes, investments, health care, retirement, and more. Our analysis is intended to be non-partisan and focused on helping you plan today for potential scenarios and outcomes.

Key takeaways

  • What tax changes matter most to you depends on your personal situation.
  • The 2020 election could impact many types of taxes: personal, capital gains, and corporate.
  • To prepare for potential changes, you may want to consult with a financial professional to assess your current situation.

Elections and your money

Learn how different 2020 election outcomes could impact your finances.

Elections come and go, but taxes are forever. During election seasons, there are often proposals of all sorts to change the US tax code, a complex set of federal laws that runs in the thousands of pages and impacts nearly every aspect of our financial lives.

This season, many Republicans are talking about further cuts to individual, corporate, and capital gains taxes, which were reduced dramatically in 2018. The President has also spoken of eliminating the payroll tax. Meanwhile, many Democrats are advocating shifting the income tax burden from lower- and middle-income families to upper-income taxpayers and corporations, while raising taxes on dividends and capital gains.

However, changes are complicated and require a lot of coordination between the President, Congress, the Treasury Department, and the Internal Revenue Service to enact reform. That means small or technical changes happen more frequently than comprehensive reform.

What matters most to you may depend on your personal situation.

If you’re working and don’t have a lot of investments outside of 401(k)s or other qualified retirement accounts, then you may be most directly impacted by changes to federal income taxes. Changes in the payroll tax, also known as FICA, could also make a difference for you. On the other hand, if you are retired or living off investment income, then the rates on capital gains, dividends, and interest are important. And if you own a business structured as a corporation, then you may care what happens with corporate taxes.

As you think about the changes that might be ahead for taxes, no matter which way the pendulum swings, you may want to think about ways to adjust to those changes.

Tax brackets

Talk about changing tax brackets often focuses on the rate at the very top—which is now 37% in 2020 for individuals and heads of households earning over $518,400, and $622,050 for couples filing jointly, after the Tax Cuts & Jobs Act of 2018 brought the top rate down from 39.6%.

"But for the average American, the top rate won't impact them," says Christopher Williams, principal at EY Private Client Services.

For people earning $80,000 to $320,000 as individuals or heads of households, what could matter is whether changes shift you to a higher or lower bracket and what that does to your effective tax rate, meaning the overall rate you pay on your total income.

Capital gains

The vast majority of Americans do not report any taxable stock transactions in the typical year, and only about 15% report gains from the sale of equities in taxable accounts, according to IRS statistics. But the amount adds up for those who do have gains to report.

"The rate of taxation on large transactions has the potential to matter to wealthy investors," says Matt Kenigsberg, vice president, investment & tax solutions at Fidelity.

Right now, rates on long-term capital gains are on the lower end of where they have been historically, at 0% for single filers up to $40,000 in income, 15% to $441,450, and 20% over that amount.

"It's unclear how much lower they could go down," says EY's Williams. "If they go up, you may see people want to refocus on tax efficiencies in taxable accounts."

Corporate taxes

Unless you own a C corporation (as opposed to an S corp, LLC, or other entity), changes in rates could have very little direct impact on you. However, you can look at what happens with corporate taxation in the macroeconomic sense, and see the potential impact down the line on individuals in the US.

Increases in taxes have historically come along with increases in government spending, and that can affect the overall picture for corporations and individuals more than just a conventional-wisdom assumption such as: If taxes go up, corporations see a 5% hit in earnings.

"Spending more than offsets it, both from an economic and stock market perspective," says Fidelity sector strategist Denise Chisholm.

"And, ultimately, tax bills do need to be revenue-neutral," adds Williams. "If Congress can bring in more revenue from corporate tax dollars, then they need to collect less from individuals."

Baskets of deductions

Your 1040 is almost like a fingerprint—unique to you in all your complexity as a taxpayer. The tax changes that could impact you the most will depend on your situation.

Almost everything is up for grabs right now. Many of the provisions of the Tax Cuts and Jobs Act will expire after 2025 if they are not extended (or repealed even earlier by additional Congressional action).

For instance, if you own property in a high-tax state like New York, New Jersey, or California, the most dollar impact to you might be if the next round of tax reform restores the full deduction for state and local taxes (SALT) if you itemize your return.

But then again, says Williams, "If the restoration of the SALT deductions comes with the resurrection of the alternative minimum tax, then it might be a wash for most people."

Make a plan

To prepare for potential changes, you may want to consult with a tax advisor to assess your current situation and then decide if you need to change your long-term financial strategy. And, you may want to consider taking advantage of current rates in a variety of possible ways.

  • Review your tax return to assess how much of your income is subject to taxes. Looking at your taxable income (e.g., adjusted gross income minus deductions) will keep you better informed about potential impacts as new tax legislation occurs.
  • You can assess your long-term investing plans and see if tax-loss harvesting makes sense for you.
  • You can consider accelerating some income into 2020 to pay the tax on it in the current year.
  • If you are considering making a large charitable contribution, you can evaluate the timing of it in light of how the value of the potential tax deduction might change.
  • If you are wondering about your tax bracket increasing in retirement, it might be a good idea to consider shifting some of your tax-deferred savings now into a Roth IRA, which will have tax-free growth potential and will not be subject to required minimum distributions (RMDs), helping to lower your taxable income in the future.

Next steps to consider

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