How Biden’s tax plan affects your clients

May 5, 2021
  • BlackRock

As a financial advisor, you likely notice a spike in calls from clients when markets go down … or taxes are rumored to go up. Nothing produces confusion or anxiety as much as the fear that your wealth is dwindling away.

Last week, President Biden announced a potential $1.8 trillion spending plan, and the focus in the media has been on proposal that long-term capital gains get taxed at the same rate as ordinary income for high earners.

Since you’re likely short on time, here’s something quick to send to your clients. Download our investor briefing here.

Key points

If you have time to scroll more, the main message here is that the proposed policies are just that – proposed policies. (You’re going to see the word “potential” or “proposed” quite a bit in this article). But it’s critical to stay in the know, as managing wealth through a tax lens is increasingly important.

At a high-level, the potential impact to your clients’ wealth highly depends on their taxable income level:

Image of Income tax and proposed tax changes

Keep steady

While it’s tempting to act now in advance of anticipated legislative changes, each decision requires careful analysis of a taxpayer’s specific situation, and it may be premature to act before we understand the likelihood of the policies to be enacted.

In the meantime, practicing good tax hygiene is always in order. Here are some guiding principles that we believe can help in the meantime:

  • Over the long-term, investors who are worried about tax implications may consider ETFs, which tend to be more efficient than the average actively managed fund, as well as municipal bond funds.
  • Optimizing a portfolio for after-tax returns often means placing the most tax-inefficient assets, those that generate a lot of taxable income, in accounts like IRAs or 401(k)s, leaving efficient strategies like ETFs to be located within taxable accounts.
  • The higher the tax rate, the more such location decisions matter. And for some investors tax-advantaged separately managed accounts allow for even further improvement in optimal tax management.

And in terms of the impact to markets, there’s little proof that tax increases lead to predictable outcomes. We did see a brief dip coincide with the release of the proposal, even though much of the proposed policies were well-known and publicized when Biden was running for President. It’s always interesting to see the market reacting to stale information.

The bottom line

Tax changes this year are neither certain nor necessarily permanent even if they are passed into law. Investors would do well to stick to their long-term goals yet focus on the value from tax-efficient strategies.

Regardless of the outcome, the recent proposal is a reminder that it’s increasingly important to view your client’s wealth through a tax lens.

We hope this primer for your clients can help.

Download “What Biden’s tax proposals may mean for your wealth” to send to your clients.