Bob’s Journal for 1/28/21

Here’s What’s Likely to Happen to Income and Estate Taxes

The 2020 election is behind us, the inauguration is over and the tax picture for the next couple of years is becoming clear.

In mid-2020, the polls indicated a big Democratic sweep was developing. If that had occurred, it probably would have led to significant increases in income and estate taxes in 2021 or maybe 2022.

Instead, the Democrats lost seats in the House of Representatives and the parties are equally split in the Senate, with Vice President Kamala Harris casting the deciding vote to break any ties.

In addition, not all Democrats are big fans of tax increases. So, we cannot assume all Democrats would vote for whatever tax increases are proposed.

Plus, the economy is weakening, so it’s not a good time to increase taxes.

This means President Joe Biden won’t be able to push through many of the income and estate tax increases in his pre-election platform. In fact, he has stated that 2021 will be focused on the COVID-19 pandemic and climate policies.

All these things taken together mean major tax changes are deferred to 2022 or later.

There likely will be a few tax provisions in any additional stimulus law that is enacted, but they will be tax decreases, not increases.

One tax law that could be enacted is the Securing a Strong Retirement Act, co-sponsored by the chairman and ranking member of the House Ways and Means Committee, Richard Neal (D-MA), and Kevin Brady (R-TX).

The bill is intended to expand retirement savings opportunities, building on the SECURE Act enacted in December 2019. It would create new financial incentives for small businesses to create retirement plans, increase automatic enrollment in retirement plans, delay required minimum distributions to age 75 and offer more savings opportunities to those 60 and older, among other provisions.

But the Act currently doesn’t have a way to pay for these benefits. It is likely that, as with the SECURE Act, a provision will be inserted when the bill nears passage that takes away one or more important retirement or estate tax benefits, just as the SECURE Act eliminated the Stretch IRA.

Other than that, I expect proposals for significant increases to be delayed to 2022 or 2023. Keep in mind that a number of Republican Senators are up for re-election in 2022 or have declined to run for re-election. There is the potential for Democrats to have a larger majority in the Senate in two years than they have now.

The political situation gives us at least a year to set up our retirement and estate plans to protect our financial security from the tax increases that are likely to come.

Expect Changes in Social Security

Changes will be made in Social Security. The questions are: What will they be? When will they be made?

As I have reported, the Social Security retirement trust fund is going to run out of money. The 2020 report from the trustees of Social Security estimated that would occur in 2034. But that was before the pandemic. Other sources have estimated the trust fund will be exhausted between 2030 and 2032. We’ll receive the trustees’ latest estimate in a few months.

During the 2020 campaign, Joe Biden proposed across-the-board increases in Social Security benefits. He wants to increase the guaranteed minimum benefit to 125% of the federal poverty level, increase benefits by 5% to those who have been receiving them for at least 20 years and increase payments by 20% to widows and widowers. He also would increase the annual cost of living adjustment in benefits.

Social Security taxes currently aren’t imposed on salaries above $142,800. Biden initially would impose them on salaries above $400,000 and phase them in on salaries between $142,800 and $400,000.

Over time, the payroll taxes would be imposed on all wages.

But those taxes would pay for only a fraction of the benefit increases Biden proposed.

The Biden proposals are very similar to the Social Security 2100 Act proposed by Congressman John Larson (D-CT).

With the trust fund expected to run out of money in about 10 years, those levels of benefit increases are unlikely to be enacted.

But Congress must act within a few years to avoid automatic benefit cuts of 20% to 25% once the trust fund runs out of money. Annual payroll tax revenue into the system is expected to be enough to pay for 75% or more of promised benefits. Once the 2021 report from the Social Security trustees is issued with a fresh estimate of when the trust fund will be exhausted, Congress will start to consider changing the system.

When Congress takes action, I expect that it will protect the benefits of those already retired and who are old enough to retire in the next five to 10 years, except perhaps for those with very high incomes or net worths.

It is likely some form of additional means-testing will be enacted. Those with higher incomes might pay higher income taxes on their Social Security benefits or receive reduced benefits.

Some version of Biden’s payroll tax increase is likely to be enacted on those who are still working, and the payroll tax rate might increase.

For future beneficiaries, the program might return to its roots of being a program that ensures all older Americans a minimum income that is unrelated to the amount of taxes paid into the system. The minimum income might be increased from today’s amounts by decreasing benefits below current levels for those with higher incomes.

Congress probably will find a way to increase benefits a bit for those who already are retired or who will retire in a few years.

Overall, I expect today’s beneficiaries and those who are likely to be beneficiaries in a few years will be in the same situation or better off after Congress acts (except for those with higher incomes). Those younger than 45, especially those with higher incomes, will be worse off than under the current system.

Big Changes in the Stock Markets

There are big differences between the performances of stock market sectors in 2020 and so far in 2021.

You might remember that in 2020, technology was the winning sector by a wide margin and consumer discretionary came in second.

So far in 2021, there is a large gap between the highest- and lowest-performing sectors, with a difference of almost 15 percentage points as of last Friday’s close. Remember, that is after only three weeks of trading.

The big winner so far in 2021 is energy with a return of 11.0%. Consumer discretionary is second again, but it’s way behind with a return of only 5.0%. (That would be a respectable three-week return in most years.) The overall S&P 500 Index was up 2.3% over the same period.

The worst-performing sector is consumer staples, with a loss of 3.8%. Remember, consumer staples surged in the first part of 2020 as people hoarded basic supplies during the pandemic. As of last Friday, industrials had lost 0.2% and utilities had gained only 0.2%.

Technology is up only 2.1%, trailing the broad index.

I don’t know if we can anticipate anything about the rest of the year from these first few weeks of trading, but so far it certainly has been a big change from 2020.

The Data

New unemployment claims increased by 847,000 in the latest week. That’s better than expectations and less than the previous week’s revised 914,000 new claims.

Continuing claims declined by 203,000 to 4.77 million. That’s the lowest level during the pandemic.

The total number of people receiving some form of unemployment benefits increased by 2.29 million to 18.28 million. That’s because the stimulus package enacted at the end of December restored and extended benefits that had expired.

New home sales increased by 1.6% in December from November’s level. That’s a 15.2% increase from December 2019’s level. In 2020, new home sales were 18.8% above the 2019 total.

Existing home sales in 2020 rose to their highest level since 2006. Sales increased 0.7% in December from November’s level. Over 12 months, sales rose 22%.

Realtors say sales would have been higher but there are more people interested in buying than there are homes for sale.

As a result, home prices are increasing rapidly, which keeps some potential buyers out of the markets.

The S&P Corelogic Case-Shiller Home Price Index increased 1.4% in November. This follows a 1.6% increase in October. Over 12 months, prices nationally are up 9.1%.

Over 12 months, home prices in all cities in the index were up at least 7%. There now are only four cities (Phoenix, Miami, Chicago, and Las Vegas) where current home prices are less than the housing bubble peaks.

The FHFA House Price Index reported similar results. It reported prices increased 1.0% in November and 11.0% over 12 months.

The overall economy improved in the first half of January, according to the PMI Composite Flash Index. The composite index increased to 58.0 from 55.7. The manufacturing sector improved to 59.1 from 56.5. The services sector rose to 57.5 from 55.3.

The Dallas Fed Manufacturing Index for January reported that the sector slowed in Texas. The General Activity Index was 7.0 in January, down from 9.7 in December. The Production Index was 4.6, down from 25.5 in December.

The Richmond Fed Manufacturing Index told a similar story. It was 14 in January, compared to 19 in December.

Durable Goods Orders increased 0.2% in December. They had increased a revised 1.2% in November. Core capital goods orders, which is considered a good measure of business investment, increased 0.6% in December, following a revised 1.0% increase in November.

Consumer Confidence, as reported by The Conference Board, increased slightly in January to 89.3, from a revised 87.1 in December. This is in contrast to the Consumer Sentiment index from the University of Michigan, which has declined in recent months. The next Consumer Sentiment index will be released Friday.

The Leading Economic Indicators index from The Conference Board rose 0.3% in December. That follows a revised 0.7% increase in November.

Gross domestic product (GDP) increased by an annualized rate of 4.0% in the fourth quarter, according to the first estimate. That follows a record 33.4% increase in the third quarter.

For the year, GDP declined 3.5% in 2020. That’s the first annual decline in GDP since the financial crisis and the largest since 1946.

The Markets

The S&P 500 lost 2.47% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 2.73%. The Russell 2000 fell 2.33%. The All-Country World Index (excluding U.S. stocks) dropped 2.91%. Emerging market equities decreased by 3.43%.

Long-term treasuries rose 0.86% for the week. Investment-grade bonds lost 0.23%. Treasury Inflation-Protected Securities (TIPS) added 0.16%. High-yield bonds fell 0.66%.

In the currency arena, the U.S. dollar increased 0.20%.

Energy-based commodities lost 0.31%. Broader-based commodities rose 0.04%, while gold declined 1.57%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.