As the election approaches, investors are bombarded with a myriad of tax policy proposals that may lead to increased stress and hasty financial decisions. The Democratic nominee, Vice President Kamala Harris, plans to introduce middle-class tax cuts while raising taxes on the wealthiest individuals and corporations. On the other hand, former President Donald Trump, the Republican nominee, aims to extend tax breaks implemented during his first term and eliminate taxes on Social Security benefits. Additionally, Trump supports imposing higher tariffs on imported goods from other countries. The sheer volume of diverse proposals can often result in knee-jerk reactions among investors, warns certified financial planner Louis Barajas.
The Disconnect Between Campaign Promises and Enacted Legislation
While candidates may make bold tax proposals during their election campaigns, the actual implementation of these policies requires approval from Congress. The uncertainty surrounding the future control of the House and Senate further complicates the likelihood of any proposed tax changes becoming law. According to financial therapist Rick Kahler, candidates’ budget plans are often filled with proposals that never come to fruition. Key unresolved issues include the expiration of several tax breaks enacted by Trump in 2017, which are set to lapse after 2025. These provisions include adjustments to federal income tax brackets, standard deductions, child tax credits, and estate tax exemptions, among others.
The Need for Strategic Financial Planning
Given the ambiguous nature of impending tax changes, families and financial advisors are faced with the challenge of multi-year planning without a clear picture of what provisions will be extended. Barajas stresses the importance of refraining from making premature financial decisions based solely on proposed tax legislation. Acting impulsively in response to proposed tax laws can lead to adverse outcomes if the legislation fails to materialize or undergoes significant alterations during the legislative process. Financial decisions should be guided by long-term financial goals rather than immediate emotional reactions, as emotions often dominate the decision-making process in financial matters. Kahler points out that a “scarcity mindset” triggered by fears of increased taxes can cloud investors’ judgment and impede rational decision-making. Thus, it is crucial for individuals to avoid making major financial decisions under the influence of strong emotions, as fear and panic do not align with prudent financial practices.
The impending presidential election and the accompanying tax policy proposals have the potential to unsettle investors and evoke impulsive financial decisions. However, it is imperative for individuals to maintain a rational and strategic approach to financial planning, especially in the face of uncertain tax legislation. Rather than succumbing to fear and anxiety, investors should seek to align their financial decisions with long-term goals and objectives. By exercising caution and refraining from hasty actions based solely on campaign rhetoric, investors can navigate the complex terrain of tax policy changes with prudence and foresight.