Markets, Taxes, and the Build Back Better Plan

By Dr. Sylvia Kwan

Historically, September has been the worst month for the stock market. Since 1950, the S&P 500 has averaged a 0.5% decline during September months. Market watchers predicted that this September might be different, but it turns out they were wrong. The September Effect was in full force this year, with the S&P 500 down 4.8% for the month, the DJIA down 4.3%, and the NASDAQ down 5.3%.

Investors had plenty to be nervous about. One of China’s largest real estate developers, Evergrande, missed an $83 million interest payment on a US-dollar-denominated bond and is facing a $300 billion debt crisis, hundreds of unfinished projects, and the decline of property markets. The potential collapse of such a large conglomerate would not only damage banks, homebuyers, and suppliers; it would also shake China’s financial system, which could ripple through global financial markets.

Here in the US, the threat of a government shutdown, should Congress not pass a bill to raise the debt limit, was underscored by worries about ongoing inflation, supply chain bottlenecks, and the Federal Reserve’s tapering of bond purchases and intent to raise interest rates. At the same time, President Biden has proposed an ambitious $3.5 trillion budget plan to expand benefits like Medicare, subsidized child care, and paid family and medical leave, and to provide tax incentives aimed at reducing carbon emissions.

To pay for these programs, the bill proposes, among other things, raising taxes on both corporations and high-earning individuals. Should the bill pass, the top corporate tax rate would increase from 21% to 26.5%, and the top marginal personal income tax rate would increase from 37% to 39.6%. At the same time, those higher rates would apply to lower income amounts; some believe the biggest impact would fall not on the highest earning Americans, but those earning from $400,000 to $1 million in income. But even those earning less could be impacted if they were to sell a business or a home, especially in expensive cities.

It’s hard enough to plan for taxes when they are known, but infinitely more challenging when trying to guess which proposals will get passed. While we never recommend making investment decisions based purely on taxes (or possible tax changes), we do believe that smart tax planning can make a difference when seeking to achieve higher after-tax returns. Earlier this week we spoke with Lydia Vercelli, CPA and Tax Managing Director at BDO, a leading global accountancy firm, to help us understand what’s being proposed and to guide us in what we should be thinking about. If you missed it, you can still watch the recording.

It will be some time before we have clarity, but for now: At Ellevest Private Wealth, we actively seek to improve after-tax returns through tax-loss harvesting, strategic use of cash flows in rebalancing, planned realization of capital gains in consideration of current and future income, and the use of donor advised funds and opportunity zone funds as appropriate. We also carefully consider the tax efficiency and after-tax expected returns of each investment we select for our clients’ portfolios, as well as the best placement of each type of investment across taxable and tax-advantaged accounts.

We plan to stay in the loop as news about this bill develops — and keep you in the loop, too. And, of course, should you have any questions about your investment strategy or financial plan today, our team of Ellevest Private Wealth Advisors is here to help.


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Dr. Sylvia Kwan

Dr. Sylvia Kwan is the Chief Investment Officer of Ellevest.