Investment Guide: Reviewing 2020 and Financial Outlook for 2021

Investment Guide: Reviewing 2020 and Financial Outlook for 2021


With all of our advisors contributing content, this is Walkner Condon Financial Advisors’ first-ever comprehensive investment guide. The guide covers a wide-range of topics – from electric cars to the S&P 500 to sustainable investing, as well as some trends we see in the markets in 2021. The COVID-19 pandemic has affected nearly all aspects of our lives, and that thematic undercurrent runs throughout the course of this guide, both in the review of 2020 and the year that lies ahead.

Will My Taxes Change Under a Biden Presidency?

Will My Taxes Change Under a Biden Presidency?

If you’ve tuned into any of the Presidential debates, seen ads on TV, or scrolled through your  social media, you have probably heard some discussion around taxes. Joe Biden has stated that he plans to increase taxes on households with more than $400,000 in income and that if your household income is less than that you will not see an increase in taxes.

Let’s define “income”. In simplistic terms, your gross income is your salary. From a tax perspective, there are many derivations from gross income. By following a US tax return you would find that there are other sources of income (e.g. dividends, capital gains, IRA distributions, etc.) that will be included in your Total Income. Your Total Income is reduced by “above-the-line” deductions to arrive at your Adjusted Gross Income (AGI). From there, you subtract the “below-the-line” deductions, usually either the standard deduction or an itemized deduction, to arrive at Taxable Income. Why did I go through this mini-exercise of how to arrive at Taxable Income? Because Taxable Income, not Total Income, is what is subject to the tax bracket tables. So when Joe Biden refers to a household making more than $400,000 in income, he is likely referring to Taxable Income. For example, for those that have a household salary of exactly $400,000 would not be included in the group that Biden refers to, because ultimately their Taxable Income would be something less than $400,000. 

I don’t have a statistic to back this up, but I would guess that most Americans would lump all taxes into one giant tax bucket that ultimately goes to the federal government. Of course taxes are more complicated than that. For one, there are federal taxes, state taxes, and local taxes. Most of this blog will be focused on federal taxes. Furthermore, most of the time devoted to discussing taxes is around the federal individual income tax, because it affects a vast majority of people in the United States. I’ll also briefly touch on transfer taxes (estate and gift), retirement plan deductions, and corporate tax.

What proposed tax increases or changes have we heard about? 

Increase the top tax bracket. One of the easiest pieces of Biden’s tax plan to understand is raising the highest marginal income tax bracket from 37% to 39.6%. The 39.6% tax bracket wouldn’t be all that new; it is actually a reversion back to the highest marginal tax bracket in 2017, the last tax year before the Tax Cut and Jobs Act (TCJA) provisions took effect.

Increase capital gains tax. Biden also proposes an increase in the capital gains tax. A capital gain is realized when an asset (e.g. a stock) is sold at a price higher than the price that the asset was purchased. Long-term capital gains (the asset is held greater than one year) can be much more favorable than ordinary income tax rates. The proposal is to increase the highest long-term capital gain rate from 23.8% (technically it is 20% capital gains tax plus 3.8% net investment income tax = 23.8%) to the highest proposed marginal tax rate of 39.6%, for those “making more than $1 million”. It goes without saying that those making more than $1 million are making a pretty good amount of money, but it isn’t entirely clear if that refers to individuals or those married filing joint tax returns.

Flat credit for retirement plan contributions. This next point isn’t necessarily an increase in a tax rate, but it instead limits the amount taxpayers could deduct for their retirement plan contributions. Ultimately that could mean a higher tax bill for high-income earners. Retirement plans such as a 401(k) allow a worker to defer income taxes on the amount that they contribute to the retirement plan, within the IRS-allowed limits. IRAs have similar tax-deductible features. The way it currently stands, if someone in the 37% tax bracket were to contribute $10,000 to a tax-deferred retirement plan, they would realize $3,700 of savings for the tax year. Meanwhile, someone in the 22% tax bracket would only realize $2,200 of savings if they were to contribute $10,000 to the same tax-deferred retirement plan. Biden would like to equalize the tax savings by imposing a flat contribution credit. The Biden website doesn’t specifically propose what that flat credit would be, but some analysts expect a 26% tax credit. High income earners might want to reconsider their tax-deferred vs. Roth strategy if this were to go into effect. 

Elimination of stepped-up basis. One proposal that would greatly change how people approach estate and legacy planning is getting rid of the step-up in basis of inherited assets. In most cases, someone that has inherited assets from a decedent will receive a step-up in basis. For example, if someone bought $10,000 of stock (their basis is $10,000) and it appreciated to $100,000 and sold it while they were alive, they would realize a $90,000 gain. The $90,000 gain would be taxed at capital gains rates. If that same person died before selling the stock and passed it to a beneficiary, the beneficiary receives a “step-up” basis of the fair market value of the stock at the date of the decedent’s death (let’s assume it was $100,000). Therefore, if the beneficiary sold the stock right away for $100,000 they would not realize taxable gain ($100,000 market value – $100,000 stepped-up basis = $0 taxable gain). If Biden’s proposal were to come to fruition, the beneficiary would not receive the stepped-up basis and instead have to pay tax on the $90,000 gain. The Biden proposal could end up taxing unrealized gain obtained from an inheritance, meaning that the beneficiary could get taxed without even selling the assets. There would be some planning opportunities in this case, including strategically selling the assets during their lifetime, gifting the assets, or utilizing life insurance to help beneficiaries with a potential tax bill. 

Elimination of the QBI deduction. The Qualified Business Income (QBI) deduction will be eliminated for those that make over $400,000 in income. I will touch more on this later but this could essentially increase the tax bracket for high income, self-employed business owners from 29.6% (with QBI) to 39.6% (Biden’s proposed highest marginal tax bracket).

Increase the corporate tax rate. The TCJA reduced the corporate tax rate from a top rate of 35% to a flat corporate rate of 21%. If reelected, Trump intends to keep it that way. This is one of the provisions from TCJA that doesn’t sunset; it is permanent (unless the tax code is changed again). Biden proposes to increase the 21% tax rate to 28%.

What (most likely) would need to happen for Biden’s tax plan to go into effect?

First, win the Presidential election. Then the Democrats would likely have to sweep Congress by maintaining a majority in the House of Representatives and win a majority of the seats in the Senate.

What about the TCJA sunsetting?
Let’s not forget that most of the existing provisions that affect individuals and families from the Tax Cut and Jobs Act in 2017 are set to sunset on December 31, 2025. That means the following will go back to pre-TCJA code, unless the tax code is updated between now and then:

Individual/household tax rates
For the most part, households saw a reduction in their marginal tax rate under TCJA. However, those that have taxable income between $400,000 – $424,950 (married filing jointly) actually saw an increase in their top marginal tax bracket from 33% to 35%. After TCJA sunsets, the highest marginal tax bracket will return to 39.6% from 37%.

Standard deductions
The effect of the increased standard deduction was that more households utilized the standard deduction instead of itemizing their deductions. The standard deduction jumped from $12,700 to $24,000 (married filing jointly, and indexed over time) from tax year 2017 to tax year 2018, due to the legislation. When TCJA sunsets, the standard deduction will again be lowered and it might be more attractive for households to begin itemizing their deductions again. 

Itemized deduction limits
TCJA limited the extent to which once could utilize an itemized deduction. TCJA introduced limits on the following relatively common itemized deductions: State & Local Taxes (SALT) deduction, mortgage interest deduction, medical expenses deduction, tax preparation and investment expense deductions. Limiting the aforementioned deductions further encouraged more households to utilize the standard deduction.

Pass-through entity deductions
Up to 20% of Qualified Business Income (QBI) can be deducted from income received from flow-through entities. Business owners that are part of an S-Corporation, a partnership, sole proprietorship, or another pass-through entity that have utilized the 20% QBI deduction will have to resort back to tax planning strategies that they have used for several decades before TCJA was enacted.

Gift/estate/generation-skipping tax exclusion
The estate tax exclusion increased significantly under TCJA, which in 2020 is $11,580,000 per person. Most people will not be subject to pay estate taxes out of pocket due to this large exclusion. If the exclusion reverts back to 2017 levels (pre-TCJA), the exclusion amount would be $5,490,000 per person. Many more households would be subject to estate tax in the scenario of the reduced estate tax exclusion. 

In summary, there is a lot that is up in the air when it comes to how the tax code may change. It might not change much at all if President Trump gets re-elected or if Joe Biden gets elected and there is a split Congress. It could change significantly if Joe Biden gets elected along with a Democratic sweep in the House and Senate. The way it currently stands is that many provisions will at least sunset at the end of tax year 2025. My main goal of this blog is to provide some education and insight rather than try to convince you that one tax code is better than another. We would love to be a resource for you and will continue to keep our clients informed as new developments arise.

Mitch DeWitt, MBA, CFP®

COVID-19 and the Real Estate Market

COVID-19 and the Real Estate Market

The Coronavirus is affecting our lives in many different ways. Eating in with carryout and delivery instead of reservations at restaurants and bars, Zoom meetings and teleconferences instead of office meetings, waves instead of handshakes and hugs; the world is a different place than it was two months ago.

More of the Same….and Then It Wasn’t

The beginning of 2020 looked quite similar to the start of the last few years in the housing market. Then, as we know, everything changed in March with COVID-19. We are now left with many more questions than answers. Mortgage rates have fallen to even lower levels as the Fed is desperately trying to help the economy. This, in turn, created a glut of refinancing applications for mortgage lenders. However, the negative economic impact of COVID-19 is far reaching, creating tremendous liquidity problems within the banking system. It is difficult to close on a mortgage refinance when the money to pay off the existing mortgage is in limbo, or lock a rate on a mortgage application when the lender has no idea how long it will take to get to a closing table. Delinquencies on existing mortgages will certainly increase as homeowners deal with an uncertain job market, leading one of the country’s largest mortgage lenders, JPMorgan Chase, to change their lending guidelines in recent weeks.

Uncertainty Abounds 

The economy is in a very different place as well. Strong earnings reports and record low employment numbers have been replaced with the utmost of uncertainty. Almost every aspect of the economy is dealing with some level of ambiguity, with the housing market taking center stage. The housing market over the past decade has been, for the most part, quite strong. This has been fostered by low interest rates, ample cash liquidity, and friendly lending guidelines. This, however, has led to the issue of low inventory and excess demand for the last few years. While this has been positive for house prices and mortgage applications, it has created an imbalance. Builders are trying to take up the slack by fast-tracking new home construction, and anyone remotely interested in selling a home has been enticed with the idea of completing offers to purchase within days, instead weeks or months.

Housing Recession Imminent?

With all of this said, it would be easy to assume that the housing market is headed for a recession of its own, but I wouldn’t be so quick to come to that conclusion. This is one of the more resilient components of the overall economy. People need to buy and sell houses every day, regardless of what is happening in the rest of the economy. We will likely have a low interest rate environment for the foreseeable future, which should keep the market somewhat stimulated. 

What To Do?

What should you do if you are in the process of a refinance or house sale/purchase? First things first…don’t panic! Nothing good will come with trying to force the process to go faster or demanding that things happen. The task at hand will require more patience and understanding than in previous years. The refinancing timeline has shifted to a couple of months versus a couple of weeks. Locking rates will almost certainly become more difficult than it was before, and underwriting guidelines are changing. My recommendation would be to work with a mortgage lender who is in touch with the current protocol and can guide you through the process. You need to be working with a lender who provides specific advice and has a strategy for operating in this environment. This, in my opinion, isn’t the time for the internet lender who is offering a teaser rate of slightly below the market rate. This is a time for trusted advisors. If you need a recommendation, please let us know and we would be happy to provide you with the contact information of different lenders.

Nate Condon 

Investment Committee Meeting Recap: Responding to Market Conditions

Investment Committee Meeting Recap: Responding to Market Conditions

With work from home, school from home, and everything else from home, routines have been disrupted for many of our clients. Fortunately for us at Walkner Condon, our preparations for the need to work offsite (detailed in Clint’s post from March) have meant that our processes have largely remained unchanged. Last week, we held an investment committee meeting (via Zoom of course, with the proper password protections!), which is a key part of our ongoing investment management process. As part of our commitment to transparency, we wanted to share some of the thoughts we discussed during the meeting.

Portfolio Structure

In general, we have maintained our overall portfolio structures as they accord with our client’s risk profiles– that is to say, we have not made overall shifts from the percentage of assets allocated to bonds or stocks. However, in our discussion we also acknowledged that maintaining our long-term strategic outlook of correlating overall allocation to a clients’ financial plan is a tactical decision, especially in light of the market volatility.   

Bonds for Balance

That said, we have not left our clients portfolios untouched, and we discussed the various markets where we see opportunities and how to position our bond and stock portfolios. For instance, our overall strategy views our bond allocation as a defensive position in our clients portfolio. Consequently, our most recent rebalances look to make our bond positions more defensive in light of the ongoing uncertainty in the market. Moreover, we discussed how one of the advantages of smart-beta and active management in the bond portfolio is that it can lead to less risk exposure in negative environments like the present. Such a defensive position may help clients in the short term and also allow us to rebalance effectively into stock positions. 

Stocks for Growth

Regarding those stock positions, we discussed where we see longer term opportunities in the markets given the longer-term fallouts from the coronavirus. While we aren’t making any predictions about the shape of or the timeline of the U.S. recovery, we do continue to think that rebalancing towards a core of U.S. equities will be a solid investment for the long-term. In that context, we’ve also noted that in the previous ten years we have experienced marked outperformance from U.S. equities. The continuing strength of the U.S. dollar (which will lower the cost of their exports), coupled with a strong response to the global pandemic could mean that Asian stocks are also particularly well-positioned for long-term growth.

As we continue to discuss the strategies surrounding our clients and our portfolios, the key refrain of this discussion and others is that we need to continue to align our portfolios with our clients long-term needs and let the portfolio construction continue to be governed by our clients’ financial plans and goals.

The Walkner Condon Team

Authored by Keith Poniewaz

What’s Going On With The Price of Oil?

What’s Going On With The Price of Oil?

On April 20th, 2020 something happened that has never happened before in history. The price of a barrel of WTI oil for the May contract went negative and closed at -$37.63 for a barrel. But what exactly does this mean and why did it happen? 

It’s Not As Simple as Just Supply and Demand 

The price of oil is usually determined by supply, demand, and market sentiment toward the product. With the entire global economic situation suffering from shutdowns to combat the coronavirus outbreak, the demand for gasoline has drastically reduced and looking forward is expected to remain that way for at least several months. The supply of oil which is used to refine into gasoline as well as other energy sources has been increasing to unprecedented levels. There is only a limited amount of storage capacity available globally for this oil and due to the scarcity, the price has drastically dropped this year. On April 10th, the market went negative because traders capitulated based on the fact that it is cheaper to pay to have the oil hauled away and stored than it is to build more storage capacity or to shut down the wells that are producing it. So, with this historic market event, where do we go from here?

The Unprecedented Impact of Coronavirus

Moving forward, it is likely that many of the states will begin to reopen their economies. Other countries will also resume economic activity. How long this will take is speculative, but one thing that is certain is that the dramatic drop in price is evidence that the coronavirus has dramatically impacted the global economy, and it is going to take some time for the prices to recover. It is likely that some oil and gas companies will go bankrupt if this downturn in economic activity and oil persist. President Trump announced that the US would open up the strategic oil reserves and ask permission to buy up some of this oil and take advantage of the low prices as well as attempt to stabilize the market. It is likely that oil prices could continue to go down or stay down until the global economy resumes at or near “normal” levels. While it feels good to fill up our tanks for less than $20, it is not always a good thing for the overall health of our economy. 

How Does It Impact Investments?

There are more liquid investments on exchanges that attempt to track the price of oil such as USO, which tracks West Texas oil price, and BNO, which is tied to the Brent Crude oil price. It is important to know that they are investing in futures contracts of the commodity, and are not always able to take advantage of the drastic price swings. They are risky investments and complex in nature because of the rolling over of the monthly futures contracts and there should be significant due diligence done to understand the underlying risks of the investments before they are considered. 

There is a lot that goes into the market for oil and it is certainly a worry about the impact that it will have on the economic recovery. In the 1980’s there was a drastic drop in price and it took 7 years for prices to recover. Understanding the underlying reasons why oil prices fluctuate are important for investors, but it does not mean that you should necessarily take significant actions. 

Where Will The Price of Oil Go From Here?

As it has in the past, prices are likely to stabilize in the future. The economy will open up, and people will get back to work. The future will be determined by the tremendous global economy that has been built and grown on innovation and adaptability and there is no reason to believe that will not be the case this time either. In the meantime, go for a drive (safely and observing social distancing of course) and enjoy these low gasoline prices while they are here!

Jonathon Jordan


Disclosure Note: The discussion of oil and ETFs such as BNO and USO are illustrative in nature only. You should check with a trusted professional advisor before implementing any of these investments into your own portfolio. 


Where Are We Now In the Markets?

Where Are We Now In the Markets?

As our lives have all been upended due to COVID-19, with an extreme drop in value and subsequent rally in the stock market, many are wondering where we are now. Is it overvalued? Undervalued? Will we test a new bottom?  

The Stock Market is a Leading Indicator

Some may wonder – with death numbers increasing and uncertainty everywhere, why did the stock market go on a huge run the last week? The answer could be multifaceted, but one of the main reasons was because the death toll numbers were being adjusted downwards and the data is pointing towards more optimistic projections of ICU bed usage and critical cases. If we extrapolate that onto the projected “opening” of the economy, it appears that the more extreme measures we have been asked to take in regards to social distancing and staying at home are likely to be relaxed within the next 4-6 weeks. This has led to some positive momentum in the price of stocks.

Valuation of Stocks

If we look at the stock market price to earnings ratio (P/E), we will find that presently it is at about 17.6 (using SPLG as a benchmark). This is slightly above the historical average of 16 or so, but over the last five years, we have been running at a P/E in the low 20s. 

S&P 500 P/E Ratio, Last 5 Years

When either the numerator or denominator gets way out of whack, you can see the P/E spike, having the appearance of overvaluation. This can be a false flag, as seen by this chart showing P/E ratios after the 2008 crash. This event could occur again shortly, as earnings are about to get crushed by the freeze in economic activity. 

Chart of P/E Ratio of S&P 500, Historical

S&P 500 Historical P/E Chart

So what does this mean about valuations and the present stock market? It’s uncertain to be sure. If the virus doggedly hangs on and the policy by the state governors and the Trump administration is one of extreme caution, it is highly likely that the economy will take longer to recover. Another plausible scenario is that the economy gets opened up only to be shut down again after a return of momentum in COVID-19 cases. In either regard (and of course there are many other possibilities), the recent stock market rebound is pricing in a fairly rapid rebound in profits after the likely recession we will have in quarters 2 and 3. If this does not occur, it is very possible that stocks are overvalued at this time and we may see another significant pullback (or two) before recovering.

How Does Governmental Action Through the CARES Act and Federal Reserve Impact Economic Conditions?

What we have seen from the government in this crisis has been absolutely unprecedented. To compare and contrast the 2008 efforts with current action, here is a good article to read. There has been a massive effort to keep Americans on payroll and extend unemployment benefits to workers that previously did not qualify (like “gig” workers or freelancers). Furthermore, direct stimulus payments were sent to Americans that qualified and small businesses were allowed to participate in a variety of loan programs, some of which will offer loan forgiveness. Obviously this will eventually lead to long-term ramifications for our economy, many of which are unknown at this time. At a minimum, we will have incredibly high deficits in 2020 and likely beyond. This may lead to higher interest rates through borrowing costs, as well as increased unemployment insurance premiums for companies, a potential for inflation, and higher tax rates for both individuals and corporations. 

What Does That All Mean and What Should I Do? 

The best analogy I heard recently was that the economy is like a muscle. If you do nothing to your body but sit, your muscles will atrophy. The longer your muscles are allowed to be dormant, the longer it will take to get them back into shape. If allowed to go too long, those muscles may never recover, and even if it is relatively short term, some lasting damage could still be done. While it is likely not responsible for us to just open up the floodgates to accept an increase in virus count, there also will be a balance point where opening the economy to allow for goods and services to be consumed more freely makes sense. 

So….what to do? Continue to look at the data. There’s tons of great sources, including Worldometer, COVID-19.direct, and IHME. Practice social distancing, be safe, and start to make a plan for how you are going to handle your financial and personal life after we are allowed to return to our places of business, coffee shops, and recreational areas. Get out for frequent exercise and fresh air (we just found out that BMI is a significant factor in being hospitalized in coronavirus cases), and enjoy the responsibilities of being a teacher or simply just enjoy being a Zoom meeting happy hour participant. Whether the stock market goes straight up from here or it tests a new bottom, this too shall pass. 

Clint Walkner

Disclosure: The post was written in a rapidly changing environment for the stock market. You should not treat any of this commentary as investment advice. Please work with a professional advisor to discuss your own personal financial situation. Charts were presented as illustrative in nature only.