The Election Results and Your Portfolio

With last week’s elections resulting in Democratic control of both the House and Senate, we’ve received several questions about what this could mean for taxes and financial planning. While elections tend to generate significant headlines and speculation, the distinction between political proposals and actual legislation is critical.

None of these proposals represents an agreed legislative agenda, and there is no reason to assume that any particular change will become law. In fact, from a political gridlock fan’s perspective, the divided government created by this election makes substantial changes less likely over the next two years. The more interesting question may be what happens following the 2028 presidential election, when the political environment could look quite different. Death and taxes may have been the only guarantee, but given a high national debt level and historically low tax rates, I’d argue that death and higher taxes may be the modern guarantee.

In the short term, President Trump remains in office for another two years, making substantial changes to the tax code unlikely without bipartisan agreement. However, the election does provide some insight into the direction tax policy could take in the coming years, particularly if Democrats regain the presidency in 2028. With that in mind, there are several areas we are watching that could inform our advice over the next few years:

Estate and Gift Taxes

The current federal estate tax exemption is $15 million per person, with annual inflation adjustments beginning in 2027. Some lawmakers have proposed reducing that exemption to as little as $3.5 million while increasing the estate tax rate. Although these proposals face significant obstacles under the current administration, families with larger estates may want to revisit their long-term gifting and estate planning strategies.

Individual Income Tax Rates

The highest federal income tax bracket is currently 37%. Proposals from lawmakers have included increasing the top rate to 39.6% or even 43%. For high-income households, changes of this magnitude could affect the timing of Roth conversions, deferred compensation, retirement distributions, and other income recognition decisions.

Business Owners and Tax Deductions

The 20% qualified business income deduction and 100% bonus depreciation were made permanent under last year’s tax legislation. Both provisions have been subjects of past tax reform discussions, particularly for high-income taxpayers. Business owners contemplating significant investments, business sales, or changes to their compensation structures should evaluate how future legislation could affect their plans. This could become particularly important when weighing legal structure decisions and the corresponding corporate vs. individual tax rates.

Social Security Taxes

Several proposals would increase Social Security taxes on higher earners, either by eliminating the current wage cap or reintroducing the tax on wages above $400,000. For 2026, Social Security taxes apply only to the first $184,500 of wages. Changes could be particularly meaningful for business owners, who would likely have the employer tax increase with the higher income limit, and high-income employees who have in the past avoided 6% of tax above the wage limit.

Investment and Retirement Strategies

Additional proposals have targeted large retirement account balances and certain tax-advantaged investment structures. Separately, the Treasury and IRS can modify their interpretation or enforcement of existing tax rules without new legislation. This is an important reminder that some financial planning strategies carry regulatory risks even when the underlying tax laws remain unchanged.

Our approach at Scholar remains the same regardless of which party controls Washington. We believe financial plans should be designed to withstand a range of possible outcomes rather than relying on predictions about the next election or a piece of legislation. This is why we typically avoid relying on advantageous tax environments in our financial strategies over the long term. We want to build as many optionality levers into a strategy as possible in areas that you can control. We will continue to evaluate potential changes that could materially affect your financial situation and incorporate appropriate strategies into our recommendations.

As always, thoughtful preparation tends to be more valuable than hurried reactions to political headlines. Enjoy the lack of political text messages and phone calls for the next 18 months.

– Stephan