COVID-19 has unleashed the worst bear market since the great financial crisis (GFC) of 2008. As of April 3, the stock market (based on the S&P 500) has declined 26.7% from its all-time high on February 19. The maximum loss occurred on March 23 @ 35.4%. How does this compare to GFC in 2008? The S&P 500 declined by 57.7% during the financial crisis in 2008. Will the COVID-19 bear market exceed the GFC bear market in terms of percentage decline? Of course, it’s impossible to forecast. However, the federal government and Federal Reserve have been introducing massive economic stimulus programs and aggressive monetary policies in an effort to preserve the domestic economy and stabilize the financial markets. Let’s review the specific details of these stimulus programs and monetary policies. Additionally, let’s discuss the potential tax consequences of these aggressive policies.

On March 27, President Trump signed into law the CARES Act, the largest financial aid package in the history of the United States. Essentially, the legislation is designed to provide financial relief to millions of American families who had their lives disrupted by the coronavirus. In addition to the CARES Act, the Federal Reserve Board has introduced aggressive monetary policies. Please review a small sample of the various programs and initiatives enacted by US leaders over the course of the past few weeks.

  • $1,200 delivered to every American taxpayer (based on income threshold)
  • $500 delivered to every American child (based on income threshold)
  • $377 billion in grants and loans for small businesses
  • $500 billion in loans to large corporations
  • $153 billion in funding to hospitals and community health centers
  • $340 to state & local governments who are struggling with COVID-19 expenditures
  • Delay tax filing deadline to 15 July for all American citizens
  • Temporarily suspend interest payments on student loans from US Dept of Education
  • Federal Reserve cuts short-term interest rates to 0%
  • Federal Reserve unveils unlimited government bond purchase program (known as QE)
  • Federal Reserve enacts a corporate bond and municipal bond purchase program

This list represents just a small sample of the trillions of US Dollars that have been placed into our nation’s economy. Without question, this is the largest coordinated effort to stimulate economic activity in the history of the United States. The total price tag will be well over $4 trillion.

The CARES Act and Federal Reserve policies have been highly praised by the vast majority of Wall Street bankers, corporate executives, investment professionals, and leaders of the academic community. They all agree that these economic stimulus packages are absolutely necessary in order to prevent a collapse of the US economy. However, in addition to the positive aspects of the CARES Act and monetary stimulus, there is also an enormous price tag attached to these programs in the form of higher taxes. Let’s review the potential tax consequences associated with these stimuli.

As of April 6, the US national debt is $23.3 trillion, based on data provided by the Bureau of the Public Debt. What exactly is the national debt? In its simplest format, our country’s debt level represents the accrued amount of government spending which exceeds the revenue collected by the IRS in the form of taxes. These taxes include individual as well as corporate. If the government spends more than it collects in tax revenue, where does the government obtain the additional dollars? The US Treasury Department issues IOUs in the form of Treasury Bonds, Treasury Notes, Treasury Bills, and Savings Bonds. These government-issued IOUs are sold to individual investors, corporations, pension plans, endowments, and foreign governments. In exchange for purchasing these securities, investors receive semi-annual interest payments from the US Treasury Department. When these IOUs reach their stated maturity date, investors receive back their initial investment from the Treasury Department.

Although consumers and investors can all agree that the CARES Act is a much-needed stimulus program, the challenging part is finding a reasonable plan to pay for the program. Undoubtedly, this will be an incredibly daunting task to find a legitimate repayment plan. After all, the CARES Act is easily the largest government spending program in US history. No matter what type of repayment plan is chosen, it’s safe to assume that federal taxes will be increased as a means to help pay for these COVID-19 programs. US consumers should definitely expect to surrender a larger proportion of their salaries to taxes over the course of the next several years.

As investors, we must accept the fact that taxes will become a more important piece of our overall investment plan and retirement strategy. Going forward, it will be critically important to develop a retirement strategy designed to properly address the issue of taxes and how it will impact our investment accounts. One of the best ways to prepare a tax-advantaged portfolio is to visit with a licensed investment professional who can offer specific tax planning strategies.

Angelica Roxas has been licensed as an investment professional for almost 20 years. She is a Financial Strategist and President of Strategic Asset Preservation, Inc. She is also the Founder and President of South Bay Tax Solutions. Angelica is an expert in providing her clients with specific tax planning strategies. COVID-19 has certainly increased the importance of having an investment plan in place to focus on the issue of how taxes will affect your investments. Angelica can provide a thorough review of your investments, particularly as it relates to taxes.

Are you prepared for the next crisis? Don’t be surprised if the next crisis is tax-related. Now is the time to begin preparing for the next financial event. Don’t wait for the crisis to occur before formulating an investment plan. Instead, be proactive and prepare in advance. Angelica’s clients were prepared for COVID-19 because they had a pre-planned exit strategy. Angelica can help you stay one step ahead of the next crisis.

Based on the fact that Angelica is an expert in developing specific tax planning strategies, she can provide clients with her tax “what-if analysis.” Specifically, this analysis allows Angelica to cover various scenarios on how taxes will affect a client’s portfolio. This type of information can be invaluable, particularly for those investors who need help with tax-related issues.

If you would like to meet with Angelica at no cost or obligation, she will be happy to review your financial situation. Angelica’s phone number is (424) 247-1120 or email at info@southbaytaxsolutions.com. Visit us at: www.southbaytaxsolutions.com