Avoid ‘knee-jerk reactions’ to candidates’ proposed tax increases, financial advisors say. Here’s why

With fewer than 60 days until the election, investors may feel stressed by the flurry of tax policy proposals. Those emotions can trigger rash financial decisions, experts say.

Democratic presidential nominee Vice President Kamala Harris has plans for middle-class tax cuts while raising levies on the wealthiest Americans and corporations.

Meanwhile, former President Donald Trump, the Republican nominee, aims to extend tax breaks enacted during his first term and end taxes on Social Security benefits. Trump also supports higher tariffs, or taxes levied on imported goods from another country.

“There are sometimes knee-jerk reactions to some of these proposals,” said certified financial planner and enrolled agent Louis Barajas, who is CEO of International Private Wealth Advisors in Irvine, California.

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But there’s a big difference between a candidate’s tax idea or proposal and signed legislation. Tax law changes require Congressional approval, and future control of the House and Senate remains uncertain.

“All sorts of things are in presidential budgets that don’t get enacted,” said CFP and financial therapist Rick Kahler, president of Kahler Financial Group in Rapid City, South Dakota. 

One key issue affecting candidates’ proposals is the trillions in tax breaks enacted by Trump in 2017.

Without action from Congress, several individual provisions will expire after 2025, including lower federal income tax brackets, bigger standard deductions, a more generous child tax credit and higher gift and estate tax exemptions, among other provisions. 

Certain issues, like the estate and gift tax exemptions, require families and advisors to undertake multi-year planning, but it’s difficult to predict whether the provision will get extended, experts say.

“We don’t make any changes until the law has passed,” said Barajas, who is a member of CNBC’s Financial Advisor Council. Actions based on proposed tax law can backfire if the legislation isn’t enacted or details change amid lawmaker debates.

Plus, tax decisions need to align with long-term financial plans, he added.

Our emotions drive the vast majority of financial decisions, according to Kahler.

When a candidate proposes tax increases, “a scarcity mindset” often leads investors to believe that higher taxes will significantly reduce their resources, he said.

But regardless of your finances, you should “never make a decision when there is a strong emotion driving you,” Kahler said.

“If you’re scared to death, this is a good time to take a deep breath,” he said. “Emotions can get in the way of making a clean decision.”