As we await the outcome of Tuesday’s Presidential election and a few key Senate races, we have prepared a comparison of Vice President Biden’s and President Trump’s tax policy proposals:
Outlook for a Potential Biden Administration:
The Biden-Harris campaign provided a fair amount of detail on their proposed tax policy. While the likelihood of these ideas advancing wholesale through Congress is small, with Democrats having failed to deliver the “blue wave” that pollsters expected, it does give insight into the party’s desire to make taxation meaningfully more progressive. Following are several proposed reforms outlined by the Biden-Harris camp.
For individuals with annual income of more than $400,000 (unclear regarding filing status), Biden’s plan proposes:
- A reversion to the pre-TCJA (“Tax Cuts and Jobs Act”) top bracket to 39.6% instead of 37% (brackets would otherwise remain unchanged)
- A 12.4% Social Security (OASDI) payroll tax, split by employees and employers, instead of 6.2%
- The reduction in value of Itemized Deductions
- A phase-out of the Qualified Business Income Deduction, and
- The elimination of 1031 Exchanges (tax-free exchanges of like-kind real estate)
Those with annual income over $1,000,000 would pay ordinary income rates on long-term capital gains and qualified dividends.
The plan proposes a flat credit for retirement contributions instead of a deduction. The idea here is that folks in lower brackets benefit more from contributing to retirement than higher earners. Currently, higher earners benefit more than lower earners.
Biden’s plan also proposes an elimination of stepped-up basis, although it is unclear what this would look like. Would the decedent’s basis carry-over to heirs? Or would unrealized gains be automatically taxed upon the owner’s death? Previous attempts to eliminate basis step-up have not been successful.
Notably missing is the elimination of the $10,000 cap on deducting state and local income taxes, a provision of TCJA that increased the tax burden for those in relatively high income tax areas.
A number of provisions would seek to provide some level of pandemic relief, some of which could be made permanent, such as increased child and child care tax credits and re-instating the first-time homebuyer’s credit of up to $15,000 for first-time buyers.
On estate and gift tax, the campaign website indicated a return to “2009 levels” for the lifetime gift and estate tax exemption. The 2009 exemption amount was $3.5 million. The current lifetime exemption amount of $11.58 million ($11.7 million in 2021) is set to revert to $5 million (indexed for inflation) at the end of 2025.
Should President Trump Secure A Second Term
President Trump signed the Tax Cuts and Jobs Act ("TCJA") into law in late December of 2017, codifying significant reforms to the Internal Revenue Code advocated by congressional Republicans. Should he be re-elected, he and his administration may advocate for additional reforms during the next four years, particularly in the form of “pandemic relief” legislation. If no further reforms are enacted, the lower brackets, higher standard deduction, and expanded child tax credit enacted in TCJA will remain in effect at least through the end of 2025, a year after the end of Trump’s second term.
President Trump’s campaign did not provide specific information on what he intends to achieve on tax reform should he serve a second term. It has been reported that he has hinted at lowering the capital gains rate to 15% for all taxpayers and indexing cost basis to inflation (thereby decreasing gain). Additionally, should the U.S. Supreme Court find the Affordable Care Act to be unconstitutional (a ruling on this is expected mid 2021), the 3.8% net investment income tax (“Medicare tax”) would no longer exist. Finally, relief to taxpayers and businesses is expected in light of the ongoing pandemic. This could be in the form of reduced payroll tax, for example.
Taxpayers would do well to avoid making the mistake that pollsters once again fell victim to: failing to expect the unexpected. In view of an uncertain outlook, now is the time for action. For taxpayers, specific examples include:
- Converting Traditional IRA assets to tax-free Roth status (grows tax-free, is withdrawn tax-free)
- Contributing the maximum amounts to tax-deferred retirement plans
- For those seeking to achieve estate and gift tax avoidance, executing Grantor Retained Annuity Trusts, given the historically low hurdle rate
- Utilizing the historically high lifetime exemption amounts for estate and gift tax, such as with a Spousal Lifetime Access Trust, for married couples who may be subject to wealth transfer taxes
Speak with your Financial Advisor and tax professional for more information on what tax planning ideas may make sense for you and your family.
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