Presidential Election Impact on the National Tax Landscape
With just weeks left until the 2020 election, a slew of tax legislation nearing expiration, and economic recovery from COVID-19 taking center stage, many are wondering how the presidential election outcome will affect the country’s tax landscape.
Both candidates have presented proposals and made multiple statements on their respective tax agendas. While it’s important to remember that neither candidate is likely to implement every aspect of such an agenda, the proposals do provide insight into the types of changes each will try to make if elected. What are these proposals and what will they mean for both individual and business taxpayers?
Trump: Extend TCJA and Reduce Capital Gains Taxes
It is clear that the primary focus of President Trump’s tax policy during a second term would be extending the many provisions of his signature Tax Cuts and Jobs Act (TCJA), scheduled to expire in 2025. The legislative process that allows budgets to get through the Senate without a filibuster generally limits the lifespan of tax changes included in those bills, so the vast majority of the provisions in the TCJA will eventually expire without additional Congressional action.
President Trump has also discussed the possibility of a 10% tax cut for the middle class, lowering the maximum capital gains tax rate to 15%, and indexing capital gains for inflation. At times he has suggested that he may bypass the legislative process and implement the indexing of capital gains via executive action, but it’s not clear if that would survive a challenge in court. Both candidates have expressed a willingness to do away with carried interest treatment that allows certain investment professionals to be taxed primarily at capital gains rates, but President Trump has not put forth any specific proposals to eliminate the practice.
Biden: Increases at Certain Income Levels and Targeted Incentives
Former Vice President Biden has proposed several changes that would increase taxes on individuals at certain income levels, such as:
- Individuals with taxable incomes above $400,000 would see their top income tax rate increase from the current 37% (enacted by the TCJA) to 39.6% (the pre-TCJA tax rate).
- Social Security taxes on incomes in excess of $400,000 would be collected, adding a 12.4% levy that would be split evenly between employers and employees. Under current law, Social Security taxes are collected only on wages up to $137,700 and that limit is indexed for inflation each year.
- The above $400,000 threshold would also trigger limitations on itemized deductions an individual could claim to reduce taxable income as well as a phaseout of the Qualified Business Income (QBI) deduction for passthrough income.
- Individuals with incomes above $1 million dollars would see long-term capital gains and qualified dividends taxed at the proposed top ordinary income tax rate of 39.6%. The Biden plan would also eliminate the practice of allowing beneficiaries to inherit stock and other capital assets at a stepped-up basis.
On the corporate side, Biden proposals include:
- An increase in the corporate tax rate from the TCJA-enacted 21% to 28%
- A minimum tax on corporations with book profits of $100 million or higher that will require them to pay the greater of their regular tax obligation or a 15% minimum tax (Net operating losses and foreign tax credits can still be claimed against alternative minimum taxable income.)
- An increase in the Global Intangible Low Tax Income (GILTI) rate on certain income earned by foreign subsidiaries from 10.5% to 21%
The Biden plan does include targeted breaks and incentives for businesses and individuals. There’s a combination “carrot and stick” proposal for a 10% surtax on corporations that “offshore manufacturing and service jobs to foreign nations” coupled with a 10% “Made in America” tax credit for activities that restore production, revitalize facilities, or expand manufacturing payroll within the United States. Biden also proposes expansion of certain renewable energy credits while simultaneously ending tax subsidies for fossil fuels. Individuals might see increases to the Child Tax Credit and the Child and Dependent Care Tax Credit, as well as the re-establishment of a First-time Homebuyer’s Tax Credit of up to $15,000.
While the former vice president has not stated categorically that he would repeal the TCJA in its entirety, he is on record questioning numerous provisions and suggesting that he might try to modify or remove them. For example, he has proposed changes to the Opportunity Zone program and other modifications to the tax code that might limit the benefits of like-kind exchanges for real estate. The Biden proposals also include an increase in the depreciable life of real estate beyond the current 39 years. Additional changes to TCJA could also be on the table.
When it comes to estate taxes, the only specifics in the Biden proposals to-date focus on the elimination of basis step-up for capital assets that we discussed above. The TCJA increased the lifetime exemption from $5 million to $11.58 million, and if no other action is taken that exemption will revert to $5 million in 2025.
What This Means for Taxpayers
Taxpayers should map out short- and long-term financial plans based on the potential tax changes to come. The tax “tail” should never wag the financial “dog,” but, for example, if taxes will change significantly in the short-term it might affect the timing of long-term financial decisions.
Offensive steps to consider now, regardless of the election outcome:
- It is never too early to plan for succession in a family business or for the transfer of family wealth, and the current economy has provided several additional incentives. First, now may be a good time to transfer assets to the next generation if valuations are temporarily suppressed. Lower valuations will maximize the amount of assets that can be transferred gift-tax free. Second, historically low interest rates mean that inter-family notes can be efficient tools and freeze techniques such as GRATs are more valuable than ever.
- If the thought of more tax reform doesn’t sit well, consider what potential expenses and sources of income could be moved into or out of the last quarter of this year. Keep in mind that even after the election, there’s still no way to know for certain what the tax landscape will look like in 2021.
Consult with tax and financial advisors before acting on any strategy aimed at modifying the timing of income or deductions, as these actions often have a variety of potential consequences that must be considered.
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