Presidential Candidates’ Tax Plans
2020 undoubtedly is the wackiest year of our lifetimes for many of us, and as it draws to a close, it also brings an end to one of the most contentious and unusual election cycles most of us can remember. The presidential candidates have very different federal tax policies, and the purpose of this article is to compare and contrast them.
Before proceeding, please note two things:
- It is not BNN’s policy, or your author’s intent, to promote one side of the political spectrum or the other, subtly or overtly, in our newsletters. Clients routinely ask us how proposed or actual tax law changes will alter their pocketbooks, and that, rather than pros and cons of political agendas is the focus of this article. In today’s unusually politically-charged climate, the text below is assembled and edited taking great pains to remain unbiased, and it is our hope that you read it without perceiving or creating a slant that doesn’t exist.
- As all of us should recall from our middle school civics classes, the president, as part of the executive branch, does not write tax laws. That is the job of Congress, the legislative branch. Any lofty goals a president hopes to implement must originate in and be passed by a group of actual lawmakers. It is rare, even in cases where the White House and both chambers of Congress are controlled by the same party, that a president’s wishes are fully implemented.
With your Miranda rights having been read to you above, let’s take a look at some of the two major candidate’s plans.
2017’s Tax Cuts and Jobs Act legislation (“TCJA”) set in motion once-in-a-generation changes to the federal tax laws, but nearly all of them impacting individual taxes are scheduled to automatically “sunset” at the end of 2025. Most corporate tax changes, however, were enacted on a permanent basis.
Because President Trump was on board with and instrumental in driving many of the TCJA changes, it should come as no surprise that for many aspects of taxation, his current plans involve making very few changes, other than to eliminate various sunset features, thereby making them permanent. Trump has floated some ideas to cut taxes further, but most such ideas were mentioned only verbally and primarily occurred prior to the pandemic and the resulting trillions of dollars of expenditures made by the federal government. Official campaign material shows very little detail, consistent with the notion that overall, most of his planned tax law changes were already implemented with the monumental TCJA, and plans for further reductions were swatted to the ground by COVID-19.
By contrast, former Vice President Biden’s plan has been reduced to writing on his campaign’s website, and it involves numerous changes. Generally his proposed changes involve rolling back a number of 2017’s TCJA changes, and sometimes modifying them somewhat, but he also has a number of new proposals. Most are designed to increase taxes on corporations (but provide some breaks for those focusing certain efforts within the U.S.), increase taxes on upper-income individuals, and decrease taxes (sometimes resulting in what could be described as negative taxes, in the form of “refundable credits”) for middle or lower-income individuals.
Individual income tax rates – on ordinary income
The TCJA altered individual tax rates, and increased the sizes of the rate brackets, generally lowering the rates that apply at any given income point. The top rate was reduced from 39.6% to 37%.
|The Biden plan would increase the top rate from 37% back to the 39.6% rate that applied prior to TCJA. The increase would apply only to those earning at least $400,000.||Trump has floated (some time ago) the idea of a 10% tax decrease for the middle class, but primarily calls for making the current structure permanent, rather than reverting back to pre-TCJA rates upon sunset.|
Individual income tax rates – on long term capital gain
Long term capital gains and qualifying dividends are taxed at no more than 20%. Rates of 0% or 15% apply for those in certain income brackets. The 20% rate kicks in at various income levels depending on filing status, including income of just under $500,000 for married couples.
|Biden would retain favorable rates, except for those with incomes exceeding $1 million, who would be subject to his top ordinary income rate of 39.6%.
Biden also would remove the “step-up” in cost basis that occurs under current law when an heir inherits a security from a decedent.
|Without much elaboration, Trump has mentioned intending to index capital gains for inflation and potentially reducing the rate.|
Observation: Some appreciated securities that are inherited and then sold can escape both estate taxation and income taxation under current rules. This occurs when the estate’s overall value is low enough that the estate tax does not apply. The step-up nevertheless increases the heir’s basis in the property to whatever the fair market value was on the date of death. If immediately sold for that value by the heir, no income tax will apply because the proceeds equal the basis. The mechanics of exactly how Biden’s plan will alter this are unclear. Will the income tax only apply to gains that did not actually generate an estate tax? Or will the same increase in value potentially be subject to both estate tax and income tax?
Currently, the first $11.58 million of value of a decedent’s estate escapes estate taxation. (This amount is indexed for inflation.) Heirs receive property from an estate with a basis that is “stepped up” to the value as of the date of the decedent’s death, whether or not an estate tax was imposed. (This is explained further above in the “long term capital gain” discussion.) The federal estate tax is imposed at rates ranging from 18% to 40%.
|Biden’s plan calls for the $11.58 exclusion to revert back to a $3.5 million level that applied in 2009. He also would raise the top rate from 40% to 45%.||Trump had proposed no changes in this area.|
Employee payroll taxes
Currently, a 6.2% payroll tax applies to wages and self-employment income up to $137,700. (This income cap is indexed for inflation, and increases by a few thousand dollars every year.) This tax is borne by the employee, and matched with an identical amount funded by the employer. Those who are self-employed play the part of employee and employer, so a total of 12.4% is collected in either case. Once a worker’s income exceeds the annual cap, this tax does not apply to additional earnings for the balance of the year. (A second component of the payroll tax – the 1.45% Medicare tax – applies to all levels of earnings. It too is paid by the employee, matched by the employer, and the self-employed again wear both hats.)
In reaction to pandemic hardships, Trump offered employers the one-time opportunity to temporarily defer collection and remittance of the employee’s share of the 6.2% tax between 9/1/20 and 12/31/20, allowing it instead to be withheld evenly between 1/1/21 and 4/30/21, in addition to that period’s normal withholding.
|Biden wishes to reinstate the 6.2% tax once income exceeds $400,000, creating a bubble (between $137,700 and $400,000) that escapes the tax. The bubble will shrink every year by leaving the $400,000 static while the lower number increases each year with inflation. Over time, the bubble will dissolve, and the 6.2% tax (x 2, when considering the employer “match”) will apply to all wages, including those with incomes under $400,000.
|Trump would like to convert the one-time temporary deferral of late-year 2020 withholdings to a one-time forgiveness of that amount deferred. He had the authority, as leader of the executive branch, to defer this tax, but not eliminate it, as only the legislative branch can do. Widely panned by members of Congress on both sides of the aisle, the odds of it being forgiven are slim, and eschewed by most employers, it would apply to very few participants. It is a short-term issue.
He has not formally proposed permanently altering the payroll tax.
Itemized (and other) deductions
The TCJA roughly doubled the size of standard deductions, while capping the portion of itemized deductions allowed for state and local taxes to $10,000. The TCJA also suspended an overall phaseout of itemized deductions that applied to upper-income taxpayers (the so-called “Pease limitation”).
|Biden would implement changes that generally would prevent itemized deductions from causing a taxpayer’s effective rate to drop below 28%. He would pair this with the reinstatement of the “Pease” limitation. He supports eliminating the $10,000 state and local tax cap (which often disproportionately impacts residents of higher-tax states).||Trump would like the sunset provision to be removed, leaving existing TCJA specs to be permanent.|
Individual tax credits – for parents and others
Credits are more potent than deductions, because deductions merely reduce the amount of income subject to tax, while credits instead reduce the tax itself, often dollar-for-dollar. The TCJA increased an existing child tax credit to $2,000 for parents of children aged 17 and younger, and created a new dependent credit of $500 for other dependents under their care. Prior to the TCJA (and continuing to the present), a credit to offset child care expenses has been available, allowing a credit of up to 35% of the first $3,000 ($6,000 for multiple children) of qualifying expenditures.
|Biden would increase the child credit from $2,000 to $3,000, and allow it to not only offset the tax that otherwise would apply (reducing it to zero), but allow it to create in essence a negative tax (a so-called “refundable” credit). He also plans to implement a means by which families can obtain this funding prior to filing their tax returns.
He would greatly enhance the child care credit, by allowing the credit percentage to increase to 50%, by increasing the qualifying costs to $8,000 ($16,000 for multiple children), and allowing the credit to be “refundable” (as explained above).
Joe Biden also proposes a number of new credits, including a $5,000 credit awarded to those caring for family members with special needs, and a new renter’s credit that would have the effect of capping certain rental costs (paid to a third party) to 30% of the taxpayer’s income.
He also would modify and take a previous credit out of its decade-long mothball status by implementing a $15,000 credit for first-time homebuyers.
|Trump has proposed no changes other than making the TCJA credits permanent.|
Business income taxes
20% Section 199A deduction
The TCJA created a new deduction under Internal Revenue Code Section 199A that allows an individual’s share of certain trade or business “pass-through” income to qualify for a 20% deduction (subject to some downright obscenely complex computations and tracking gyrations). Filers with incomes over $157,500 ($315,000 if filing a joint return) are subject to stringent qualification rules that often limit or remove the deduction.
|Biden would phase out the new Sec. 199A deduction for those earning more than $400,000.||Trump would like the sunset provision to be removed, causing this 20% deduction to become permanent in its current form.|
The TCJA created some favorable provisions for real estate investors, who, relative to other business investors, have long encountered many tax law hurdles that delay or prevent losses. In particular, the TCJA created the ability to delay, reduce, or eliminate some taxes for those willing to invest in disadvantaged geographical areas known as “Opportunity Zones.” Together with a technical amendment, it also extended favorable depreciation terms to investments in real estate.
TCJA also narrowed a widely-used benefit. “Like kind exchange” describes a transaction whereby an investor swaps property, one for another, rather than outright selling it. Tax rules have long allowed tax on gains from like kind exchanges to be deferred, often until the replacement property is sold (the legislative rational being that tax should not be required until cash is generated with which to pay it). This deferral used to be available for both real estate and personal property (like automobiles), but the TCJA narrowed its use only to real estate.
|Biden’s plans have been mentioned briefly, and primarily verbally, with very little detail. However, he or campaign officials have described the desire to fund a new child care and elder care program primarily by eliminating benefits for the real estate industry.
He has proposed repealing “bonus depreciation” provisions that allow immediate deduction of certain property costs (rather than deducting them over a multi-year period representing the property’s useful life).
Biden would eliminate the ability to defer taxes related to any like kind exchanges, including real estate.
|Trump has not proposed direct or significant changes in this area.|
Corporate income tax rate
The TCJA eliminated multiple brackets and replaced it with a flat 21% corporate income tax rate. Unlike most of the individual tax provisions in the TCJA, this change does not sunset.
There are many differences between net income for purposes of federal income taxation, and net income for accounting purposes (“book income”). Each year, a number of adjustments must be made to convert book income to taxable income before filing a corporation’s tax return. Most, but not all, adjustments represent temporary differences that reverse in later years, so that over time, both measurements may be roughly comparable.
|Biden would increase the flat rate from 21% to 28%.
He also would create a new form of minimum tax. It would apply to companies with more than $100 million of book income, and require them to pay the greater of 15% of book profits, or 28% of taxable income.
|Trump proposes dropping the rate from 21% to 20%.|
Observation: Under Biden’s plan, it is unclear whether some sort of credit would be allowed for corporations who paid tax based on their book income one year and taxable income the next, and how the use of net operating losses might impact these computations. If no adjustments are made to account for fluctuations, it seems possible that over time, an amount greater than either cumulative book income or cumulative tax income would be subject to tax. This would result in a rate that could significantly exceed the top 28% stated rate – cumulatively and perhaps permanently.
U.S. tax on multinational companies
The TCJA rolled out an entirely new tax as part of its anti-base erosion efforts (a fancy way of describing taxes lost to other countries). This tax on global intangible low-taxed income (“GILTI”) is incredibly complex, and explained in greater detail in a 2018 article by my colleague and international tax practice leader Stu Lyons. Basically, a U.S. tax is assessed on overseas earnings for companies who (1) earn a very high rate of return, as measured by “hard” assets (which implies that they are so profitable due to significant intangible assets) and (2) pay very little tax to the foreign jurisdiction. With that very oversimplified explanation, the effective rate of this tax is 10.5%.
|Biden would double the GILTI rate from 10.5% to 21%.
He also would create a new additional 10% “Offshoring Penalty” surcharge on companies that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This would yield a combined 30.8% rate, when combined with the 28% flat tax.
Biden also proposes a 10% “Made in America” credit for various rehiring, retooling, payroll or headcount expansion, and revitalizing efforts.
|Details are scant, but Trump is considering a number of alternatives, including 100% expense deductions for companies engaged in “essential industries” who bring back their operations to the U.S.
He also proposes (without providing details) his own version of a “Made in America” credit, as well as a credit specific to entities that return jobs lost to China.
There are other proposals floated by both candidates in various forms, although the material above covers a number of what many would consider the most substantive or concrete ideas. More information may be found on the links below, and in any number of media stories covering the candidates.
As noted above, recall that these plans are nothing more than wish-lists, as a president is the last person of many to sign off legislation, which must first originate with a member of Congress, survive a committee assignment, and then undergo the scrutiny of the entire House of Representatives and Senate, who as we have learned occasionally can fall short of working in complete bipartisan harmony.
None of the proposals is likely to shock anyone, or change their minds about the candidates, as both sets of plans are comfortably entrenched in policies consistent with their respective party’s very different agendas of how a federal government should be run and funded.
For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.