With Election Day right around the corner, we wanted to highlight the significant differences in the tax plans of the presidential candidates. The majority of this blog post will focus on proposed tax policies of Joe Biden, as many of Donald Trump's proposals were carried out by the Tax Cuts and Jobs Act (TCJA) in 2017. If there is a change in administration, you should not expect that Biden's proposed changes would happen immediately, if at all. If Joe Biden does win the election, Democrats would need to maintain their majority in the House and win control of the Senate for the majority of his campaign proposals to move forward.
Summary of Joe Biden's Tax Plan for Individuals:
- Increase the top individual income tax rate to 39.6%. The current top individual income tax rate is 37%
- Impose the 12.4% Social Security payroll tax on income earned above $400,000 (split evenly between employee (6.2%) and employer (6.2%). This Social Security payroll tax currently applies to income up to $137,700 per individual (scheduled to increase to $142,800 in 2021).
- Eliminate the favorable step-up in basis for capital gains taxation of inherited assets. Currently, recipients of inherited assets are able to step up their basis to the fair market value at the date of death of the previous owner. The elimination of the step-up in basis would increase capital gains taxes for heirs of appreciated assets.
- Tax long-term capital gains and qualified dividends at the ordinary income tax rate of 39.6% on income above $1M. The current tax rate on these sources of income is 20% for taxpayers at this income level. Under this proposal, the top tax rate on long-term capital gains would nearly double from 23.8% to 43.4% (including the 3.8% Net Investment Income Tax).
- Expand the estate and gift tax by reducing the exemption amount to $3.5M and increasing the top rate for the estate tax to 45%. The estate tax exclusion was increased to $11.4M in 2018 under the TCJA and currently $11.58M for 2020 with a top tax rate of 40%.
- Restore the limitation of itemized deductions for taxable incomes above $400,000 and cap the benefit of itemized deductions to 28% of their total value. The TCJA eliminated the limitation through the 2025 tax year, and itemized deductions currently provide a benefit up to the marginal tax rate of the taxpayer (e.g. between 10% and 37% based on tax bracket).
- Change the tax benefits associated with defined contribution retirement plans (e.g. 401k contributions) to a 26% credit on contributions. Currently, the benefit associated with contributions apply based on the tax rate of the taxpayer (e.g. 37% if at the top tax rate and
- Expand the Child and Dependent Care Tax Credit to apply to a maximum of $8,000 in qualified expenses ($16,000 for multiple dependents) and increase the maximum reimbursement rate to 50%. The credit is currently applies to a maximum of $3,000 in qualified expenses ($6,000 for multiple dependents) with a maximum reimbursement rate of 35%.
- Create a new $5,000 tax credit for caregivers of individuals with certain physical and cognitive needs.
- For 2021, increase the Child Tax Credit to $3,000 for children under 18 and provide a $600 bonus credit for children under 6, and make the credit fully refundable. The Child Tax Credit is currently $2,000 for children under 18.
- Expand the Affordable Care Act (ACA) by eliminating the 400% income cap on premium tax credit eligibility and lower the limit on cost of coverage from 9.86% to 8.5%
- Reestablish the First-Time Homebuyers' Tax Credit that would provide up to $15,000 for first-time homebuyers. This program was originally established in 2008 and ended in 2010.
Summary of Joe Biden's Tax Plan for Business Owners:
- Phase out the 20% Qualified Business Income (QBI) deduction for filers with taxable income above $400,000. The QBI deduction, introduced with the TCJA, has reduced taxes for pass-through business entities (sole proprietors, LLCs, partnerships, and S-Corporations) that pass through profits and associated tax liabilities to their owners.
- Increase the corporate income tax rate to 28%. The corporate income tax rate was previously reduced by the TCJA from 35% to 21%.
- Create a minimum tax on corporations with book profits of $100M or higher. The TCJA previously repealed the Alternative Minimum Tax (AMT) on corporations.
- Double the tax rate on Global Low Tax Income (GILTI) from 10.5% to 21%. GILTI was enacted under the TCJA on earnings that exceed a 10% return on a company's invested foreign assets.
Summary of Donald Trump's Tax Plan:
- Make permanent the TCJA provisions that are currently scheduled to expire after the 2025 tax year.
- Reduce the 24% marginal tax rate on individual income to 15% as part of a "Tax Cuts 2.0" middle-class tax cut.
- Reduce payroll taxes (details unspecified) and forgive deferred 2020 employee payroll taxes.
Planning Opportunities Under the Proposed Biden Tax Plan:
- Carefully consider the timing of equity compensation (Nonqualified Stock Options, Incentive Stock Options, Restricted Stock Units) and project the tax impact. Tripping over the $400,000 and/or $1M income thresholds could cause a significant increase if effective tax rates due to additional income tax, additional social security taxes, and reduction of deductions.
- Spread capital gains across multiple years on large sales to eliminate or reduce ordinary income tax rates applied on income over $1M.
- Consider accelerating asset sales to apply lower tax rates prior to changes.
- Implement a gifting strategy and estate plan to transfer assets to heirs while considering the proposed reduction in the estate tax exclusion and step-up in basis.
Conclusion:
Please contact us or work with your advisor before implementing any changes to your financial and plan based on the results of the election. If you would like to discuss any of the proposed changes and/or planning opportunities highlighted in this post, please use contact us at 913-451-0056 or use our scheduling page at www.calendly.com/ongandcompany to select an available time for a tax planning meeting.