As we approach the November 3, 2020, presidential election, the visions that President Trump and former Vice President Biden have for America are stark in contrast, emphasizing the differences between the two candidates.
President Trump highlights his record and the success of the economy following his Tax Cuts and Jobs Act (TCJA). His tax policy is designed to enhance these laws without undue upset.
The Trump administration will push to expand many of the initiatives from the TCJA and make permanent many of the provisions that are scheduled to sunset in 2026, including individual income tax rates, estate tax exemptions, and the qualified business income deduction.
Trump has long discussed reforming capital gains tax. He supports indexing cost basis to inflation and reducing the amount of capital gains subject to tax, as well as reducing the 20% rate for taxpayers in the top bracket to 15%.
Middle class tax cuts are also at the forefront of his agenda. Cutting rates by 10% or reducing the employee’s share of payroll taxes are ideas that he has conveyed to accomplish this.
The United States had the highest corporate tax rate in the world when Trump slashed it from 35% to 21%. At a minimum, he would keep that rate but would be in favor of reducing it even further (to 20%). A few other business tax initiatives include:
- Making 100% bonus depreciation permanent so businesses can deduct the full cost of assets in the year they are purchased and placed into service;
- Creating tax breaks for companies using U.S. supply chains to incentivize bringing jobs back from China; and
- Expanding Opportunity Zones where investments in specific geographical areas can defer and/or eliminate capital gains as incentive to boost struggling local economies.
Candidate Biden, on the other hand, highlights the shortfalls of our current administration and the need for change that includes robust tax reform. His tax policy is designed to cure what he deems as inequities under current tax law that provide the greatest benefits to the wealthiest individuals and corporations.
Biden would move to reverse a lot the provisions passed in the TCJA, such as:
- Returning the top tax rate back to 39.6% from 37%;
- Phasing out the 20% qualified business income deduction;
- Lowering the estate tax exemption from $11.58 million to around $5 million and eliminating the cost basis step-up at death; and
- Increasing the corporate tax rate from 21% to 28% with a minimum rate of 15%.
He will seek to create additional tax on the wealthiest Americans through a number of new initiatives that would shift more tax on those with high levels of income. These include:
- Taxing all capital gains at less preferential ordinary income rates for millionaires;
- Limiting the value of itemized deductions to 28%;
- Preventing taxpayers with income over $400,000 from using real estate losses to offset other income;
- Limiting the value of retirement plan contributions to a fixed percentage in the form of a credit instead of offsetting income being taxed at higher rates;
- Applying the 6.2% social security tax for employees and employers on wages over $400,000, creating a “donut hole” effect;
- Creating a financial transactions tax; and
- Eliminating the deferment of tax on like-kind exchanges of real estate.
Biden has his own ideas for lower- and middle-class tax relief. He would work to allow workers over age 65 to claim the earned income tax credit, increase the amount of eligible child and dependent care expenses, create a tax break for first-time home buyers and renters, eliminate tax on the forgiveness of student loan debt, and introduce a credit for taxpayers who provide long-term care assistance to elderly and disabled relatives.
Whether our three past years of tax policy will be reversed will depend not only on the results of our presidential election but also shifts in the Senate. Your RMB advisor and team remain poised to help you navigate these important concerns as they evolve.
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