With the first presidential debate occurring tonight at 9:00 PM EST, many will watch and listen to the candidates’ plans for the next four years. The fourth of six scheduled 15-minute time segments will be dedicated to the economy. In preparation for this discussion we have prepared a high-level overview of the candidates’ tax proposals, and some important considerations around their potential implications.
Legislative proposals are typically brought forward by the president, while law is then generally dictated by Congress. Coming into this fall’s election cycle, the House is controlled by the Democrats and the Republicans need 20 seats to take control. The Senate is controlled by the Republicans and the Democrats need to gain four seats to take control. Substantial movement in tax policy is likely only with unified control of the White House and Congress. If Congress continues to remain divided between the parties, we should expect continued gridlock on tax policy, no matter who wins the presidential election.
Tax laws and their impact on society and the economy are intensely contested issues. Below we offer no opinion on which laws are best or most advantageous as this would be highly dependent on your personal facts and circumstances.
This high-level comparison of the candidates’ initial tax proposals implies significant differences for high-wage earners, those with capital gains, corporate shareholders, and investors in foreign entities. Biden’s tax law proposals intend to ensure high-net-worth individuals, high wage earners and corporations pay “their fair share.” Most notable are the proposals to increase the corporate tax rate to 28%, impose a 15% tax on book* income for companies earning $100 million or more or book* profits, phase out the QBI 199A deduction for those who earn income over $400,000, and raise the Long-Term Capital Gains rate on earners of income over $1 million from 20% to 39.6%.
Trump’s tax law proposals will focus on making many provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) permanent. The Trump campaign has also suggested, but not formally proposed, additional tax cuts by expanding bonus deprecation, expanding opportunity zones, and tax credits for bringing jobs back from China and investing in “Made in America.”
*There have been no details released about the definition of book income for this provision or how this would operate.
The Federal Estate Tax Exemption: Under current law, the TCJA temporarily doubled the federal estate tax exemption to $10 million indexed for inflation. In 2020, the federal estate tax exemption is $11.58 million per individual, or $23.16 million per married couple, with a top marginal tax rate of 40%. On January 1, 2026, the increased exemption is set to revert to $5 million, indexed for inflation to approximately $5.8 million, with a top marginal tax rate of 50%. The TCJA exemption increase is "use-it or lose-it," meaning if taxpayers do not use the increased exemption by the end of 2025, they will miss out on this opportunity. Additionally, the IRS announced in 2019 that it will not “claw back” gifts made during this period of higher exemption to retroactively seek estate taxes on those gifts.
Presidential proposals regarding the federal estate tax exemption include Trump seeking to supersede the current reversion date of January 1, 2026 and make permanent the increased estate tax exemption enacted by TCJA, indexed for inflation. Biden’s proposal reverts the estate tax exemption to pre-TCJA levels of 2017’s $5.49 million indexed for inflation. In addition, Biden has mentioned a proposal to repeal the step-up in basis at death and immediately tax the unrealized appreciation of assets upon their transfer whether by gift during life or upon death, with the appreciation being taxed at the ordinary income tax of 39.6% for households making greater than $1 million. The potential for significant changes in estate tax policy coupled with low interest rates have many taxpayers looking closely at estate planning opportunities. Click here to see our recent webinar on this subject.
Regardless of the election outcome, the country’s burgeoning debt-to-GDP ratio of 107.7% as of July 30th, 2020, coupled with the economic devastation from the ongoing coronavirus pandemic, suggests the need for greater net tax revenue, spending cuts, or possibly both.
Biden’s overall economic and tax plan increases gross tax revenues significantly but is nearly net neutral after considering his proposed new spending programs and increased refundable tax credits. Trump’s plan to make many of the TCJA provisions permanent, coupled with what many bipartisan pundits consider lofty assumptions on economic growth, seem to at best, also result in net-neutral changes to the deficit. At some point, whoever takes the White House is going to have to pivot and rethink the tax plans and policies they have presented thus far to prevent or address the nation’s debt crisis.
We will continue to follow both candidates’ tax policy plans and keep our readers posted on any significant changes that may be released before election day.
While we are on the subject of election day…
COVID-19 has thrown a monkey wrench into many of our 2020 plans, but one thing we do not want any our employees to miss this year is the chance to vote. Therefore, Drucker & Scaccetti will close on Tuesday, November 3rd to ensure all Tax Warriors can cast their vote and volunteer at polling centers if they wish to do so.
If you have not recently checked on your voter registration status, you can do so here.