With the presidential election only weeks away, many policy issues are being discussed, including taxes. Among their many differences, President Donald Trump and former Vice President Joe Biden have widely divergent tax proposals. Their stances could have a major impact on the amount of taxes you’ll owe in the future. Here’s an overview of each candidate’s tax proposals for both individuals and businesses.
Proposals for Individual Taxpayers
TRUMP: The GOP-backed Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. It included a number of temporary federal tax cuts and breaks for individuals and families for 2018 through 2025. President Trump has indicated support for preserving and making permanent tax changes implemented by the TCJA, as well as possibly providing additional breaks for individuals and families, including:
- The current federal income tax and estate tax regimes,
- The expanded child and dependent tax credits (along with continued disallowance of dependent exemptions),
- Increased standard deduction amounts (along with continued disallowance of personal exemptions),
- More favorable alternative minimum tax (AMT) rules, and
- Continued limitations on itemized deductions for home mortgage interest and state and local taxes (SALT).
In August, Trump promised that, if reelected, he’ll find a way to forgive federal payroll taxes that were temporarily deferred for certain employees from September 1, 2020, through December 31, 2020, by an executive action issued on August 8.
>> Read “President Signs Order for Deferral of Payroll Tax Obligations for COVID-19 Relief”
He has also mentioned permanent federal payroll tax cuts, without providing details. However, forgiving or permanently reducing payroll taxes would need to be part of a bill passed by Congress, and that type of relief hasn’t received much support from Democrats or Republicans.
Unless the Republicans regain control of the House and retain control of the Senate, any tax cut proposals are likely to face strong opposition from congressional Democrats. And if reelected, Trump is unlikely to sign any legislation that calls for major federal tax increases for individuals.
BIDEN: If former Vice President Joe Biden is elected, he has expressed support for major federal tax law changes. The Biden plan would raise the top individual rate on ordinary income and net short-term capital gains back to 39.6%, the top rate that was in effect before the TCJA lowered it to 37% (for 2018 through 2025). Biden has also promised not to increase taxes for those who make under $400,000. However, it’s unclear whether that limit refers to taxable income, gross income or adjusted gross income — or whether it would apply equally to singles, heads of households and married joint-filing couples.
Other elements of Biden’s plan that would affect individual taxpayers include:
Limits on itemized deductions. For upper-income individuals, Biden would reinstate the pre-TCJA rule that reduces total allowable itemized deductions above an applicable income threshold. Prior to the TCJA, allowable deductions were reduced by three cents for every dollar of income above a threshold. Regardless of who’s elected president in 2020, the pre-TCJA limits will be reinstated in 2026 under current law, unless they’re extended by Congress.
Relief for certain homeowners. Biden is calling for the elimination of the TCJA’s $10,000 cap on itemized SALT deductions, which mainly affects residents of high-tax states.
Expanded breaks for eligible families. Biden’s plan includes a refundable federal tax credit of up to half of a family’s costs to care for children under the age of 13 and disabled dependents. He would like the maximum credit to be $8,000 for one qualifying child or $16,000 for two or more qualifying children. Families earning between $125,000 and $400,000 could qualify for partial credits.
Higher maximum rate on long-term capital gains. Higher-income individuals would face higher capital gains taxes under the Biden plan. Net long-term gains (and presumably dividends) collected by those with incomes above $1 million would be taxed at the same 39.6% maximum rate that he would apply to ordinary income and net short-term capital gains. With the 3.8% net investment income tax (NIIT) add-on, the maximum effective rate on net long-term gains would be 43.4% (39.6% + 3.8%). That would be almost double the current maximum effective rate for high-income individuals.
Elimination of basis step-up for inherited assets. Under current law, the federal income tax basis of an inherited capital-gain asset is the stepped up to fair market value as of the deceased’s date of death. The Biden plan would eliminate this tax-saving provision.
Proposals for Business Taxpayers
TRUMP: President Trump has indicated support for preserving business-focused tax reforms under the TCJA if he’s elected for a second term. The TCJA includes many federal tax cuts and breaks for businesses such as:
- A flat 21% tax rate for C corporations and personal service corporations,
- Permanently liberalizing the Section 179 first-year depreciation rules,
- Temporarily expanding first-year bonus depreciation deductions, and
- Repealing the AMT for C corporations.
Trump has said he would push for both tax credits and tax breaks for both businesses that focus on manufacturing in the United States, as well as for businesses that bring jobs back to the United States, including:
- A new “Made in America” tax credit,
- A new tax credit for companies that bring back jobs from China,
- Enhanced tax breaks for certain industries, including pharmaceuticals and robotics, that bring manufacturing back to the United States, and
- Permanent federal payroll tax cuts. (However, Trump hasn’t laid out a plan for how Social Security benefits would be paid if the withholding taxes that fund them are eliminated.)
Trump will need to address what will happen with the 100% bonus depreciation deduction after 2022, when it’s scheduled to begin being phased out under current tax law. Additionally, in 2022, a new requirement for businesses to amortize research and development costs over five years may also be on the table to be delayed.
BIDEN: Former Vice President Biden’s plans include rollbacks or revisions of several TCJA provisions, which would be necessary to pay for his plan to rebuild the U.S. economy under the moniker of “Rebuilding America Through Investment.”
Notably, the Biden plan would increase the corporate federal income tax rate from 21% to 28%. The change would raise an estimated $1.1 trillion over 10 years.
In addition, if elected, Biden would support a new 15% minimum tax on book net income for corporations with at least $100 million in annual income that pay little or no federal income tax under the “regular rules.”
Biden also supports “green energy” tax changes. Specifically, if elected, Biden would support reinstating deductions for emission-reducing investments in residential and commercial buildings, and credits for buying electric vehicles. Biden would also like to eliminate federal income tax deductions for oil and gas drilling costs and depletion.
As additional details regarding the two candidates’ tax plans continue to take shape, we will continue to monitor the scenarios and help you best plan for your own unique tax situation.
Contact a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.