The U.S. presidential election is just a week away, yet neither candidate has released a formal, detailed plan addressing his vision for the tax code. We can, however, gain a sense of how their approaches differ through casual mentions of some aspects of tax policy on the campaign trail.
Tax policy underpins business decisions and consumer behavior, so an understanding of the candidates’ more detailed vision for tax policy will be essential to successfully navigate the economic downturn triggered by the pandemic. Savvy businesses and individuals should pay close attention to how any proposed policy may ultimately alter their total tax liability.
It’s also important to keep in mind the fundamental role of Congress in passing tax legislation. Depending on the makeup of the White House, Senate, and House of Representatives, passing tax legislation may be challenging. For example, if both the Senate and House are of the same party as the successful presidential candidate, any changes in tax law may still have to be passed through the budget reconciliation process, because 60 votes in the Senate generally would be needed to avoid using the reconciliation process (and it is very doubtful that there would be 60 members of the Senate of the same party).
Both in 2017 and 2001, passing tax legislation through reconciliation meant that most of the changes were not permanent; that is, they expired within the 10-year budget window. If any of the White House, Senate, or House are of a majority party different than the others, the chances of passing and enacting any agreed-to tax legislation becomes more doubtful.
The following table contains side-by-side snapshots of current and potential future tax policies of the presidential candidates, based on what has been mentioned informally on the campaign trail.
|Current Tax Law|
(Tax Cuts & Jobs Act
(TCJA) – Present)
|Biden’s Stated Goals||Trump’s Stated Goals|
|Qualified Business Income Deduction for Pass-Through Businesses||Allows an additional 20% deduction to certain qualified business S-Corporations, Partnerships and Individual businesses that is set to expire in 2025.||Biden would phase out the qualified business income deduction for filers with taxable income above $400,000.||Trump would extend beyond 2025 and make permanent the deductions established by the TCJA.|
|Corporate Tax Rates and AMT||Corporations have a flat 21% tax rate and no corporate alternative minimum tax (AMT), which were both changed by the TCJA.|
*These do not expire.
|Biden would raise the flat rate to the pre-TCJA level of 28% and reinstate the corporate AMT on profits of $100 million or more.||Trump has not announced changes and has no plans to reinstate a corporate AMT.|
|Capital Gains and Dividends||The top tax rate is 20% for income over $441,450 for individuals and $496,600 for married filing jointly. There is an additional 3.8% net investment income tax.||Biden would eliminate breaks for capital gains and dividends for income above $1 million. Instead, these would be taxed at ordinary rates.||Trump would reduce the capital gains tax rates, index capital gains for inflation, and create a capital gains tax holiday that would eliminate capital gains taxes for a period of time to be determined.|
|Payroll Taxes||The 12.4% payroll tax is divided evenly between employers and employees and applies to the first $137,700 of an individual’s income.||Biden would maintain the 12.4% tax split between employers and employees and keep the $137,700 cap but would institute the tax on earned income above $400,000. The gap between the two wage levels would gradually close with annual inflationary increases.||Trump issued an executive order to temporarily postpone Social Security tax for employees from Sept. 1 through Dec. 31, 2020.|
He has indicated he would make this temporary reprieve permanent.
|Estate Taxes||The estate tax exemption for 2020 is $11,580,000. Transfers of appreciated property at death get a step-up in basis. The exemption is scheduled to revert to pre-TCJA levels, or $5,800,000, in 2025.||Biden would maintain the 2025 reversion and eliminate the current step-up in basis on inherited assets.||Trump would push to extend the exemption and would not change the transfer of appreciated property step-up in basis.|
|Individual Tax Rates||The top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing jointly. This was lowered from 39.6% pre-TCJA.||Biden would restore the 39.6% rate for taxable income above $400,000. This represents only the top rate.||Trump would keep the current status quo of 37%. In addition, he would enact a 10% rate cut for middle-class taxpayers, which would lower the 22% rate to 15%.|
For 2020, the 22% rate applies to income over $40,125 for individuals and $80,250 for married filing jointly.
|Individual Tax Credits||Currently, individuals can claim a maximum $2,000 Child Tax Credit (CTC) plus a $500 dependent credit.|
Individuals may claim a maximum dependent care credit of $600 ($1,200 for two or more children). The CTC is scheduled to revert to pre-TCJA levels ($1,000) after 2025.
|Biden would increase the CTC to $8,000 ($16,000 for two or more children).||Trump would extend the $2,000 CTC past 2025; however, he would also require Social Security numbers to be eligible to take any of these credits.|
|Education||Forgiven student loan debt is included in taxable income. There is no tax credit for contributions to state-authorized organizations that sponsor scholarships.||Biden would exclude forgiven student loan debt from taxable income.||Trump would provide a tax credit for individual and corporate donations to state-authorized organizations that sponsor scholarships.|
|Itemized Deductions||For 2020, the standard deduction is $12,400 for single/married filing separately and $24,800 for married filing jointly.
After 2025, the standard deduction is scheduled to revert to pre-TCJA amounts, or $6,350 for single/married filing separately and $12,700 for married filing jointly.
The TCJA suspended the personal exemption and most individual deductions through 2025. It also capped the state and local tax deduction at $10,000, which will remain in place until 2025, unless repealed.
|Biden would enact a provision that would cap the tax benefit of itemized deductions at 28%.
State and local tax (SALT) cap: Senate minority leader Charles Schumer has pledged to repeal the cap should Biden win in November (the House of Representatives has already passed legislation to repeal to the SALT cap).
|Trump would extend beyond 2025 and make permanent the deductions established by the TCJA.|
While the candidates’ tax policy plans are not yet publicly formalized, more details may be released as we approach Election Day. With the potential of tax rates increasing with a Biden win, many are asking if it makes sense to accelerate income into 2020 to pay taxes at a lower rate and defer deductions into a later tax year to offset income that could be taxed at a higher rate. Many private business owners are closely watching the results of the election as this will provide direction on how best to tax plan for 2020 and beyond.
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