As we approach the highly anticipated November 3rd election, I get anxious, as a CPA, for what changes will occur to our tax system. I know that with all that’s going on in the world, from Coronavirus to civil unrest, that taxes may not be the most important thing to worry about, but I’m always curious where taxes are going. Back in 2017, The Tax Cuts and Jobs Act (TCJA) created several significantly new tax laws that we’ve now seen applied to two tax filings in 2018 and 2019. Many people in our local area benefited from lower taxes and/or simpler tax reporting. So, what will change in a continued Trump administration or in a Biden administration?
The CPA Practice Advisor published an article called Election 2020: Comparing the Biden and Trump Tax Plans. This article presents a simple comparison of each party’s approach to some of the most common tax law categories. I’ll give you a summary and some of my thoughts below.
Individual tax rates: The common thought and indications from the parties is that the Biden administration would restore the previous tax rates. Therefore, raising the top rates back to 39.6%. ON the other hand, the Trump administration want to hold the rates where they are currently and add some additional cuts for middle-income taxpayers.
Itemized Deductions: The Trump administration wants to extend the changes from the TCJA beyond 2025. A Biden administration wants to cap the tax benefit of itemized deduction at the 28% rate, which means that taxpayers in brackets higher than 28% would have their itemized deduction limited. One of the major itemized deductions is charitable contributions, so this could have an impact on the incentive to donate to charities. This could limit their source of income.
Capital Gains and Dividends: A Biden administration wants to remove the beneficial long-term capital gains treatment for capital gains and dividends over $1 million. The Trump administration has provided little specifics in the way of change other than a desire to reduce the taxes. This doesn’t impact many of the people you run into on a regular basis, so I doubt the average person even notices this change.
Individual Tax Credits: The Trump administration hasn’t offered any significant changes to the existing $2,000/$500 child/dependent credit. However, the Biden administration has proposed several changes to this by increasing the credit and potentially awarding it monthly instead of a tax credit on the return.
Estate Tax: The Biden administration proposes to allow the exemption to revert back to $5 million and eliminate the step-up in basis on inherited assets, while Trump has stated that he will pursue a larger exemption. Surprisingly, this one impacts many of you reading this article. It’s long been tax policy that your heirs would receive their inheritance with no tax liability. Under Biden’s plan, they would be responsible for the tax on the appreciation of the assets received. The timing of this taxation is unclear as to whether it would be due at transfer or could be deferred until the asset is sold.
Payroll taxes: The Biden administration has proposed a new 12.4% tax on the payroll above $400,000. Currently, income up to $137,700 for 2020 is subject to this tax, but any amount above is exempt. This would create a “donut hole” of exempt payroll from $137,700 to $400,000. The Trump administration has issued his executive order for the end of 2020, but it is unclear what future plans will be..
All of these are just proposals ,and in some ways wishes, but we’ve learned over the last decade or so that things can change quickly. As I said earlier, taxes aren’t everything, but they are a major component of the information you need to consider when voting for the President and Congress. I recommend that you educate yourself on all of the issues and most importantly VOTE!