With the November presidential election just two months away, taxes are an issue quickly moving to the forefront of voters’ minds. What do the two candidates’ plans entail, and what are the implications of their plans on individuals? Of course, it’s not just about who is elected president. The outlook for individual tax legislation will also depend on which party controls Congress.
Here is a summary of what we are hearing from each candidate.
President Trump has proposed to make permanent the individual tax provisions enacted under the 2017 federal tax reform legislation, which lowered the highest individual income tax rate from 39.6% to 37%. The 2017 tax reform act was enacted under the budget reconciliation process, which requires only a simple majority in the US Senate, not a 60-vote supermajority.
Former Vice President Biden has proposed to return to the pre-2017 federal tax reform rates for taxpayers earning more than $400,000, which would include restoring the highest individual rate to 39.6%.
President Trump hasn’t officially proposed any changes to current capital gains tax rates but recently has expressed interest in possibly lowering the current 20% maximum individual capital gains tax rate to 15%. He also has expressed support in the past in indexing capital gains tax rules for inflation.
Former Vice President Biden has proposed taxing long-term capital gains and qualified dividends at ordinary rates for taxpayers with taxable income above $1 million – meaning long-term capital gains and qualified dividends would be taxed in the same manner as short-term capital gains and ordinary dividends. Biden is also proposing that unrealized capital gains above $100,000 be taxed at death or upon gift, as opposed to waiting until the sale or exchange of the asset. This exclusion would likely be on a per-individual basis, and exceptions would include assets passing to the taxpayer’s spouse or charity.
Some changes made to itemized deductions under the 2017 federal tax reform legislation are scheduled to sunset in 2025, along with the other individual tax provisions. Other individual tax provisions President Trump is proposing to make permanent include:
Former Vice President Biden has proposed to cap the value of itemized deductions at 28% for taxpayers earning more than $400,000, but his official campaign policy statements do not address all of the specific individual tax deductions that were modified by the 2017 tax reform act. Biden has expressed support for restoring the itemized deduction for state and local taxes, according to some reports.
The 2017 federal tax reform legislation increased the lifetime gift and estate tax exemption as well as the generation-skipping transfer (GST) tax exemption to $11.58 million from $5.49 million. Like other individual tax provisions, these estate and GST changes are scheduled to sunset in 2025.
President Trump has proposed to make these estate and GST changes permanent. Absent future legislative action, the estate and gift tax exemption and GST tax exemption is set to return to $5.49 million (adjusted for inflation) in 2026.
Biden’s current campaign tax proposals do not specifically address these taxes, but former President Barack Obama proposed reinstating the estate, GST and gift tax rules that applied in 2009 – an exclusion amount of $3.5 million for estate and GST taxes and $1 million for gift taxes.
Former Vice President Biden’s tax proposal also includes the expansion of retirement savings incentives, which may include a proposal to replace the deduction for IRA and defined contribution plan contributions with a 25% refundable credit. In addition, Biden has proposed to expand Social Security taxes to apply to an individual’s earnings in excess of $400,000.
It’s not easy to plan with so much uncertainty about the future direction of individual tax rules. But it’s important to look at both proposals and consider the possible impacts. Although tax legislation will not happen overnight, there is concern about any law changes passed in 2021 being retroactive to January 1, 2021. So individuals should consider how the proposed changes may affect their cash flow planning as well as any wealth transfer planning they may be considering and consider effecting those changes by the end of the year if it is deemed advisable.