With COVID-19 going on and having no end in sight, it might be a little bit difficult to remember that this is an election year. There will be, after all, no Republican or Democratic National Convention, and we have yet to see a live debate between President Donald Trump and Democratic presidential nominee Joe Biden. In less than 100 days, however, we will elect a president, and each of their tax plans for our country are very different. With economic recovery on a lot of people’s minds, tax policy should play a big role in the election, since any new economic initiatives will have to be paid for somehow and that usually means altering the tax code.
President Trump has not really talked much about second-term tax proposals. He does want to keep taxes low, including a 21% rate on corporate tax profits, low capital gains rates for individuals, the ability to defer up to $1 million in gains invested in qualified opportunity zones and the 20% qualified business income deduction.
Meanwhile, on July 21, Mr. Biden unveiled a 10-year, $775 billion plan that prioritizes child care. It would include new tax credits for children, seniors and disabled Americans and build thousands of new child care centres nationwide. It would also expand the child and dependent care tax credit to provide a fully refundable credit. Other tax plans he envisions include:
Tax wages and capital at the same rate. Mr, Biden wants to have wages taxed the same as capital, which consists of long-term capital gains and the sale of real estate and companies. He wants to eliminate the favorable capital gain tax treatment on long-term investments and have these items taxed at progressive rates.
Increase taxes on the wealthiest Americans by limiting unequal and unproductive tax expenditures. Wealthy Americans benefit significantly in their taxes from expenditures that provide deductions and credits to specific groups and for specific activities. Some of these expenditures include self-employed health insurance, benefits for tax-qualified retirement saving accounts and investments in qualified opportunity zones. All of these deductions reduce adjusted gross income; Mr. Biden wants to end them.
Increase corporate tax rates. As part of his tax plan, President Trump cut corporate tax rates in the U.S. from 35% to 21%, a reduction of 40%. Mr. Biden wants to increase this rate from 21% to 28%.
Increase estate taxes back to their norm before the Tax Cuts and Jobs Act of 2017. Before the TCJA, any assets from estates valued at less than $5.49 million (or about $11 million for couples) were exempt from being taxed when passed down from deceased persons to their heirs. Anything over that threshold is taxed at about 40%. President Trump more than doubled the exemption in 2017 to $11.4 million per person or about $22.8 million for couples.
Finally, as mentioned earlier, Mr. Biden wants to expand the child and dependent care credit, which would increase from a maximum nonrefundable $3,000 tax credit per one child to a refundable $8,000 tax credit and from $6,000 to $16,000 for those with two or more children. Mr. Biden’s plan would also expand afterschool, weekend and summer care programs for children and provide pre-kindergarten education at no cost to all three- and four-year-old children.
Mr. Biden’s 10-page plan document does not contain a lot about how these new changes would be paid for, but it does state that they would be paid for in part by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000, and by taking steps to increase compliance for high-income earners. He also wants to do away with like-kind exchanges for real property. Like-kind exchange rules enable a property investor to avoid capital gains taxes on sales if the proceeds are invested in another piece of real property.
We can’t predict who’s going to win the election, but if Mr. Biden wins, taxes will very likely increase. If you’re thinking of divesting an asset held long term, you might want to sell before January 1, 2021. Contact your Schneider Downs representative and they will be happy to discuss the situation with you.
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.