‘We can’t control the wind, but we can adjust our sails.’
With a looming election, the topic of taxes always comes up. Regardless of which scenario plays out, it is likely that individual and corporate taxes will go up.
Here are the changes Biden and Trump are proposing.
Biden Tax Proposals
CAPITAL GAINS RATES
The biggest and major difference will be capital gains tax rates will go from 23.8% to 39.6% WOAH that’s a major change!
This change is only likely to happen if 1. Biden is elected 2. Democrats retain the House of Reps and 3. Senate flips to Democrats
A fellow accountant friend of mine wrote an article about how one of his clients had a $6M capital gains sale this year. The client originally wanted to make this a 3 year installment sale but decided to capture the entire gain this year to take advantage of the 23.6% capital gains rate instead of risking the rate going up to 39.6% in future years. This saved the client $320,000 in taxes.
If you need to sell off a brokerage account to pay for your kids’ college, 2020 may be a good year to do that.
Tax law changes happen when politicians want to change our (citizens) behaviors. The ‘Trump tax laws’ wanted to incentivize investing, hence the lower capital gains rate. This higher capital gains rate likely means politicians want to incentivize spending versus investing.
Since tax rates may go up, it might be a good time to convert your IRAs to a ROTH IRA which means you pay the tax on it this year rather than future years. However, if you’re a decade or more out from retirement, you may want to hold tight.
Starting in 2018, the exemption on estate taxes went up to $11.4M for individuals - double that if you’re married. What that means is you can gift $11.4M at your death without your estate paying taxes on it.
This provision ends in 2025, however Biden wants to bring the exemption back down a lot sooner.
It may be a good time to speed up gifts if you’re net worth is higher than $11.4M.
Right now, everyone pays 12.4% social security on income up to $137,700. If you make above that, no additional social security taxes are taken out of your paycheck.
The new payroll taxes would assess more social security taxes on income over $400k.
Additionally he has talked about higher taxes on the wealthy, limiting itemized deductions, limit like-kind exchanges for real estate investors, and limit the Qualified Business Income Deduction. He wants to expand the child and dependent care credit to $8,000 per kiddo, forgive student loan debt, expand the Work Opportunity Tax credit, enhance access to 401ks, and create tax credits that offer retirement plans for their workers.
Trump Tax Proposals
Trump hasn’t come out with much on his tax changes - likely because he already overhauled the tax laws in 2017.
The payroll tax deferral will be pushed to be completely forgiven.
A middle-class tax cut has been hinted at which would drop the current tax rate of 22% down to 15%.
TAX CUTS AND JOBS ACT OF 2017
He will likely seek permanent status for some of the provisions of the Tax Cuts and Jobs Act of 2017. These changes would like be to set permanent the lowered tax rates, the increased standard deductions, and the doubled child tax credit.
SECOND STIMULUS CHECK
Trump also wants a second stimulus check which now seems stalled until after the election.
CAPITAL GAINS RATES
Decrease in capital gains rates. Although this spurs investments, it does cater more towards the wealthy so that will be harder to pass. He also wants to index capital gains for inflation which means your basis in the stock would be indexed for inflation. Kind of a cool idea but a nightmare for accountant’s to try and figure out.
There is currently a 3.8% surtax on net investment income and if the Supreme Court comp,Evelyn overturns Obamacare - this surcharge would be eliminated.
Trump has come out and said he wants to expand opportunity zones. Again this one only benefits wealthy taxpayers however I do like this program because it incentivizes investing in economically distressed communities. I’ve gotten to see the amazing gentrification of Durham, NC when I lived in Raleigh and I'M HERE FOR IT.
TRAVEL EXPENSE TAX CREDIT
I don’t care who you are but this is cool: Trump wants to help airlines, hotels, restaurants, and other biz that rely on tourism by offering a tax credit for travel expenses. This rebate would be called the Tax Rebate and Incentive Program (TRIP - see what they did there?). This credit would be worth $8,000 for married couples plus $500 for each kiddo for domestic travel. Whattttttt?! Hello Hawaii!
BUSINESS TAX BREAKS
‘Made in America’ tax credits
Cut taxes to keep jobs in America
Tax credits for companies that bring jobs back from China
US manufacturing incentives
Restore deductibility of Meals and Entertainment
Employee retention tax credit