[Co-authors: Sarah Kim, J.D. and Christopher Rullo, CPA]
With the Presidential election less than 60 days away, fiscal policy will likely play a prominent role in the upcoming debates as the candidates’ tax policies stand in stark contrast with one another. The Biden Campaign seeks to use the tax code to address social issues arising from income inequality and wealth concentration in conjunction with funding federal programs in areas such as education, climate change, and health care. The Trump campaign on the other hand seeks to make permanent many of the provisions of the Tax Cuts and Jobs Act (TCJA), which lowered taxes on businesses and most individuals in furtherance of supply side economic principles espoused by Republicans.
To assist our clients and friends in processing these disparate views on how to move the country forward on solid economic footing, we have compiled the accompanying chart highlighting the respective campaigns’ positions on the main components of their tax plans.
||TRUMP TAX CURRENT/PROPOSAL
||BIDEN TAX PROPOSAL
|Individual Tax Rate
||The 2017 Tax Cuts & Jobs Act (TCJA) reduced the top rate from 39.6% to 37%*.
||Biden's tax plan reverts the top rate to 39.6% for MFJ filers with taxable income over $400,000.
|Long Term Capital Gain (LTCG) and Qualified Dividend Tax Rate
||LTCG and qualified dividends are taxed at the top rate of 20%, plus a 3.8% net investment income tax (NIIT) imposed under the Affordable Care Act (ACA). Trump has supported legal challenges to the ACA in the Supreme Court that would remove the 3.8% NIIT.
||Biden would raise the top LTCG and qualified dividend tax rate to match the top ordinary income rate of 39.6% for taxpayers with income over $1 million.
||Social Security (SS) tax is split evenly between employers and employees. Currently a 12.4% SS tax is imposed on wages up to $137,700. No SS tax is imposed on wages above $137,700.
||Biden's tax plan:
1. 12.4% SS tax for wages up to $137,700;
2. no SS tax for wages between
$137,701 - $400,000;
3. 12.4% SS tax for wages above $400,000.
||The 2017 TCJA increases the exemption amount to $11.58 million for 2020. It will revert back to $5 million (to be adjusted for inflation) after 2025. Assets passed to heirs at death get a basis step-up to fair market value.*
||Biden's tax plan reduces the estate tax exemption amount to $5 million (possibly as low as $3.5 million). It also eliminates basis step-up at death. Alternatively, his plan might make death a taxable event by subjecting unrealized capital gains to income tax at death.
||The 2017 TCJA caps the State and Local Tax (SALT) and real estate tax deduction to $10,000. It also suspends (through 2025) the 3% limitation on total itemized deductions for high-income taxpayers.*
||Biden's tax plan ends the $10,000 SALT and real estate tax cap, restores the 3% itemized deduction limitation for high-income taxpayers (above $400,000 for MFJ). His plan also proposes a second limitation, which caps the tax benefits of itemized deductions to 28% of value ― taxpayers in the tax brackets with a tax rate higher than 28% will face limited itemized deductions.
|Section 199A Qualified Business Income (QBI) Deduction
||The 2017 TCJA allows a 20% QBI deduction. For higher income taxpayers, the deduction is subject to limitations based on wages and unadjusted basis in depreciable assets.*
||No change to the QBI deduction for taxpayers with taxable income under $400,000 while phasing the deduction out completely for those with income over $400,000.
||A qualified “like-kind” exchange of real property allows the tax deferral of gains.
||Biden’s plan would eliminate Section 1031 like-kind exchanges for investors with annual income greater than $400,000.
Income Tax Rate
|The 2017 TCJA reduced the corporate tax rate from 35% to 21%.*
||Biden has proposed raising the corporate tax rate from 21% to 28%.
|Corporate Alternative Minimum Tax (AMT)
||The 2017 TCJA eliminated the federal AMT for corporations.*
||Biden’s tax plan reinstates the corporate AMT in a different form. A 15% minimum tax is imposed on “book” profits of $100 million or higher, still allowing for net operating loss (NOL) and foreign tax credits. Corporations will pay the greater of their regular income tax or the 15% minimum tax.
|Global Intangible Low Tax Income (GILTI)
||10.5% minimum tax is imposed for qualified foreign affiliates of U.S. companies on income earned from intangible assets.
||Biden’s tax plan doubles the minimum tax rate on GILTI from 10.5% to 21%.
*Trump supports making the TCJA tax changes permanent.
Enactment of a Biden tax policy agenda would likely require a clean sweep of the Executive and Legislative branches, as the current milieu in Washington of political rancor makes bipartisan lawmaking extremely elusive. While much needs to happen for any of these proposals to become law, they represent a window into the respective parties’ thinking on this perennially important subject.
In thinking about the potential effective dates of Biden tax changes, while as a general proposition the U.S. Constitution is not a bar to retroactive tax legislation, the dictates of fairness and good faith suggest that tax changes affecting transactions (e.g., repeal of section 1031) be effective prospectively, while general changes like tax rates may be made effective as early as January 1, 2021. This is what the think tanks and other institutions that have analyzed the potential economic impact of these proposals seem to be assuming.
An important caveat: The materials included here are based on interpretations of the general information and concepts made available by the campaigns. Once reduced to actual legislative language these interpretations could prove inaccurate. For example, things as basic as whether provisions designed to apply based on income levels look to gross income, adjusted gross income, or taxable income are unclear. Or, whether the repeal of the basis step-up of assets held by a decedent at death would be effectuated by a tax on unrealized appreciation at death or a carryover basis regime.
Also, it should be remembered that evaluating the effect on taxpayers of proposed changes in federal tax law requires consideration of their interaction with state and local income tax laws and their effect on the overall tax burden. Many state tax systems follow federal rules in whole or at least in part. For a frame of reference, when reading the balance of this writing and the linked information, New York State’s top two personal income tax brackets for single and married filing separate taxpayers are 6.85% on income in excess of $215,400 and 8.82% on income in excess of $1,077,550. New York City’s top personal income tax rate of 3.876% kicks in on income in excess of $50,000. The respective corporate rates are 8.3785% (including MTA surcharge) and 8.85% for the State and City.