In most election years the tax policies of the two major presidential candidates would be a topic of frequent discussion.  However, with the current pandemic and social unrest, this topic appears to have taken a backseat, until recently.  Many of President Trump’s tax proposals enumerated during the 2016 campaign were enacted with the passage of the Tax Cuts and Jobs Act of 2017 (TCJA).  Although President Trump has not released a formal tax plan for the upcoming four years, he intends to preserve and expand the TCJA.  The TCJA generally lowered effective tax rates for businesses, including those structured as corporations and pass-through entities, as well as certain individuals, trusts, and estates.  Former Vice President Biden contends the TCJA’s benefits favor corporations and wealthy individuals. His tax proposals are aimed at addressing that perceived imbalance by rolling back certain provisions enacted by the TCJA.

INDIVIDUAL TAXATION

Income Tax Rates

  • Current Law – There are seven individual tax brackets based on taxable income, ranging from 10% – 37%, applicable from 2018 through 2025 under the TCJA.
  • Trump Plan – Considering a 10% rate cut for middle-income taxpayers, effectively lowering the 22% rate to 15%.  Also, would extend the TCJA provisions past 2025 and make the tax rates permanent
  • Biden Plan – Would propose an increase in the top rate to 39.6% which was the maximum individual tax rate in effect prior to the TCJA.

Capital Gain Rates and Dividends

  • Current Law – Top tax rate for capital gains and qualified dividends is 20%.  Net investment income tax adds 3.8% rate to married filing jointly taxpayers earning over $250K and $200K for other taxpayers.  Taxpayers in the 10% and 12% tax brackets pay 0%.  Taxpayers in brackets between 12% and 37% pay 15%.
  • Trump Plan – Considering the reduction of the maximum capital gains rate to 15% and indexing capital gains to inflation.  Otherwise, the fiscal year 2021 budget would extend TCJA provisions past 2025.  Would enact a capital gains tax holiday that eliminates capital gains taxes for a yet to be identified period.
  • Biden Plan – Would increase capital gain rate to equal his proposed top ordinary income rate (39.6%) for taxpayers with over $1M income and eliminate the tax basis step-up that eliminates built-in gains on property decedents pass to their heirs.  Would keep the net investment income tax.

Tax Deductions

  • Current Law – Taxpayers may take eligible deductions and credits against their income tax liability including the qualified business income (“QBI”) deduction which allows business owners to deduct 20% of qualified business income through 2025.  The itemized deduction for state and local taxes is capped at $10K.
  • Trump Plan – The fiscal year 2021 budget would extend 2017 TCJA provisions past 2025.
  • Biden Plan – Proposes that itemized deductions be limited in two ways.  First, Biden would institute an overall 28% cap on the rate against which one could take itemized deductions.  So, for example, an individual in the 39.6% (newly restored) tax bracket would see a 28-cent reduction for every dollar itemized, rather than 39.6 cents without the cap.  Additionally, Biden would reinstate the “Pease Limitation” which was suspended through 2025 under the TCJA, for those with income above $400K.  The Pease Limitation effectively reduces the amount one can deduct above a certain threshold.  For every dollar of income earned above the threshold, the Pease Limitation reduces the value of itemized deductions by three cents. In addition, the Biden plan aims to phase out QBI deductions for those with over $400K in earnings as well as the special qualifying rules for real estate investors.

Child Tax Credits

  • Current Law – Taxpayers can claim a maximum $2,000 Child Tax Credit, a $500 dependent credit, and a maximum dependent care credit of $600 ($1,200 for two or more children).  Workers older than 65 who do not have a qualifying child are not eligible for the Earned Income Tax Credit.
  • Trump Plan – No proposed changes but would require Social Security numbers to be eligible for any of these credits.  Trump’s fiscal year 2021 budget would extend the applicable TCJA provisions beyond 2025.
  • Biden Plan – Proposes increasing the child tax credit to $8,000 ($16,000 for two or more children) and expanding the dependent care credit. Would expand the Earned Income Tax Credit to workers older than 65 who do not have a qualifying child.

Education

  • Current Law – Forgiven student loan debt generally is included in taxable income.  In addition, no tax credit currently exists for contributions to nonprofit scholarship granting organizations, but some amount may be deductible as a charitable contribution.
  • Trump Plan – Would enact the Education Freedom Scholarship tax credit, which would provide up to $5 billion of income tax credits annually for individual and corporate donations to scholarship granting organizations.
  • Biden Plan – Would exclude forgiven student loan debt from taxable income.

Payroll Taxes

  • Current Law – The 12.4% Social Security employer (6.2%) and employee (6.2%) combined payroll tax rate applies to earnings up to an annual maximum ($137,700 in 2020).  An executive order has been issued that defers the collection of Social Security payroll taxes from September 1st until the end of the year for workers making less than $4,000 for any biweekly pay period ($2,000 per week, or $104,000 annually).  Since the executive order only defers the taxes and does not eliminate them, they will need to be withheld and paid gradually from paychecks issued between January 1, 2021 and April 30, 2021.
  • Trump Plan – No proposed changes.
  • Biden Plan – Earnings between $137,700 and $400,000 would be exempt, creating a “doughnut hole” of nontaxable wages.  Earnings above $400,000 would become subject to the 12.4% tax.

 Health Care

  • Current Law – The Affordable Care Act (ACA) of 2010 which was designed to extend health insurance coverage to millions of uninsured Americans as well as preventing insurance companies from denying coverage due to pre-existing conditions, is still in effect today.  The ACA created several new taxes; however, with the passage of the TCJA, the penalty assessed to individuals for failure to maintain health care coverage was eliminated in 2019.
  • Trump Plan – Continues to support the repeal of the ACA; the Supreme Court will hear a case this fall to possibly overturn the ACA which will mostly likely be decided in the first half of 2021.  The Trump Administration announced that their health care plan will be rolled out shortly.
  • Biden Plan – Proposes to build and expand on the ACA by eliminating the 400% income cap on tax credit eligibility and lowering the limit on the cost of coverage.  Additionally, would propose expanding a variety of family tax credits to increase coverage and lower premiums.

BUSINESS TAXATION

Corporate Tax Rates

  • Current Law – The TCJA of 2017 reduced the tax rate to a 21% flat rate. Prior to the TCJA, the corporate tax rate was based on a graduated taxable income structure ranging from 28 – 35%.
  • Trump Plan – No proposed changes.
  • Biden Plan – In addition to increasing the corporate tax rate to 28%, Biden would also require C corporations with over $100 million annual book income to pay the greater of the “normal” corporate tax liability or a 15% minimum tax on “book” profits, which is reported annual income net of annual expenses.  This tax would function as an alternative minimum tax, replacing one that was in effect until the TCJA.

Business Tax Deductions

  • Bonus Depreciation
    • Current Law – The TCJA increased first year bonus depreciation to 100% for assets with recovery periods of 20 years or less.  The 100% depreciation deduction rate remains effective until the end of 2022.  It is then gradually phased out in 20% increments until it is fully phased out at the end of 2026.
    • Trump Plan – May propose making the 100% bonus depreciation deduction a permanent provision.
    • Biden Plan – Proposes to eliminate the bonus depreciation deduction.
  • Energy Tax Incentives
    • Current Law – Businesses may claim deductions for intangible drilling costs paid or incurred by operators of oil and gas wells and the depletion of minerals and oil and gas extraction.  In addition, various credits are available for oil production, electric vehicles, and the production of solar, wind and other “green” energy.
    • Trump Plan – No proposed changes to energy tax incentives.
    • Biden Plan – Proposes to eliminate deductions for drilling wells and depletion of oil and gas deposits.  Intends to restore the full electric vehicle tax credit and various credits and deductions to incentivize both residential and commercial energy efficiency.​
  • Manufacturing
    • Current Law – Manufacturing companies currently do not receive any special incentives. Prior to the TCJA, businesses were entitled to a 9% deduction for domestic production activities, but this was repealed for tax years beginning after December 31, 2017.
    • Trump Plan – Fiscal year 2021 budget does not include any planned changes to current law.
    • Biden Plan – Proposes a manufacturing communities tax credit that promotes revitalizing and modernizing existing or recently closed facilities.  In addition, his plan includes the creation of a 10% tax penalty on companies that move operations overseas and a 10% tax credit for companies that create jobs in the U.S. to incentivize manufacturing.

There is a clear difference in the tax policies between the candidates.  In summary, if President Trump is re-elected his tax policies would focus on improving the TCJA and making many of the temporary provisions scheduled to expire at the end of 2025, permanent.  However, if former Vice-President Biden is elected, many of his policies focus on ensuring the most affluent taxpayers shoulder a higher tax burden than they do under the TCJA and eliminate or phase-out many TCJA provisions.  Although we don’t know who will set the tax policy agenda when the next presidential administration begins in 2021, it is worth noting that no matter who wins the election, enacting tax code changes requires a consensus between Congress and the White House, as such legislation must be enacted by Congress and signed into law by the President.