Election mania has officially engulfed America, and so far, it’s living up to the hype.
As both candidates, President Donald Trump and former Vice President Joe Biden, sling insults at one another nearly as fast as they make promises to voters, the people are left responsible for deciphering all the rhetoric. One of the most-debated issues every four years is each candidate’s tax plan.
Trump passed the Tax Cuts and Jobs Act (TCJA) in 2017, one of the largest tax reforms in history. He credits his tax plan for unleashing the American economy, citing GDP growth over 3% for four quarters of his administration, and the lowest unemployment level in over fifty years (pre COVID-19)
His campaign is not proposing anything too novel for a second term, but rather stands to protect the reforms already put into place. Vice President Biden does offer an array of suggestions that make a stark contrast.
To address the simpler of the two first, Trump vows to prolong TCJA and its staple reforms, including the following:
- Income tax simplified to seven brackets, lowering the top rate to 37%.
- Standard deduction raised to $12,400 for Singles and $24,800 for Married Filing Jointly.
- Corporate tax lowered top rate from 35% to 21%.
While there is no formal tax plan for his second term’s candidacy, Trump has promised to repeal Obamacare, which would eliminate the 3.8% surtax on net investment income. He wants to lower the top capital gains rate from 20% to 15%. He has also discussed publicly a middle-class tax cut, which experts expect to effectively lower the 22% bracket to 15%.
Biden, as to be expected of the challenger, has provided a clear alternative. The theme of his campaign, in respect to taxes, is that it is time for the rich the pay their fair share, but with a promise that anyone making under $400,000 will not pay a penny more. Here is a list of the key factors in his tax proposal:
- Capital Gains: Investment income to be taxed as ordinary income for those earning over $1 million.
- Corporate Tax: Raise from 21% to 28%, and penalize American companies that shift jobs overseas.
- Income Tax: Revert to pre-TCJA’s highest rate of 39.6%, and add social security tax on any income over $400,000, creating a donut hole between $137,700 and $400,000.
- Death Taxes: Reduce estate tax credit from $11.58mil to $5.79mil, and eliminate Step-Up in Basis at death.
- Real Estate: Eliminate 1031 Like-Kind Exchange for earners over $400,000.
- Deductions: Limit itemized deductions for those making over $400,000, and eliminate Qualified Business Income (QBI) deduction for pass-through entities, such as partnerships and LLC’s, with income over $400,000.
- Family Tax Credits: Increase Child Tax Credit from $2,000 to $3,000 for kids ages six-seventeen and to $3,600 for under six years-old, and further increase the Child and Dependent Care Credit for low and middle-income families from $3,000 to $8,000 per child.
- Healthcare Tax Credits: Offer credits to anyone paying more than 8.5% of income on health insurance, credits for buying long-term care insurance, and to those taking care of elderly loved ones.
- Homebuyer Tax Credits: Offer up to $15,000 credit in advance for purchasing a first home.
In order to analyze the pros and cons of either candidate’s plan, voters must consider their own situation. It is important to understand the math therein and not the politicking.
For instance, Biden has quoted on his campaign website that, “In Trump’s America, a working family making $65,000 will pay 22% on every dollar they earn, not including payroll taxes, while billionaires will pay just 15% on their profits from investments.”
In reality, a married couple filing jointly would be in the 12% tax bracket, and with a marginal system, only income within that bracket is taxed at that rate. Take into account the first $19,750 being taxed at 10% and the $24,400 standard deduction they’d be allowed, and this couple would have an effective tax rate of 6.65%, not including any potential tax credits for the kids.
Americans must also understand that reform will have two impressions on their finances, first the immediate tax impact, but secondly the overall impact to the economy. The Urban-Brookings Tax Policy Center shows that every level of earning would realize a lower after-tax income in Biden’s plan. Their model assumes that 60% of corporate tax is borne by shareholders, 20% by capital owners, and 20% by the labor force in wages..
Some action to anticipate if Biden were elected would be companies rushing to accelerate income into 2020, potential Roth conversions in the current lower tax brackets, and tax planning strategies to keep earners under $400,000 of income.
One of the biggest changes might be felt at death, with the elimination of the step-up in basis rules, in which beneficiaries from every walk of life will be subjected to capital gains tax on inherited assets from huge investment portfolios down to mom and dad’s house.
In summary, both candidates are sticking with their party’s mantra. Trump wants lower taxes and smaller government, while Biden wants higher taxes and more government. Stay tuned to this ever-evolving tax climate.
Please tune into “The Kuderna Podcast” for more insight.
Bryan Kuderna is a Certified Financial Planner™, Life Underwriter Training Council Fellow, and Investment Adviser Representative with Kuderna Financial Team. He is also the author of the best-seller "Millennial Millionaire."
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