As the final countdown to Election Day nears, taxes and tax reform are top of mind for voters. It’s been almost three years since the Tax Cuts and Jobs Act (TCJA) was passed, legislation that lowered tax rates for many taxpayers, increased the standard deduction, changed the value of itemized deductions for some and nearly doubled the estate and gift tax exemptions.
However, many of those changes are temporary, and the TCJA is scheduled to sunset at the end of 2025, resulting in an increase of the top income tax rate and a significant reduction of the estate and gift tax exemption amount.
Of course, we may see tax changes before 2026. Considering our national debt currently exceeds $26 trillion, trillions more in stimulus packages likely adding to the debt, and a debt-to-GDP ratio approaching 100%, many believe taxes are likely to increase sooner rather than later. Also, taxes may be impacted by the outcome of the election.
Below is an analysis of the current proposals of the presidential candidates, how the proposed changes could impact financial, retirement and legacy plans, as well as some strategies to help navigate an uncertain and likely changed tax environment. These proposals, if considered, would be subject to congressional debate, negotiation and approval.
Income Taxes: Currently, the top income tax rate is 37% for those with income exceeding $518,401 (single filers) and $622,051 (married couples filing jointly). President Trump would like to make the TCJA permanent.
Former Vice President Biden would increase tax rates for those making over $400,000 and increase the top tax rate to 39.6% for those making over $470,000.
Deductions: Currently there are no proposals from Donald Trump to change income tax deductions. The standard deduction would remain $12,400 (single filer) and $24,800 (joint filer), adjusted for inflation.
For those who itemize their deductions, they can deduct interest on mortgages up to $750,000 ($1,000,000 for those mortgages originating prior to December 15, 2017), charitable contributions, medical expenses exceeding 10% of the taxpayer’s Adjusted Gross Income (AGI) and state and local income, sales and property taxes up to $10,000.
Joe Biden would cap itemized deductions to 28% and reinstitute the Pease limitation thereby reducing the value of itemized deductions by 3% of the amount that exceeds $400,000 up to an 80% overall reduction. He would also remove the $10,000 cap on the state and local tax deduction.
Capital Gains: Donald Trump would keep the same long-term capital gains rates currently 0% for those with taxable income less than $40,000 single/$80,000 joint; 15% rate for those with taxable income up to $441,000 single/$496,600 joint; and 20% for those with taxable income above that.
Also, the 3.8% Medicare surtax would apply for those with taxable income above $200,000 single/$250,000 joint. That would bring the top total long-term capital gains tax at 23.8%.
Joe Biden would keep these rates the same but tax capital gains as ordinary income for those with taxable income above $1,000,000, thereby bringing the top tax rate to 43.3% (39.6% plus the 3.8% Medicare surtax).
Corporate Taxes: The top corporate tax rate is 21%. Joe Biden would increase that to 28% with a 15% corporate minimum tax.
Social Security Payroll Tax: An employer and employee are each subject to a Social Security payroll tax of 6.2% up to the current taxable wage base of $137,700. Donald Trump would waive the 2020 Social Security payroll tax. Joe Biden would expand the taxable wage base to include income above $400,000.
Estate and Gift Tax: Donald Trump would make the TCJA permanent with a current federal estate and gift tax exemption of $10,000,000 per person indexed for inflation (currently in 2020 the amount is $11,580,000). He would also preserve the step-up in cost basis of capital assets held at death to fair market value.
Joe Biden would reduce the estate and gift tax exemption to the $3,500,000–$5,000,000 range. He would eliminate the step-up in cost basis.
What to Do Now
Considering the uncertain tax environment and the potential for tax reform, now is a good time to consider some strategies to take advantage of the current tax laws and mitigate the risks of higher taxes in the future. Some tax-saving strategies may include: