2020 Election

President Donald Trump- Building on TCJA

In general, Republican presidential nominee Donald Trump plans to continue the tax reform efforts that he supported during his first term. Specifically, he signed the GOP-backed Tax Cuts and Jobs Act (TCJA) into law in December 2017. It included many federal tax cuts and breaks for businesses, such as:

• Installing a flat 21% tax rate for C corporations and personal service corporations,
• Permanently liberalizing the Section 179 first-year depreciation rules,
• Temporarily expanding first-year bonus depreciation deductions, and
• Repealing the alternative minimum tax (AMT) for C corporations.

In addition, the TCJA created a deduction for up to 20% of qualified business income (QBI) from sole proprietorships, limited liability companies (LLCs), partnerships and S corporations. That provision is scheduled to expire after 2025. However, the White House budget for fiscal year 2021 (which starts on October 1, 2020) would extend the QBI deduction beyond 2025.

In general, President Trump has indicated support for preserving tax reforms under the TCJA if he's elected for a second term. He would also like to expand the existing Opportunity Zone program, which is intended to encourage investment in economically distressed census tracts by providing capital gains tax relief for individuals and businesses that make qualified investments in those areas.

Without providing specifics, Trump would push for the following tax law changes if reelected:

• A new "Made in America" tax credit,
• A new tax credit for companies that bring back jobs from China,
• 100% first-year expensing for certain industries, including pharmaceuticals and robotics, that bring manufacturing back to the United States, and
• Permanent federal payroll tax cuts. (However, Trump hasn't laid out a plan for how Social Security benefits would be paid if the taxes that fund them were eliminated.)

Furthermore, Trump has called for forgiveness for federal payroll taxes that were temporarily deferred for September 1, 2020, through December 31, 2020, by an executive action issued on August 8.

Unfortunately, Trump's tax proposals leave many unanswered questions. For example:

• What will happen with the 100% bonus depreciation deduction after 2022, when it's scheduled to begin being phased out under current tax law?
• Will Trump support the requirement for businesses to amortize research and development costs over five years, which is scheduled to start after 2022? (Under current law, research and development costs can be fully deducted when paid or incurred.)
• Will Trump allow COVID-19-related business tax relief measures to expire — or will he encourage Congress to extend them?

Unless the Republicans regain control of the House and retain control of the Senate, any tax cut proposals would likely face strong opposition from congressional Democrats. However, if reelected, Trump is unlikely to sign any legislation that calls for major federal business tax increases.

Trump's Promise to Business Owners

When accepting the Republican party nomination, Trump pledged to continue the progress made on business tax reforms during his first term. Specifically, he promised to "provide tax credits to bring jobs out of China back to America — and … to impose tariffs on any company that leaves America to produce jobs overseas." His federal tax promises for the second term is "to continue to reduce taxes and regulations at levels not seen before."

Former Vice-President Joe Biden — Rebuilding America through Investment

If Democratic presidential nominee Joe Biden is elected, he has expressed support for major changes to the current federal tax laws. His plans could gain traction if Democrats retain control of the House and gain control of the Senate. This could mean rollbacks or revisions of several TCJA provisions, which would be necessary to pay for his plans to rebuild the U.S. economy.

Notably, the Biden plan would increase the corporate federal income tax rate from 21% to 28%. The change would raise an estimated $1.1 trillion or so over 10 years. This rate is significantly lower than the 35% maximum effective rate for profitable corporations that was in place before the TCJA was enacted. But Biden's proposed tax rate would be a flat rate, not based on a graduated schedule.  

In addition, if elected, Biden would support a new 15% minimum tax on corporations with at least $100 million in annual income that pay little or no federal income tax under the "regular rules." An affected corporation would pay the greater of:

• The regular federal income tax bill, or
• 15% of reported book net income.

This new tax would raise an estimated $160 billion to $320 billion over 10 years.

Biden also would introduce a so-called "financial risk fee" on banks, bank holding companies and nonbank financial institutions with over $50 billion in assets. The fee would be based on an institution's covered liabilities and would provide the Federal Deposit Insurance Corporation (FDIC) with a pool of funds to pay for FDIC-insured deposits held in failed institutions.

Biden also supports "green energy" tax changes. Specifically, if elected, Biden would support reinstating or expanding tax incentives intended to reduce carbon emissions, including:

• Deductions for emission-reducing investments in residential and commercial buildings, and
• Credits for buying electric vehicles produced by manufacturers with credits that have been phased out under current law.

If elected, Biden would also like to eliminate federal income tax deductions for oil and gas drilling costs and depletion.

In addition, real estate investors could see several tax breaks eliminated under the Biden plan. For example, Biden's plan would eliminate:

• The $25,000 exemption from the passive loss rules for rental real estate losses incurred by middle-income individuals,
• Section 1031 like-kind exchanges that allow deferral of capital gains taxes on swaps of appreciated real property,
• Rules that allow faster depreciation write-offs for certain real property, and
• QBI deductions for profitable rental real estate activities.  

However, Biden generally supports enhancing the QBI deduction for owners of other pass-through entities, including sole proprietorships, LLCs, partnerships and S corporations, that aren't involved in rental real estate activities.

Under current law, the QBI deduction is phased out at higher income levels. For 2020, phase-out begins once taxable income (calculated before any QBI deduction) exceeds $163,300 for an unmarried individual or $326,600 for a married joint-filing couple. Other limitations apply in specific circumstances. Biden's plan would simplify matters by limiting QBI deductions only for individuals who earn more than $400,000. (As mentioned earlier, however, Biden would eliminate QBI deductions for rental real estate activities.)

Biden's Economic Plan

When accepting the Democratic Party nomination, Biden presented his plan to rebuild the U.S. economy from the damage incurred during the COVID-19 crisis. He pledged to invest in infrastructure; make improvements in education, health care and elder care; and pursue climate change initiatives.

These investments would be funded by tax increases on wealthiest 1% of individuals and the largest, most profitable corporations. "I'm not looking to punish anyone. Far from it. But it's long past time the wealthiest people and the biggest corporations in this country paid their fair share," said Biden during his acceptance speech at the Democratic National Convention.

What Does Trump Promise if Elected to a Second Term?

In general, Republican presidential nominee Donald Trump has indicated support for preserving tax reforms under the TCJA — and possibly providing additional breaks for individuals and families. During his acceptance speech at the Republican National Convention, Trump promised, "Just as I did in my first term, I will cut taxes even further for hardworking moms and dads, not raise them."

The White House budget document for the government's 2021 fiscal year (which starts on October 1, 2020) indicates support for extending these TCJA individual tax provisions beyond 2025:

• The current federal income tax and estate tax regimes,
• The expanded child and dependent tax credits (along with continued disallowance of dependent exemptions),
• Increased standard deduction amounts (along with continued disallowance of personal exemptions),
• More-favorable AMT rules, and
• Continued limitations on itemized deductions for home mortgage interest and state and local taxes.

Trump has floated the idea of a middle-class tax cut without providing specifics. In addition, he supports reducing the maximum capital gains rate to 15%. After adding on the 3.8% net investment income tax (NIIT), the maximum effective rate would be reduced from the current 23.8% (the 20% top rate + 3.8% for the NIIT) to 18.8% (15% + 3.8%). He has also floated the idea of making annual inflation adjustments to the rate brackets for net long-term capital gains and qualified dividends.

In August, Trump promised that, if he's reelected, he'll find a way to forgive federal payroll taxes that were temporarily deferred for September 1, 2020, through December 31, 2020, by an executive action issued on August 8. This could provide an extra boost to people earning less than $4,000 every two weeks (about $104,000 annually). He has also mentioned permanent federal payroll tax cuts, without providing details. However, forgiving or cutting payroll taxes would need to be part of a bill passed by Congress.

Trump's plan doesn't indicate whether he supports extending other CARES Act tax relief measures for individuals beyond 2020.

Unless the Republicans regain control of the House and retain control of the Senate, any tax cut proposals are likely to face strong opposition from congressional Democrats. And if reelected, Trump is unlikely to sign any legislation that calls for major federal tax increases for individuals and families.

What Does Biden Promise if He's Elected?

If Democratic presidential nominee Joe Biden is elected, he has expressed support for major federal tax law changes. During his acceptance speech at the closing of the Democratic National Convention, Biden declared, "It's long past time the wealthiest people and the biggest corporations in this country paid their fair share."

The Biden plan would raise the top individual rate on ordinary income and net short-term capital gains back to 39.6%, the top rate that was in effect before the TCJA lowered it to 37% (for 2018 through 2025). Biden also has promised not to increase taxes for those who make under $400,000. But it's unclear whether that limit refers to taxable income, gross income or adjusted gross income — or whether it would apply equally to singles, heads of households and married joint-filing couples.

Other elements of Biden's plan that would affect individual taxpayers include:

Limits on itemized deductions. For upper-income individuals, Biden would reinstate the pre-TCJA rule that reduces total allowable itemized deductions above an applicable income threshold. Prior to the TCJA, allowable deductions were reduced by 3 cents for every dollar of income above a threshold. Regardless of who's elected president in 2020, the pre-TCJA limits will be reinstated in 2026 under current law, unless they're extended by Congress.

In addition, Biden's plan would limit the tax benefit of itemized deductions to 28% for upper-income individuals. That means each dollar of allowable itemized deductions could not lower your federal income tax bill by more than 28 cents, even if you were in the proposed 39.6% maximum tax bracket.

Relief for certain homeowners. Biden is calling for elimination of the TCJA's $10,000 cap on itemized SALT deductions, which mainly affects residents of high-tax states. His plan also would create a new refundable tax credit of up to $15,000 for eligible first-time homebuyers that would be collected when a home is purchased, rather than later at tax-return filing time.

New credit for low-income renters. Biden would like to establish a new refundable tax credit for low-income renters that's intended to hold rent and utility payments to 30% of monthly income.

Expanded breaks for eligible families. His plan includes a refundable federal tax credit of up to half of a family's costs to care for children under 13 and other disabled dependents. He would like the maximum credit to be $8,000 for one qualifying child or $16,000 for two or more qualifying children. Families earning between $125,000 and $400,000 could qualify for partial credits. He's also proposed implementing an income-based cap on child-care costs for many families.

Under current law, a tax credit of up to $2,100 is allowed to cover expenses to care for a qualifying dependent, including an eligible child, or up to $4,200 for expenses to care for two or more qualifying dependents. However, in most cases, an income limitation reduces the maximum allowable credit to $1,200 or $2,400 for two or more qualifying dependents.

His plan would also establish a new credit of up to $5,000 for "informal" caregivers, who are family members or loved ones who do this work for no pay.  

Elimination of basis step-up for inherited assets. Under current law, the federal income tax basis of an inherited capital-gain asset is stepped up fair market value as of the decedent's date of death. So, if heirs sell inherited capital-gain assets, they owe federal capital gains tax only on the post-death appreciation, if any.

This provision can be a huge tax-saver for an inherited asset that has appreciated significantly over the years — such as stock shares that were acquired many years ago for a small amount and are now worth millions. The Biden plan would eliminate this tax-saving provision.

Biden hasn't yet clarified whether he would also like to see a lower unified federal gift and estate tax exemption, which is currently set at $11.58 million ($23.16 million for married couples).

Higher maximum rate on long-term capital gains. Higher-income individuals would face higher capital gains taxes under the Biden plan. Under current law, the maximum effective federal income tax rate on net long-term capital gains and qualified dividends recognized by individual taxpayers is 23.8% (20% top rate + 3.8% for the NIIT).

Under the Biden plan, net long-term gains (and presumably dividends) collected by those with incomes above $1 million would be taxed at the same 39.6% maximum rate that he would apply to ordinary income and net short-term capital gains. With the 3.8% NIIT add-on, the maximum effective rate on net long-term gains would be 43.4% (39.6% + 3.8%). That would be almost double the current maximum effective rate for high income individuals.

Payroll tax hike for higher-income individuals. Under current law, the 12.4% Social Security tax hits the first $137,700 of 2020 wages or net self-employment income. Employees pay 6.2% through withholding from paychecks, and employers pay the remaining 6.2%. Self-employed individuals pay the entire 12.4% out of their own pockets via the self-employment (SE) tax. For 2020, the 12.4% Social Security tax stops once 2020 wages or net SE income exceed $137,700. The Social Security tax ceiling is adjusted annually to account for inflation, so it usually goes up every year under current law.

The Biden tax plan would restart the 12.4% Social Security tax on wages and net SE income above $400,000. This is the so-called "donut hole" approach to increasing the Social Security tax. Over the years, the donut hole would gradually close as the lower edge of the hole is adjusted upward for inflation while the $400,000 upper edge of the hole remains static. This change in the Social Security tax regime would raise an estimated $800 billion to $1 trillion over 10 years.

Green tax breaks. Biden supports reinstating or expanding tax incentives intended to reduce carbon emissions, including credits for buying electric vehicles produced by manufacturers with credits that have been phased out under current law.

Biden's plans could gain traction if Democrats retain control of the House and gain control of the Senate. This would mean rollbacks or revisions of various TCJA provisions. Biden considers these changes necessary to pay for his plans to rebuild the U.S. economy and support various causes, including clean energy and improvements in education, health care and elder care.