As we enter the dog days of summer, the political calendar is about to heat up. Both major parties are scheduled to hold their conventions in August (Democratic National Convention Aug. 17-20; Republican National Convention Aug. 24-27). After the nominations are made official, we will have just over two months before Election Day.
Tax policy may not be the headline issue in the presidential campaign, but it will certainly get some attention given the clear differences between the candidates. The Trump campaign has not yet released a detailed tax plan, but the Republicans are likely to highlight the Tax Cuts and Jobs Act (TCJA) as a signature domestic policy achievement, and possibly propose making the individual changes in that law permanent. On the Democratic side, the Biden campaign recently published a lengthy policy document covering a wide range of issues, including making the tax code more progressive, raising the corporate rate and expanding payroll taxes on high-earning taxpayers. Biden’s campaign also released a new proposal for addressing racial economic inequality, offering a number of tax incentives.
We will provide a comprehensive analysis and comparison of the two candidates’ tax policy priorities following the conclusion of both parties’ conventions. In the meantime, this short alert will summarize former Vice President Biden’s proposals for individual, business, payroll and estate taxes, compared to the TCJA and Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, expect these provisions to evolve. Given the uncertainty of the times, as well as ongoing negotiations over a fourth stimulus package, both campaigns will likely monitor economic conditions and revise their tax platforms accordingly.
The TCJA reduced the top individual rate to 37%, eliminated personal exemptions, increased the standard deduction, capped the state and local tax (SALT) deduction at $10,000, and removed many miscellaneous itemized deductions. Most of these changes are scheduled to expire after 2025. The administration occasionally has mentioned making the individual changes permanent as part of a “tax reform 2.0” package, but few details have emerged. A principal roadblock to making these changes permanent is that these provisions would increase the deficit over a 10-year budget period. The Senate’s Byrd rule prohibits legislation from increasing deficits in the long term outside the budget window, which is typically 10 years. This is the reason these provisions were scheduled to expire when the TCJA was enacted.
Many of the individual changes under the Biden plan are focused on higher-income taxpayers. For example, the top individual ordinary income tax rate would be set at 39.6% (the same rate in effect prior to the TCJA) for filers with taxable income over $400,000, up from 37% under current law. Capital gains and dividends also would be taxed at this top rate for taxpayers with income in excess of $1 million. In addition, the Biden plan would phase out the IRC section 199A qualified business income deduction for taxpayers with income over $400,000. Itemized deductions would be limited to 28% of their total value, and the “Pease limitation” that phased out itemized deductions would be restored. The child and dependent care tax credit would be increased to $8,000 from $2,000 per child, but limited to a total of $16,000 for taxpayers with two or more children.
The TCJA cut the corporate tax rate to a flat 21% from 35%, limited certain business deductions (e.g., business interest expense limitation) and overhauled the international tax landscape. The Biden plan would split the difference on rates, increasing the corporate tax rate to 28%. There is also a proposal for a new form of minimum tax, to be imposed at a rate of 15% on financial statement net income. The former vice president has also called for a repeal of the net operating loss (NOL) carryback provisions as provided by the CARES Act, as a way to fund student debt relief.
Under current law, the 12.4% Social Security tax, shared equally by the employer and the employee (or in full for independent contractors, partners and sole proprietors), is assessed on the first $137,700 of employee wages ($141,900 for 2021). As a way to shore up Social Security’s finances, the Biden campaign would also impose the 12.4% tax on wages above $400,000.
The TCJA doubled the exclusion from the 40% tax on estates, gifts and generation-skipping transfers to $10 million from $5 million (indexed for inflation); this change sunsets after 2025 when the exclusion returns to $5 million (indexed for inflation). Under the Biden plan, the exclusion would revert to $5 million. In addition, the Biden plan would eliminate the step-up in basis of a decedent’s assets to their fair market value.
The new proposal would amend the qualified opportunity zones program by increasing the reporting requirements and corresponding Treasury Department reviews. Furthermore, it would offer incentives for opportunity zone projects to collaborate with local not-for-profit and community leadership organizations to create plans for how the surrounding economy will benefit from the investments, with a focus on job creation.
The new proposal would expand funding to and make permanent the New Markets Tax Credit (currently set to expire at the end of 2020), another program designed to spur investment in low-income communities. The plan additionally includes a credit of up to $15,000 for lower-income families purchasing their first homes, and a new renter’s tax credit for lower-income families that are ineligible for the federal housing choice voucher program.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.