At Pine & Co CPAs, we know that tax policy matters. It means real money for our clients. That’s why we were surprised that the recent presidential debates scarcely addressed the topic of taxes.
It’s too bad because there are some key differences between the candidates you should know about.
If we were the moderator of a third debate, here are the topics we would address.
New Benefits under Biden: To begin with the positives, the Biden Tax Plan would deliver several advantages to individuals earning less than $400,000 a year. The Plan offers a $15,000 tax credit toward the purchase of a first home, increases the maximum Child and Dependent Tax Credit from $3,000 to $8,000, and would deliver a $3,000 caregiver tax credit for families who provide care for an elderly parent. The Plan also envisions tax credits for investors who renovate distressed properties in distressed communities and offers tax favored incentives for those wishing to invest in Opportunity Zones. Finally, it provides a tax credit for employers who build child care centers at the work site. Biden’s Plan delivers these benefits without adding any new taxes for those earning less than $400,000 per year. These are tax advantages for individuals and businesses.
But Biden’s Plan contains a number of important disadvantages for our clients, as compared to President Trump’s approach. We call your attention to the following areas.
- Individual Income Tax Rates. There are currently seven tax brackets, with the highest brackets topping out at 32%, 35% and 37%. For the top tax bracket – single filers at an income of $523,600 or joint filers at $628,300 – Biden’s plan will increase the income tax rate from 37% to 39.6%. Trump’s plan would make the current tax rates permanent.
- Capital Gains: Currently the top rate on capital gains is 20%. Biden’s plan would maintain that rate in general but increase it to 39.6%, for those with incomes greater than $1 million. Trump, by contrast, proposes to cut, by executive action, the capital gains rate back to 15%. He says he is considering indexing capital gains to inflation. Nevertheless, the Trump capital gains differential would still be nearly 5% for all income earners and 24.6% for those earning in excess of $1 million a year.
- Estate Taxes: There are two significant changes to current estate tax law proposed by the Biden Plan. They are a reduction in the estate tax exemption and an elimination of the step-up in basis currently accorded to inherited assets. Both call for awareness and planning. The estate tax exemption is rather straightforward. Currently, couples enjoy exemption from estate tax up to $11.58 million of estate assets, jointly held. The Biden plan would reduce this estate tax exemption by a projected 50%.
The repeal of the “step-up in basis” rule would impact families across a wide range of incomes. Under current law, assets such as the family home, securities, art works and other property, pass from parent to children with favorable tax treatment. When the property transfers, it receives a “step-up in basis” to Fair Market Value at time of transfer. Let’s illustrate the point with an example close to home. Say, in 2020, your parent’s home is currently appraised at $600,000 but was purchased for $90,000 in 1975. Under current law, after the death of your parents, this home could be passed down to you and your siblings with a basis of $600,000. But if, say, your parents died in 2022, under a Biden Administration, the home would not receive a step-up in basis. Its basis would remain at $90,000; and you and your siblings would shoulder a major tax burden if you sold it. The same would hold true for securities, art works and other property. For families of significant wealth, this change in law would carry particularly heavy financial consequences.
- Corporate Tax Rates: Corporate tax rates are based on operating earnings after expenses have been deducted. Before the Tax Cuts and Jobs Act in 2017 (TCJA), the corporate tax rate was 35%. After the TCJA, the corporate rate was lowered to 21%. Trump’s plan proposes to maintain this rate, while Biden proposes to raise it to 28%. Of note: clients who own S Corporations do not pay corporate tax, as the income passes through to the business owner’s individual tax return.
- Qualified Business Income Deduction (QBI): The QBI is a meaningful deduction for many of our clients. It applies to owners of sole proprietorships, partnerships, S corporations and some trusts and estates. QBI allows eligible taxpayers to deduct up to 20% of their qualified business income, plus 20% of qualified REIT dividends. The QBI deduction will remain under Trump’s plan. But under Biden’s plan, the qualifying rules are phased out for taxpayers making over $400,000 per year.
- Real Estate Taxes: We counsel clients who invest in real estate to take advantage of the benefits afforded by Section 1031 of the Tax Code. Section 1031 applies to business or investment properties, not primary residences, and allows for real estate assets of a similar nature (like-kind properties) to be exchanged without incurring any tax liability. Under current law, this constitutes a legal mechanism to use real estate losses to reduce income tax liability. Biden Plan’s would disallow like-kind exchanges for those with annual incomes over $400,000. Trump’s plan extends the current provisions past 2025.
- Payroll Taxes: Under the Biden plan, clients earning more than $400,000 would shoulder an additional 6.2% social security tax burden on all earned income of $400,000 or more. For self-employed individuals, the burden doubles, as the self-employed are responsible for a 12.4% social security tax on their net profits. There is no change in Payroll Tax under the Biden Plan for those making less than $400,000.
As always, there are positive elements to both tax plans. If we were the moderator – or the nation’s tax advisor – we would tease out both these strands into a seamless approach benefitting those with incomes above and below $400,000. But, as it stands, we want you to be aware of the reality of each plan and how they would likely affect you.
Curious how to plan for the tax policies of 2021 and beyond? Schedule a Tax Planning Session with Pine & Co, CPAs. Regardless of who is standing at the podium on Inauguration Day in January, our goal is for you to pay the taxes you legally owe but not a penny more!