What the Upcoming Election Could Mean for Your Taxes

The upcoming Presidential election and the possibility of a switch from red to blue in the White House – and blue to red in the House of Representatives – is raising many questions for taxpayers. Many clients are starting to ask what a Biden win could mean for them and what they should be doing to prepare for changes in tax law that may increase their tax burdens.

Here are some thoughts based on information available as of this writing.

HOW ARE CEOs PLANNING?

CEOs are preparing for the possibility of a significant tax policy change should Joe Biden win. The smartest CEOs are preparing their companies now, rather than waiting until Election Day to start. Their biggest fear is not having enough time to implement a plan if they start later. There will be a considerable demand for quality tax and legal work and they want to get in front of the line.

Secondly, the House and Senate will have something to say about tax policy. Depending on which candidate is on the ballot, the House and Senate elections may have more impact than the Presidential race.

ASSUMING THERE IS A BIDEN WIN, WHAT SHOULD TAXPAYERS CONSIDER?

Complete as much estate planning and gifting as possible before the end of the year. With revenue needing to be raised due to the pandemic, it will be hard to keep the estate tax exemption at its present level. In addition, the prospect of inflation could be a distinct possibility. Now, with low rates, inter-family transfers might just have a window open that may never be seen again. Since the current estate tax exemption of $11.58 million (indexed for inflation) sunsets in 2026, a new President may not need to lower the exemption, but merely let the exemption amount expire.

The second item is reminding taxpayers that a maximum capital gains tax rate of 20% is not an expensive rate. The capital gains tax rate seems to have a target on its back, again, likely due to pandemic expenses, so closing any imminent transactions by year-end would ensure taxation is captured at the lower rate.

Finally, with the passage of the CARES Act, taxpayers are going to have to make a decision about accelerating income or accelerating deductions. Those who accelerate income would be paying a lower income tax rate in 2020 than after a presumed 2021 tax hike. If deductions are accelerated, and a net operating loss is created, taxpayers will have the choice of carrying the loss forward to a potentially higher income tax rate year, or carrying the loss back to refund previously paid income taxes.

WHAT ARE THE BIGGEST CONCERNS CLIENTS ARE EXPRESSING?

• The Estate Tax: What the effect of the current and future exemption amount could mean to families.
• The SALT Deduction: Many clients are positive that their state and local tax rates will rise to pay for the costs of the pandemic. Some are planning to move into lower tax jurisdictions. The announcement by California about increasing the state income tax rate caused a fury of inquiries.

HOW QUICKLY SHOULD TAXPAYERS BE PREPARED TO ACT?

One word: NOW. Most advisors have a pretty good understanding of the direction in which the Biden and Trump camps will want to take tax policy. Regardless of the election outcome, it’s important to do estate planning. Having a plan and being ready to implement it will help families sleep at night. Revisiting old plans to make sure they are still providing for the family’s goals should be a regular occurrence.

Assuming most family businesses have a calendar year-end, reviewing quarterly results will give the business, and its advisors, time to react. It will be important to get up to date with internal accounting records and make a date with your advisors. It will be time well spent.

HOW DO YOU PREPARE EITHER WAY?

We have found that the economic effect of the pandemic has been more of decision driver than tax policy. Keep in mind, in order to have significant tax policy changes, the House, Senate and President all have to agree. But the pandemic has affected all businesses, either positively or negatively. Make plans to strengthen your business, discuss the goals of these plans with your advisors, and then a long-term plan of action can be drafted.

Internal accounting records need to be accurate as they will be the medium on which advisors will base advice and decisions made. Focus on the quality of internal records and start calling advisors now, with a schedule of when decisions must be made in order to complete a plan by year-end.

Please ask for help. Ask your trusted advisors what’s best for you. As the political winds whip up, you will hear information from both campaigns. Trust your advisors to give you the best advice for you.

SUMMARY

Tax policy has a lot less to do with the candidates than with the focus of the parties. The control of the Senate will have a lot to do with what happens with any tax changes. If the Senate is controlled by the Republicans, they will move to make permanent the Tax Cuts & Jobs Act; however, the deficit hawks will have conflict about raising taxes and paying down debt.

If the Democrats gain control of the Senate, you will see much of Biden’s agenda passed-unless Trump wins.

If the Senate is split, or 51/49 either way, there may be some senators who will be flexing their political muscle.

What does this mean? It probably means we need four sets of “what to expect” outcomes rather than just two — Trump, Biden, and both with a Senate of the opposing party.

A summary of the Presidential Tax Position include (as of this writing):

Individual Income Tax Provisions

Biden’s Position

• Raise top individual tax rate from 37% to 39.6%, generally for those making over $400,000.
• Increase top long-term capital gain and qualified dividend tax rate to 43.4% (ordinary income tax rate plus Obamacare surtax) for income above $1 million.
• Cap the tax benefit of itemized deductions at 28% for taxpayers with rates higher than 28%. Restore PEASE limitation on itemized deductions (which phases out itemized deductions) for taxpayers with income over $400,000.
• Phase out qualified business income deduction for taxpayer with income over $400,000.
• Expand earned income tax credit.
• Create an $8,000 tax credit for one child and $16,000 for two or more for those with income of up to $125,000 with a phaseout between $125,000 and $400,000.
• Equalize tax benefits for defined contribution retirement plans.
• A first-time home buyer credit of up to $15,000.
• A renter credit to assist-low income individuals who make too much to qualify for section 8 housing.
• The elimination of the benefit of section 1031 like-kind exchanges for those with incomes over $400,000.

Trump’s Position

• Make permanent the Tax Cut and Jobs Act set to expire 12/31/2025, including the reduced tax rates, increased standard deduction, state and local tax cap, and many others.
• Trump has also spoken about a middle class tax cut which would reduce rates by 10% and even reduce the 22% to 15%.

Wildcard

Whether in a stimulus package or a post-election tax act, the Democratic caucus is looking to remove the SALT limitation in the Tax Cut and Jobs Act. As certain states are desperately looking for revenue to offset the Covid-19 pandemic, the possibility of states raising tax rates is much more likely. To make the increase more palatable, those states are pushing to remove the cap.

The Republican caucus is vehemently opposed to removing the cap; however, they may be open to increasing it.

Capital Gains Rates & Deferral

Biden’s Position

• Increase top long-term capital gain and qualified dividend tax rate to 43.4% (ordinary income tax rate plus Obamacare surtax) for income above $1 million.

Trump’s Position

• Cut the maximum capital gains rate to 15%.
• Would like to consider indexing capital gains to inflation.
• Favors a capital gains tax holiday, for an undesignated period, which would carry a zero tax rate.

Opportunity Zone (OZ) Reform

Biden’s Position

• Would like to reform OZ funds to partner with Non-Profit and community – oriented organizations to create jobs for low income residents or other financial impact to residents in the Opportunity Zones.

Trump’s Position

• Not addressed

Individual/Estate Tax Provisions

Biden’s Position

• Eliminate “tax free” step-up in basis on estate assets. It’s unclear if the elimination will come via capital gains income tax paid upon death, or the inherited assets will still carry the decedent’s basis.
• Reduction in the estate tax exemptions back to pre-TCJA levels (as adjusted for inflation.)

Trump’s Position

• Continue with the current exemption amount of $11,580,000; looking to make the exemption permanent.

Wildcard

Biden does not actually have to raise taxes on estates but simply let the current law sunset. Many wealth advisors are preparing for the estate tax to be the target for raising revenue to pay for the cost of the economic stimulus packages due to the Covid-19 pandemic.

Payrolls & Benefits

Biden’s Position

• 12.4 social security payroll tax on wage income over $400,000 (currently capped at $137,700). Tax would be split between employer and employee. Would result in no social security payroll taxes on income between n $137, 700 and $400,000. No proposed changes to Medicare taxes.
• Automatic 401(k) for workers without access to plans.
• Offer tax credits to offset the cost of starting or mainlining retirement plans.

Trump’s Position

• No change to existing law: 6.2% (employee’s share) up to maximum wage base ($137,700); employer pays a similar share. 1.45% Medicare tax full wage base (no cap) and a surtax of 0.9% on wages above $200,000 (couples $250,000).

Corporate Taxes

Biden’s Position

• Raise corporate tax rate to 28%. Impose 15% minimum corporate tax (a so-called minimum book tax) for companies reporting book net income net income over $100 million).

Trump’s Position

• No change to the present 21% rate.

Wildcard

Republicans may concede on raising the corporate tax rate somewhat higher in exchange for passing some of the other tax cuts Trump proposes.

International Taxes

Biden’s Position

• Impose a 21% GILTI (global intangible low-tax income) rate on foreign profits.

Trump’s Position

• No change in 10.5% GILT (global intangible low-tax income) rate on foreign profits.