With the presidential election approximately 74 days from now, I thought it might be beneficial to review the tax plans that each candidate has disclosed so that you have that comparison available as you contemplate who you will cast your vote for this year. As part of the analysis, I will state what the current tax law is and how each candidate plans to make changes to the current law, as applicable.
Regarding the individual tax rate structure, the current top marginal rate is 37% for income over $518,400 for individuals and $622,050 for married filing joint taxpayers. President Trump wants to enact a 10% middle-class tax cut which likely would entail lowering the current 22% rate bracket to 15%. Many Americans fall in this tax bracket so they would likely see a reduction in their tax liability as a result. He also desires to extend the individual tax rate structure enacted by TCJA a couple years ago beyond the current sunset date of 2025.
Former Vice-President Biden plans to raise the top marginal tax rate to 39.6% for income over $400,000 which was the top tax rate under President Obama until TCJA was passed.
Regarding the long-term capital gains rate, the current maximum rate is 20% for income over $441,450 for individuals and $496,600 for married filing joint taxpayers. There is also an additional 3.8% net investment tax for taxpayers with income over certain levels. President Trump wants to reduce the capital gains rate and enact a capital gains tax holiday that eliminates capital gains taxes for a certain period of time.
Former Vice-President Biden wants to remove the preference for capital gains and qualified dividends for income over $1,000,000 by taxing them at ordinary rates. He wants to maintain the additional net investment income tax of 3.8%.
Regarding deductions, the basic standard deduction for individuals is $12,400, $18,650 for heads of household and $24,800 for married filing joint taxpayers. The TCJA suspended the personal exemption and most individual deductions through 2025. President Trump wants to extend the higher basic standard deduction and other deductions enacted by the TCJA beyond 2025.
Former Vice-President Biden wants to limit itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%. This means taxpayers in tax brackets higher than 28% will face limited itemized deductions. He also wants to phase out the 20% pass-through deduction for income over $400,000.
Regarding tax credits, the current maximum child tax credit amount is $2,000 and the maximum other dependent credit for children older than 16 is $500. When a taxpayer doesn’t have federal tax liability of at least the credit amount of $2,000 for a given year, the maximum refundable child tax credit per child is $1,400 rather than $2,000. The current maximum child and dependent care credit is $1,200. There is currently no tax credit for first-time homebuyers and there is no tax credit for renters. President Trump wants to require a dependent to have a social security number to be eligible to be claimed for the $500 other dependent credit and require a taxpayer to have a social security number to claim both the child tax credit and the $500 other child dependent credit. He also wants to extend the $2,000 child tax credit beyond 2025 when it would expire.
Former Vice-President Biden wants to raise the child and dependent care tax credit maximum expense allowable for the credit calculation to $8,000 for one child and $16,000 for two or more children for taxpayers with income up to $125,000 per year. The credit would phase out for income between $125,000 and $400,000 per year. He wants to expand the EITC to workers older than 65 who do not have a qualifying child. He wants to enact a $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs. He also wants to enact a refundable, advanceable tax credit of up to $15,000 for first-time homebuyers. Lastly, he wants to enact a renter tax credit designed to reduce rent and utilities to 30% of income for low-income individuals and families who make too much money to qualify for a Section 8 voucher.
Regarding education, the current law has no tax credit for contributions to state-identified not-for-profit scholarship-granting organizations, though some amount might be deductible as a charitable contribution. Forgiven student loan debt generally is included in taxable income as well. President Trump wants to enact an education freedom scholarship tax credit which would provide up to $5 billion worth of income tax credits annually for individual and corporate donations to state-identified not-for-profit scholarship-granting organizations.
Former Vice-President Biden wants to exclude forgiven student loan debt from taxable income.
Regarding the estate and gift tax, the current law provides an exemption of $11,580,000 per person. Transfers of appreciated property at death get a stepped-up basis which greatly reduces long-term capital gains income on the sale of appreciated property after death within the estate or trust. President Trump wants to extend the higher estate and gift tax exemption beyond 2025.
Former Vice-President Biden wants to eliminate the stepped-up basis on transfers of appreciated property at death.
Should you have any questions regarding your own tax situation, please contact us.