The Potential for Post-Election Tax Reform
The outcome of Tuesday’s election could have major tax consequences, especially if one party manages to win control of both houses of Congress and the White House.
While the corporate tax changes in the Tax Cuts and Jobs Act of 2017 were permanent, most of the individual tax provisions of that law are temporary and will expire by 2025. Both candidates have put forward proposals for various tax reforms leading up to the election.
Former Vice President Joe Biden has proposed increasing the highest individual marginal tax rate to 39.6 percent for taxpayers with more than $400,000 of income. This is already set to happen when the individual provisions of the 2017 tax cuts expire in 2025, but Biden’s proposals would accelerate this change.
Biden has also proposed other tax changes, including taxing capital gains and qualified dividends for individuals with more than $1 million in income at ordinary rates. (Capital gains and qualified dividends are currently taxed at reduced rates under certain conditions.) Biden has also proposed a mark-to-market tax system for wealthy taxpayers, which would require taxpayers to recognize the change in value of their investments from year to year, instead of the current system which allows gains and losses to be deferred until the investment is sold. Biden has also proposed reducing the estate tax exemption back to approximately $5 million, where it stood before passage of the 2017 tax cuts. Several of Biden’s proposed business tax reforms are centered on encouraging businesses to invest in American manufacturing and in low-carbon technologies.
On the other hand, President Donald Trump has called for reducing the preferred capital gains tax rate from 20 percent to 15 percent. In August, the president signed an executive order to defer collection of Social Security payroll taxes that are normally withheld from worker’s paychecks. The 6.2 percent tax is deferred from September 1 through the end of the year for workers who earn less than $4,000 per bi-weekly pay period. This move has been criticized though, because it is just a deferral, and not an elimination. Under the current rules, employees will have to make up the tax they deferred starting at the beginning of 2021. Trump has called for forgiving the deferred payroll taxes if re-elected.
No matter the outcome of the 2020 election, the tax environment is constantly changing. Even if there are no legislative changes to the tax code, taxpayers may face greater withholdings in early 2021 to make up for the deferred payroll tax collections implemented in the second half of 2020 and some provisions of the 2017 tax cuts will begin to expire as early as 2022. Schreiber Accounting and Advisory can help you navigate the tax landscape with comprehensive tax compliance and tax planning services. Contact the firm for more information.
Material discussed is for informational purposes only. It is not to be interpreted as investment, tax or legal advice. Individual situations vary, and this information should only be relied upon when coordinated with individual professional advice.