A Tale of Two Tax Futures
As November approaches, my inbox is getting more and more emails from political candidates and parties, both Democrats and Republicans. I find it amazing. Despite its flaws, I love our democratic republic that is our United States of America.
I encourage all those eligible to register to vote, research and understand the positions of the candidates and vote your conscience. If you don't vote, you can't complain.
As part of my education process prior to an election, I like to learn about the proposed tax plans of each candidate and thought I would take a moment to compare the two front runners for President of the United States from a tax policy position.
First let's look at Individual Income Tax Rates. Currently, the top marginal tax rate for an individual is 37% on the Federal level. This is reached at $518k for single individuals and $622k for married filing joint returns. These rates will sunset after 2025.
Vice President Joe Biden (Biden) would like to raise the top marginal rate to 39.6% for incomes over $400k.
President Donald Trump (Trump) would like a 10% middle class tax break, either by lowering the 22% marginal rate to 15% or some other method or combination. This would apply to incomes over $40k for single taxpayers and $80k for married filing jointly. Trump would also like to make the current tax rates under the Tax Cuts and Jobs Act (TCJA) permanent (in other words, not sunset in 2025).
Second, let's examine the candidates' Capital Gains Tax plans. Currently, the top rate for capital gains and qualified dividends in 20% which kicks in for taxpayers with incomes over $441k for individuals and $496k for married filing jointly. Rates for lower incomes are 0%, 10% and 15% as incomes grow to the 20% level. There is also a 3.8% net investment income tax to help fund Medicare.
Trump would like to lower the capital gains rate, index the income tiers for inflation and provide an unspecified capital gains tax holiday (no capital gains tax for gains during a certain period of time).
Biden suggests keeping the current capital gains structure but capping the amount that is eligible for the preferred rate, making incomes over $1 million taxed at the ordinary rates (his proposed 39.6% or current 37%).
Next let's look at Tax Credits, in particular the Child and Dependent Tax Credits, the Earned Income Credit and First-Time Homebuyer Credit and Renter's Credit. Under the current law, dependent children with social security numbers that lived with the taxpayer that are under 17 years of age are eligible for a $2,000 per qualifying child Child Tax Credit. Other dependents that do not qualify for the child tax credit outlined above are eligible for a $500 Dependent Tax Credit up to a total of $1,200 per year maximum. Employed individuals over age 65 are not eligible for the Earned Income Credit. There are currently no credits for first-time home buyers or renters.
Biden would like to raise the Child Tax Credit to $8,000 for one child and $1,600 for two or more children for taxpayers with incomes up to $125,000 phasing out completely at $400,000. He would also like to make working taxpayers over 65 eligible for the Earned Income Credit. He would also like to create a $5,000 tax credit for parents/caregivers of people who have certain physical and cognitive needs.
Biden would also like to create a $15,000 first-time home buyers credit and make it refundable and advanceable. He would also like to create a renter's credit that would be enacted to reduce the cost of rent and utilities to 30% of the income of low income families that do not qualify for rent vouchers or subsidies.
Trump would like to require those eligible for the $500 dependent care credit to have social security numbers. He would also like to keep the $2,000 child tax credit past the 2025 sunset date (when it reverts to $1,000).
As for Deductions, current law has a standard deduction of $24,800 for married filing joint taxpayers and $12,400 for single taxpayers and $18,650 for head of household filers. After 2025, these will revert to pre-TCJA levels. Personal exemptions were eliminated under the TCJA.
Trump would like to make the standard deductions under the current TCJA, which are indexed for inflation, permanent.
Biden would keep the standard deductions and let them sunset but also limit itemized deductions to 28% meaning taxpayers in brackets higher than 28% would have their deductions limited. He would also like to phase out the Qualified Business Income Deduction of 20% of qualified business income to $400,000 of qualifying business income.
For the Estate and Gift Tax, currently the exemption from this tax is $11,580,000 and will revert to approximately $5.8 million after the TCJA sunsets. Transfers of appreciated property are also eligible for a stepped up basis or the value upon date of death rather than what the deceased purchased the property for.
Biden would like to eliminate the stepped-up basis on transfers of appreciated property.
Trump would like to extend the higher exemptions beyond the 2025 sunset date and keep the stepped-up basis provision.
There you have it. The above represents my best take on the candidates' tax positions currently. As politicians go, they may change their mind and what either one of them does once in office is another story. At least you will be more informed when choosing who to vote for. Prepare to vote.
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