As of the writing of this article, it is still unclear who will win the U.S. Presidential election. As the nation waits, it may be worthwhile to consider the candidates’ tax platform and what good wealth planning may look like in light of proposed changes. This article considers both President Trump’s and Vice President Biden’s tax proposals and will suggest some basic tax tactics in case Biden wins the election and alters the current tax landscape.
President Trump’s tax platform is to continue the life of the Tax Cuts and Jobs Act of 2017 (“TCJA”). The TCJA, commonly known as the Trump tax cuts, was primarily a corporate tax cut, lowering the top tax rate for C Corps from 35% to 21%. The TCJA also offered a number of tax cuts to individuals, as it:
- Lowered all tax brackets for the individual income tax, specifically lowering the top marginal rate from 39.6% to 37%
- Created a new 20% deduction for pass-through businesses
- Doubled the standard deduction to $12,000 for individuals
- Doubled the child tax credit to $2,000 per child
- Increased the estate tax exemption from a level indexed for inflation based on $5 million per person ($5.49 million in 2017) to a level of $10 million per person ($11.18 million in 2020)
All of these non-business tax changes are set to expire in 2026. President Trump has centered his tax platform on making these tax cuts for individuals permanent.
Vice President Biden has argued for ending the TCJA, though his platform does not call for a direct repeal. Instead, Biden calls for substantial tax increases on corporations and on individuals making more than $400,000 per year. Specifically, the Biden platform proposes to:
- Raise the corporate tax rate from 21% to 28%
- Increase the tax rate for everyone making more than $400,000 per year from 37% to 39.6%
- Add a new Social Security tax of 6.2% on income over $400,000
- Cap itemized deductions for those making more than $400,000 to 28% of the deduction’s value
- Switch the tax treatment of capital gains for anyone with more than $1 million in income from long term capital gains (23.8% maximum rate) to ordinary income (39% maximum rate)
- Lower the estate tax exemption from its $10 million inflation indexed base back to a $5 base
Vice President Biden has also proposed some tax relief for individuals, notably increasing the child tax credit from $2,000 per child to $3,600 or $3,000 depending on the age of the child, substantially increasing the dependent care deduction, reinstating the first-time homebuyer’s tax credit, and expanding the earned income tax credit for more aged earners.
The Biden tax plan also has a few proposals that are more unorthodox with potentially substantial effects on the tax landscape. Most notably, Vice President Biden proposes to end the automatic step-up in basis for assets held at death. The tax code currently says that any asset a decedent holds at his or her death will automatically have its tax basis increased to the value of the asset at the decedent’s date of death. This means that the decedent’s heirs can then sell the asset with little or no tax. Eliminating this step-up provision may mean that an heir will inherit an appreciated asset with a low basis and may choose to not liquidate it in order to avoid paying tax on the sale. This creates a situation known as capital lock-in.
Vice President Biden’s tax plan also proposes to end Section 1031 like-kind exchanges, which allow real estate investors to sell land and invest the sales proceeds in new land with no taxes due on the transaction. The dual elimination of the step-up in basis and the Section 1031 like-kind exchanges means that families who own land may be locked-in to their land going into the future. This may have an especially large impact on family farms.
If Biden does win the election prudence may suggest taking steps to prepare for anticipated changes to the tax code. Those who expect an increase to income tax rates should consider accelerating expected income into the current year, while rates are still relatively low. This means selling investments and potentially rebalancing portfolios while rates are still favorable. Moreover, individuals who may face a new estate tax burden under the Biden administrations should consider using their current estate tax exemption through lifetime gifts before the exemption is reduced. Effective trust structures may allow individuals to both accomplish this type of lifetime gifting while still enjoying access to valuable assets.
By: David Frederick
|David Frederick, J.D., LL.M. is the Director of Wealth Planning at First Bank Wealth Management and Adjunct Professor of Economics at Washington University. David may be reached by phone at 314-995-8764 or via email at David.Frederick@fbol.com.|