What should I do in preparation for the outcome of the election? This seems to be the most common question we are getting these days and worries many Americans as we approach election day. The anxiety that Americans feel has varying degrees and rationales, but the overall theme is – uneasiness. Regardless of who you’re voting for or who ultimately sits in the White House in January 2021 is unknown, at least for now. So, what should you consider doing to prepare? The answer – reassess where you are personally and educate yourself on the potential outcomes. What are your needs, goals, and timeframes? From there, ensure you are set up to deal with whatever good and/or bad that could come from the next administration. We’ve talked with clients who have fears of either candidate getting elected, and none of us directly control that outcome. However, focusing on what you can control leads to greater confidence and less fear. Understanding the potential outcome is a good place to start so you can be educated on what may be coming.

With no way of accurately predicting the results, you are otherwise left savaging for answers wherever you can find them. This can lead to speculative behavior, such as going to cash, which would negatively impact your ability to reach your long-term goals. We know from the history of market returns that going to cash has rarely paid off. Further, US stocks have trended up regardless of whether a Republican or Democrat is in office. Speculative behavior doesn’t equate to the achievement of your goals.

With the Presidential election taking place next month there is a considerable amount of changes that will be made if candidate and Former Vice President, Joe Biden gets elected. With the recent release of his tax policy, this provides a clear first-hand look into the types of changes he’s looking to make. This article will unveil what those changes are and quantify what they mean to you. While this list is not fully exhaustive of all the tax changes that are being considered, the items below highlight the bigger noteworthy changes that will impact the majority of Americans.

Changes for Individual Taxpayers

  • Biden pledges to not increase tax rates on those making less than $400,000. Their plan is to repeal the Tax Cuts and Jobs Act (TCJA) which was passed by President Trump in 2017 and restoring the 39.6% top marginal tax rate (up from 37% currently).
    • One consideration to note here is the tax rates that will be reverted to. According to the Tax Policy Center under TCJA “taxes would fall for all income groups on average in 2018, increasing overall average after-tax income by 2.2%.” What this means is that unless there is a new tax brackets system identified, repealing the TCJA would effectively increase the tax rate individuals will pay. To be fair, with the increase in tax credits and deductions proposed there is still room for the possibility of a reduced overall tax liability even if tax rates increase.
    • TCJA brackets verse prior law is illustrated below:
  • Elimination of step-up in basis for inherited property. This is further followed by a reduced federal estate and gift tax exclusion from the current $11.58 million lifetime exemption down half that at $5.79 million.
    • This rule states that when you pass, almost all inherited assets step-up in basis to fair market value. Keeping this simple, if you bought a $10,000 in Apple stock in a brokerage account and when you pass it’s worth $100,000. The fair market value, or $100,000, is the new basis your heirs will have in the stock. Your heirs could sell the stock for $100,000 and pay no tax on the gain. This new legislation will now result in heirs owing a $90,000 tax bill if sold at $100,000 as the basis is now carried over to heirs instead of adjusting to fair market value on the date of death.
    • Current law today allows $11.58 million to be passed estate tax-free. Under the new changes, this amount would be reduced in half to $5.79 million. A gross estate value above this amount is taxed at 40%.
      • Your gross estate is the total dollar value of everything you own at the time of your death, so think home, automobiles, investments, rental properties, jewelry, antiques, artwork, etc.
    • If passed, this will result in a huge shift in planning as this rule has been essential for estate planning.
  • Remove deductions for contributions for IRAs, and similar retirement accounts and replace them with a credit.
    • Currently, as it stands today, if you contribute $5,000 to your IRA you receive a tax deduction for your contribution (given you are eligible to deduct your contribution). Biden is looking to promote greater equality by making tax savings equal by way of retirement contributions.
      • The rationale for this is deductions are more advantageous for high-income earners than low-income earners. For example, take someone in the 35% tax bracket their $5,000 deduction is worth $1,750. For someone in the 22% bracket, this deduction is only $1,100 resulting in a $650 savings for the higher wage earner.
    • Taxes on long-term capital gains and qualified dividends will be at the ordinary tax rates of 39.6% on income above $1 million.
      • As it stands today, for those with income that places them in the top 2 tax brackets will pay a 20% long-term capital gain tax on investment gain (think interest, dividends, and capital gains, etc.). This would mean for those who meet the income thresholds of $1 million, their capital gains rate would be taxed as ordinary income rates of 39.6% instead of 20%.
    • Increase Child Tax Credit to $3,600 for children under age 6, and $3,000 for all other children under 17. This credit would be fully refundable.
      • TCJA Rules: $2,000 per child under age 17 with 70% refundable.
      • Note: Refundable means if you owe $1,000 in taxes and you qualify for a refundable credit of $3,000 your tax liability will be wiped away and you will receive a $2,000 check.
    • Child Dependent Care Credit for qualified expenses totaling $8,000 for one child and $16,000 for two or more children. This credit is refundable, and Biden’s plan increases the maximum reimbursement from 35% to 50%.
      • TCJA Rules: Max credit of $3,000 ($6,000 for two or more qualifying individuals) of qualified expenses.
      • You can claim this credit if you paid expenses for the care of a qualifying individual (child under 13, mentally incapable spouse of self-care who lived with you for more than half of a year, etc.) to enable you to work or actively look for work. The credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual.
    • A new Caregiver Credit of $5,000 for informal caregivers who support older family members. This section further states increasing the generosity of tax benefits for older Americans who purchase long-term care insurance but doesn’t specify the benefit to be received.
    • Reestablish the First Time Homebuyer Tax Credit for $15,000 for first-time home buyers.
      • This is planned to be accessed when a buyer purchases the home instead of receiving the credit when they file their taxes.
    • Create a 12.4% Social Security payroll tax on income earners above $400,000. This would still be split in half where 50% is paid by the employer and 50% is paid by the employee.
      • Currently, as it stands today, you pay 6.2% and your employer pays 6.2% social security tax on dollars earned up to $137,700 but not for dollars earned above this amount. This creates a hole where those who fall within the income ranges between $137,700 and $400,000 will not have to pay social security tax. This new tax provision would begin taxing for social security again at 12.4% (6.2% for the employer and 6.2% for the employee) for those who make $400,000 and beyond.
    • Cap the benefit of itemized deductions to 28% for high-income earners (over $400,000/yr)
      • For those in tax brackets under 24%, this will have a marginal impact on you. This primarily would affect those in higher tax brackets who benefit more from using itemized deductions instead of the standard deduction.

Changes for Business Owners

  • Increase the top corporate tax rate from 21% to 28% and impose a 15% minimum book tax on firms with $100 million or more of net income that pay little to no federal income tax.
  • Double the tax rate on Global Intangible Low Tax Income (international income) to 21%
    • This would most heavily impact large companies such as Amazon, Apple, Netflix and others who have been able to pay little to no federal taxes in recent years because they are able to route money through offshore corporate tax havens. Countries like the Bahamas and the Cayman Islands have a 0% corporate tax rate, so businesses feed their profits through these offshore sites which result in little to no corporate tax.
    • While corporations can defer paying taxes on foreign income for long periods of time or almost indefinitely, the effectiveness of this law will be determined by the United States’ ability to force foreign income back into the United States.
    • Lastly, with the international tax rate of 21% lower than the corporate tax rate of 28%, this still heavily encourages corporations to send their dollars offshore.
  • Eliminate Qualified Business Income (QBI) Deduction for high-income earners (over $400,000/yr).
    • As it stands today the TCJA allows for a 20% QBI deduction for business owner income that passes through to your personal tax return (LLCs, S corporations, Partnerships, Sole Proprietors). This provision would eliminate a wage earner above $400,000/yr to use this deduction.
  • Offer tax credits to small businesses for adopting workplace retirement savings plans.
    • This would allow a small business who wants to adopt a 401k to deduct the expenses associated with creating this benefit for their employees.

Biden’s plan is proposing a total of $3.2 trillion in additional spending that is broken down as follows: $1.7 trillion on climate and infrastructure, $750 billion on a health care plan, $750 billion on a higher education plan. The economic effects of Joe Biden’s tax plan are summarized by the Tax Foundation below:

  • According to the Tax Foundation General Equilibrium Model, Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs.

When looking at tax policy from President Trump he wasn’t as detailed as Biden on the specific changes. From what was mentioned, it seems that the summary of his changes can be described as more of the same which follows the trend of lower tax rates, business tax incentives, leaving tax deductions unchanged.

Hopefully, this serves as a clear outline regarding the tax policy changes that were to occur if we face a new president this coming election. Please reach out if you have any specific questions regarding how this may affect you. Your emails and calls are always welcomed!