2020 Election Impacted Tax Planning Professionals – Trump vs Biden Tax Plans Differ
This year’s race to the White House was a rocky one. When the recession began to take its toll on business operations, business owners set their sights on the November election, hoping it would serve as a turning point for the economy. While there’s no knowing exactly when our economy will fully recover in 2021 or beyond, the outcome of the Presidential election has consequences for individuals and business owners alike, and it’s important that tax planning professionals and their clients understand the implications of both President Donald Trump’s and former Vice President Joe Biden’s tax plans.
Business Tax Plans
Many of President Trump’s fiscal policies for his presidential tenure were realized when he signed the Tax Cuts and Jobs Act (TCJA) into law in December 2017. The TCJA altered the corporate tax code in a few significant ways, and President Trump hopes to maintain many of those changes if he gets elected for a second term.
- The TCJA lowered the corporate tax rate from 35% to 21%. President Trump hopes to reduce this even further, down to 20%.
- The TCJA established a 100% bonus depreciation deduction through the end of 2022. The Trump administration has proposed making the 100% bonus depreciation deduction permanent.
- The TCJA created a 20% deduction for owners of pass-through entities called the Qualified Business Income (QBI) Deduction. President Trump’s plan is to maintain the 20% QBI Deduction until it expires at the end of 2025.
- The TCJA established a 10.5% minimum tax on income earned from intangible assets held offshore as a way to discourage shifting certain types of income overseas. President Trump plans to maintain the Global Intangible Low-Taxed Income (GILTI) tax.
- The TCJA altered the Research and Development (R&D) expense deduction. R&D expenses can be deducted immediately, but beginning in 2022, they must be amortized over a five-year period. President Trump plans to maintain this amortization requirement beginning in 2022.
Former Vice President Biden’s tax plans look different in some of these areas. While Trump wants to lower the corporate tax rate, Biden wants to raise the corporate tax rate to 28% and institute a minimum tax of 15% on book profits for large businesses. He also wants to increase the GILTI tax rate from 10.5% to 21%.
Biden plans to maintain the current tax law as it pertains to bonus depreciation. This allows for 100% bonus depreciation through the year 2022, after which it will start to get phased out. Absent any extenders bills that are passed between now and then, bonus depreciation will expire at the end of 2026.
Regarding the R&D expense deduction, Biden hopes to reverse the TCJA’s amortization requirement and allow businesses to fully deduct R&D expenses in the year they are incurred.
But arguably one of Biden’s biggest changes to the corporate tax code would be his “Made in America” tax credit. This 10% credit would be made available to businesses that create manufacturing jobs for American workers. It would be awarded to companies that:
- Reopen a closed (or closing) factory
- Retool existing facilities to help advance manufacturing technologies
- Bring production or service jobs back to the United States
- Expand existing facilities to enhance production capacities
- Increase manufacturing payroll for US workers
Individual Tax Plans
Just like with corporate tax, President Trump’s plan is to maintain most of the individual tax laws that are in effect today.
- Trump hopes to maintain the current individual tax rate tables. These tax rates were lowered slightly for some individuals when the TCJA was passed.
- Trump proposes no changes to the capital gains tax rate. Currently, capital gains are taxed at preferential rates that range from 0% for the lowest earners and 20% for the highest earners.
- The Child and Dependent Care Credit awards up to $3,000 per dependent (max of $6,000) to caretakers making less than $43,000 per year. Trump hopes to maintain this tax credit.
- The Earned Income Tax Credit (EITC) is a refundable tax credit available to low-income working families that is calculated based on earned income and family size. Trump also hopes to maintain this tax credit.
Former Vice President Biden proposes changes to each of these laws.
- Biden wants to reverse the tax rate changes implemented with the TCJA for individual taxpayers. This would raise the top marginal tax rate back up to 39.6%.
- Biden wants to maintain the preferential rate for capital gains tax for taxpayers reporting less than $1 million of taxable income. For high earners, he wants to tax capital gains at the same rate as ordinary income, which under his tax plan would be 39.6%.
- Biden wants to increase the Child and Dependent Care Credit to $8,000 per dependent (max of $16,000) and make the credit fully available to families earning less than $125,000 and partially available for families earning between $125,000 and $400,000.
- Biden wants to extend the EITC to workers age 65+.
There are also a handful of new tax credits that former Vice President Biden hopes to establish, including:
- Homebuyer Tax Credit – For a handful of years following the 2008 recession, Congress enacted a temporary $8,000 first-time homebuyer’s credit. Biden would create a similar credit worth $15,000 per individual but make it a permanent addition to the tax code.
- Renter’s Tax Credit – Biden would establish a tax credit for low-income renters that limits their rent and utility payments to 30% of their income.
- Informal Caregiver Tax Credit – Biden would provide a $5,000 tax credit to informal caregivers who may not be eligible for the Child and Dependent Care Credit.
But perhaps the part of Biden’s tax plan that has made the biggest splash in the news is his claim that he would not raise taxes for anybody making less than $400,000 per year. This statement has been under scrutiny, but we can see in his tax plans that this $400,000 threshold shows up many times.
- Wages that exceed $400,000 would be subject to social security tax. Under current law, all wages that exceed $137,700 are exempt from social security tax. Biden’s “donut hole” payroll tax bill would levy social security tax on wages below $137,700 and on wages that exceed $400,000. Amounts in between those two thresholds would not be taxed.
- Some tax credits – like the Child and Dependent Care Credit – would be phased out once families reported $400,000 of income.
- The 20% QBI deduction would be eliminated for individuals earning more than $400,000.
- Biden would phase out itemized deductions for taxpayers with incomes above $400,000. Currently, there is no overall limitation on itemized deductions, although individual deductions may be limited based on income.
Comparing Tax Plans Heading into 2021
Both President Trump’s and former Vice President Biden’s tax plans are just that – plans. Each candidate’s intentions are important, but your clients must understand how quickly these proposals can shift. The trajectory of the coronavirus, international relations, public perception of government leaders, and the outcomes in the House and Senate races will all affect business operations in 2021. Use this information to help your clients take a holistic approach to tax planning as you head into 2021.
How Tax Planning Software Can Help
Tax planning professionals should be aware of four distinct periods should Biden get elected:
- November 3rd to December 31st, 2020
- January 1st, 2021 to COVID-19 bill
- January 1st, 2021 to tax overhaul bill in 2021
- Tax overhaul bill in 2021 to December 31st, 2021
There are three distinct periods that you need to be aware of should there be a Trump win:
- November 3rd to December 31st, 2020
- January 1st, 2021 to COVID-19 bill
- COVID-19 bill to December 31st, 2021
Each of these periods requires a different set of tax planning. Not to mention, the COVID-19 bills and tax overhaul may happen in different years (2020, 2022), which may create even more tax planning periods. We’ve built a proactive, multi-entity, multi-year tax planning software to help you save your clients money in every single period, no matter which party is in power.