“Tax Proposal Comparison September 2020” - Michael Shaff, Chair, Tax Practice
With the election approaching, it may be of interest to compare the tax proposals of President Trump and former Vice President Biden. At this time, neither candidate has tax proposals on his website. It is also important to note that the proposals will be subject to change once in the hands of Congress and will only resemble the President’s or former Vice President’s proposal if the newly elected President’s party, whichever one it is, controls both houses of Congress. The proposals, if and when enacted, may take effect prospectively or retroactive to January 1, 2021.
Discussing tax planning strategies may be prudent at this time, as there will only be a short window between elections and the start of the 2021 tax year
TRUMP Proposals. The Administration’s tax proposals were obtained from the Tax Foundation website, https://taxfoundation.org/president-trump-tax-plan-2020/. A number of the President’s tax policy changes were enacted in 2017.
- Payroll tax cut. The President has authorized an optional plan to defer the 6.2% employee’s portion of the payroll tax until next year. The plan is basically a loan and will have to be paid by the employee in the form of higher withholding later. The President has stated that he would want to have the loans forgiven if he is reelected.
- Opportunity Zones. At present the Tax Cut and Job Act enacted in 2017 provides for opportunity zones, investment in which can result in the deferral and ultimately no taxation on gains reinvested in an opportunity zone. Each state can designate economically impacted areas for Treasury to recognize as opportunity zones. The proposal is to expand the opportunity zone program.
- 100% expensing of capital expenditures. Instead of capitalizing and depreciating the cost of capital assets, US based pharmaceutical and robotics manufacturers would be able to deduct instead of capitalize capital expenditures. The proposal reflects the desire to domesticate key industries from abroad.
- 15% capital gains tax rate. The maximum tax rate on net long term capital gains is now 20% (exclusive of the 3.8% Obamacare tax on net investment income that may apply). The proposal is to drop the maximum rate to 15%.
- Tariffs. The Tax Foundation anticipates the continued use of tariffs to foster key US industries.
BIDEN Proposals. Former Vice President Joe Biden’s tax proposals are also derived from the Tax Foundation website https://taxfoundation.org/reviewing-joe-bidens-tax-vision/ .
- Capital Gains. The preferential tax rate for net long term capital gains would go to 39.6% for taxpayers with incomes over $1,000,000.
- Top tax bracket. The top tax bracket would increase from 37% to 39.6% for incomes over $400,000.
- Estate tax. The value of assets in an estate would be recognized as if all the assets were sold at death. While the proposal is not specific, it seems reasonable to infer that the rate for the death tax would be up to 39.6%. The automatic tax free step up in basis to the date of death value would not apply. Inherited basis would be a function of the gain recognized on death. It is unclear how the marital deduction would work if it were preserved.
- Section 199A. The qualified business income deduction designed to narrow the gap between the corporate tax and the individual tax rate would be repealed for those with incomes over $400,000.
- Corporate tax rate. The corporate tax rate would go from 21% to 28%.
- Itemized deductions. Individuals with income over $400,000 would lose the benefit of some of their itemized deductions. The Pease Amendment that was in effect until 2018 limited the deductibility of mortgage interest, state and local taxes and charitable deductions. The former two deductions are already severely limited by the changes enacted in 2017.
- Minimum corporate tax. 15% minimum book income tax for corporations with income over $100,000,000.
- GILTI. The tax rate on global intangible low taxed income (basically most income that a corporation earns from foreign sources) would double from 10.5% to 21%.
- Social Security Payroll Tax. At present the social security payroll tax of 12.4% (6.2% on the employer, 6.2% on the employee) phases out on income over $137,700. The phase out would be eliminated.
- Childcare Tax Credit. Up to $8,000 tax credit for qualifying child care.
There was no mention of restoring the state and local tax deduction. In fact, the value of itemized deductions for those with income over $400,000 would be greatly limited.
Californians in the top federal and state brackets could be paying a combined 56.4% income tax rate if the pending proposal to raise the top tax rates by 3.5%, to a top rate of 16.8%, is enacted retroactive to January 1, 2020 as proposed.
About Michael Shaff
Michael specializes in all aspects of federal income taxation. Mr. Shaff has served as a trial attorney with the Office of the Chief Counsel of the Internal Revenue Service for three years. Mr. Shaff is certified by the Board of Legal Specialization of the State Bar of California as a specialist in tax law. Mr. Shaff is a past Chair of the Tax Section of the Orange County Bar Association. He is co-author of the “Real Estate Investment Trusts Handbook” published annually by West Group.
Michael received his A.B. at Columbia college in 1976, his J.D. from New York University School of Law in 1979 and his LL.M. in taxation from New York University School of Law in 1986. He is admitted to practice law in the states of California, New York and Massachusetts and is a member of the Orange County Bar Association.