Federal income taxes are an important consideration for voters in the 2020 presidential election next week. This alert summarizes the federal income tax proposals included in the tax plans of President Donald Trump and former Vice President Joe Biden.
Individual Income Tax Rates
Under current law, individual taxpayers pay ordinary income tax at graduated rates ranging from 10% to 37%. The current rate structure is applicable through December 31, 2025 and would remain largely unchanged if President Trump is re-elected. Former Vice President Biden would increase the top ordinary income tax rate to 39.6% but has stated that no taxpayer making less than $400,000 will see a tax increase under his plan.
Capital gains are taxed at a maximum 20% rate under current law. In addition, a 3.8% tax may be imposed on the net investment income of taxpayers earning more than certain income thresholds. If re-elected, President Trump would seek to lower the maximum capital gain rate to 15%. Former Vice President Biden would tax capital gains for taxpayers earning more than $1 million at the highest ordinary income tax rate and supports a transaction tax on the purchase and sale of securities.
Other Individual Income Tax Provisions
The deductions currently available to individual taxpayers would remain largely unchanged under President Trump and he would propose extending many of these provisions past their current expiration date of 2025. Former Vice President Biden would eliminate the current $10,000 limitation on state and local taxes, cap the tax benefit of itemized deductions at 28% (which lowers the benefit of deductions for taxpayers with tax rates higher than 28%) and restore the overall phase-out for itemized deductions for taxpayers earning more than $400,000. His plan would also subject the wages of taxpayers above $400,000 to social security tax.
Former Vice President Biden also supports a provision that would provide for the tax-free cancellation of student loan debt for certain taxpayers and would implement tax credits for first time home buyers and renters. Both candidates support the elimination of the benefits available for carried interest investments received in exchange for services.
Business Income Tax Provisions
President Trump would retain the current 21% corporation income tax rate. Former Vice President Biden would raise the corporate tax rate to 28% and implement a minimum 15% tax on corporations reporting more than $100 million in book income that report no income tax.
The Trump tax plan would also retain the 20% deduction for qualified business income from pass-through entities. Former Vice President Biden’s plan would also retain that deduction for taxpayers making less than $400,000 but would implement restrictions for other taxpayers including real estate investors.
President Trump would extend the existing rules for other provisions past their current 2025 expiration date including those for capital investment recovery and depreciation, like-kind exchanges for real estate, and opportunity zone investments. Former Vice President Biden would propose changes to the current opportunity zone and like-kind exchange provisions for certain real estate investors and high income taxpayers.
President Trump would retain the current rules applicable to offshore income and extend those rules past their current expiration date of 2025. Former Vice President Biden would make several changes to the taxation of international operations including raising the minimum tax rate on certain offshore income, implementing a surtax on profits from the offshore production of a U.S. company intended for domestic sales, implementing a tax penalty on companies that move operations overseas, and providing a tax credit for companies that create U.S. manufacturing jobs.
Estate Tax and Wealth Tax
Under current law, taxpayers may be subject to an estate tax based on the fair market value of the assets held on their date of death. However, those assets receive a tax basis step-up to their fair market values on that date. President Trump would extend the current estate and gift tax provisions past their 2025 expiration date. Former Vice President Biden has proposed to eliminate the stepped-up tax basis provisions, would raise the current estate tax rate, and would lower the current estate tax exemptions. Neither candidate supports a tax on current wealth accumulation for high-income taxpayers. Whitley Penn will issue a separate tax alert that addresses the potential changes in the federal estate tax.
Once the results of the election are final, we will send additional alerts providing more detailed discussions regarding the expected future federal tax laws and the potential impact of those laws. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.