The upcoming presidential election could be transformative for you, your finances, and your estate plan, as a large portion of the Tax Cuts and Jobs Act (TCJA) moves closer to expiration and the economic recovery from COVID-19 becomes one of the prominent issues of the 2020-2024 presidential term.
President Donald Trump has focused his presidential campaign this election cycle on his economic accomplishments and has presented himself as the only candidate in the field who can rebuild the economy following the COVID-19 pandemic. Not surprisingly, Trump largely credits the strong, pre-COVID economy to the TCJA, his personal legislative track record, and his administration has telegraphed to those listening that a “Tax Cuts 2.0” is on the way to continue what he started during his first term. How this will play out is anyone’s guess. What is clear is that additional tax cuts will have a dramatic impact on the nation’s economy.
By contrast, Democratic nominee Joe Biden has used the COVID-19 pandemic to showcase his own progressive economic philosophy, one that includes a well-defined tax platform that increases taxes across the board for individuals, small businesses, and corporations at almost every point in on the economic scale. The Biden-Harris team is hoping to persuade voters that the COVID pandemic has exposed flaws and inequities in our society and economy and that their progressive tax plan, which would be the most progressive of any Democratic nominee in the countries history, would provide a desperately needed correction to both our social and economic ills that our country faces. Will voters accept this proposition, and put the Biden-Harris team in the oval office in November is anyone’s guess. But the implications of a Biden vs Trump victory would have a significant impact on wealth and economics in our country for generations.
What Trump Wants: Bigger Better Tax Cuts
A Trump victory this November would be held by his campaign and his Republican supporters in Congress as a resounding endorsement by the people of his management of the US economy and, his tax policies. It would give congressional Republicans significant political capital to push legislation through both houses to a friendly president in the oval office.
In addition, congressional Republicans may also have the political will to seek additional aggressive changes to the tax code otherwise off the table. President Trump isn’t expected to formally unveil his Tax Cuts 2.0 package until late fall probably early to mid-October, but tax goodies advanced by the Trump administration include a reduction of the corporate tax rate (a favorite of wall street), a further cut in the payroll tax, immediate expensing for businesses that bring operations and jobs back to the United States (this targets China in our ongoing trade war), a deep middle-class tax cut, indexing capital gains to inflation and introducing new tax-free savings and investment accounts. All of which are billed as ingredients for growing our economy even further.
Before you get too excited, please remember, Trump’s prosed tax plan will still face major headwinds and challenges even with a Trump victory in November. Congressional Democrats appear to have favorable odds to retain control of the House of Representatives under Nancy Pelosi’s control and a good chance at taking control of the Senate as well. Even if Republicans achieve a surprise victory and sweep of both chambers of Congress, they are unlikely to reach the required 60-vote threshold in the Senate required to overcome procedural obstacles.
What Biden Wants: An Obama-Sanders Style Tax Policy
A Biden-Harris victory would radically transform the economic outlook for our country. If elected, President Joe Biden would enter office with a strong mandate from the people for change, and a central pillar of his tax platform will be reversing major parts of the Trump era tax cuts with a decidedly Sanders flavor. While Biden never endorsed some of his primary opponents’ most liberal tax proposals, like Elizabeth Warren’s proposed wealth tax, he has moved substantially to the left and his tax platform remains very progressive relative to previous democratic presidential candidates platforms. Put simply Biden proposed tax platform is far more radical than traditional democratic candidates.
Joe Biden has proposed raising the corporate tax rate to 28%, which is modest compared to the full 35% rate proposed by many other Democrats like Alexandria Ocasio Cortes. In a deep blow to the fossil fuel industry, he has called for ending tax breaks for fossil fuels and is instead pledging to reform and extend tax incentives that promote investment in renewable energy production, technology, and jobs. This has all of the hallmarks of Solidra all over again. In addition, Biden recently unveiled a plan centered on boosting American industry that calls for new credit to encourage the reopening and revitalization of closed plants, tax incentives for manufacturing drugs and other “critical products” in the United States, and a clawback of public investment and tax incentives when companies move jobs overseas. The question with respect to this component of his tax plan is who will be the winners as we already can see who would be the losers.
Biden wants to tax capital gains at the ordinary income rate
For individuals, Joe Biden proposes restoring the 39.6% top rate and capping the value of itemized deductions at 28%, something former President Barack Obama also advocated. In addition, borrowing from Sanders, Biden’s most significant change would be taxing capital gains as ordinary income, nearly doubling the current top rate of 20% (not including net investment income tax). This change in how capital gains are handled would have broad support from many progressive Democrats like Sanders but would likely run into fierce opposition in Congress from Republicans and moderate Democrats and more modest increases in the capital gains rate could be considered.
Biden’s Sanders/Obama hybrid tax platform also proposes changes to the current long-term capital gains tax rate on investment income in excess of $1 million dollars. Stocks, bonds, funds, and other investments that are owned for more than a year get special tax treatment when they’re sold: The gains, or profits, aren’t taxed for married couples with total income below $80,000; they’re taxed at 15% if the couple’s income is above that, but below $496,600. For those with income above that, capital gains are taxed at 20%. Biden adds an additional tax for investment gains that exceed $1 million, regardless of your total income: Any profits that exceed $1 million would be taxed at the ordinary income rate of 39.6%. So if you are a real estate investor and purchased a building 2 years ago for $500,000 and now are able to sell it for 2 million dollars under Biden’s plan you would pay $585,000 in taxes.
So What About My Estate Plan?
The Biden-Harris team has also set his sights on the estate tax, but it taking a different approach from their predecessors. Rather than simply raising the estate tax rate, Biden has indicated that he would levy a tax on the unrealized appreciation of assets passed at death. This backdoor move would effectively do away with the tax planning strategy known as the step-up in basis and would result in a significant increase in estate taxes for millions of Americans.
Under the current tax code when the heir of an estate inherit something that has appreciated in value—such as an stock portfolio, or real property—they get what is called a “step-up” in basis, meaning they inherit the asset at its current market value as opposed to the basis of the person they inherited the real property from. For example, if Grandma bought a house on capitol hill in Washington DC back in 1970 for 50k her cost basis in the property is 50K, the amount she purchased it for. If now that property is worth 1.1 million dollars under the current tax code if Grandpa passes and you are lucky enough to inherit the property from her you get a step-up in basis as of the date of her death, your basis in the property is 1.1 million so if you turn around and sell the property you have no gain. Gain =Sale Price-Cost Basis).
However under Biden’s plan, you would not get a step up in basis, rather you would get the property at Grandma’s basis, so instead of 1.1 million of basis as of the date of death, you would get Grandma’s 50k basis which means when you went to sell you would realize 1,050,000 of gain and would be facing an approximately 390k tax bill to the Federal government and an additional 39k in tax to the District of Columbia. What’s worse is in one form of Biden’s modification to the step-up in basis for estate, this gain would be taxed not only if you sell but also would automatically be trigger by simply inheriting the property. So even if you hadn’t decided to sell, the simple act of inheriting the property would mean you would have a large tax bill coming your way, that might result in you having to sell the property if you don’t have the 490k to cover being able to keep the property.
Finally, don’t forget that Biden’s proposed tax reforms would dramatically affect that amount of money that people can pass to future generations without having the burden of paying estate taxes. Presently the estate tax exemption is 11.58 million dollars. However, Biden has indicated that he would like to see a return to the pre-Obama era exemption rate of 3.5 million dollars which would create thousands of newly taxable estates in the country. Whatever the outcome of the election it is likely in the event of a Biden victory that taxes are going up. To put it in perspective when the estate tax exemption was last at 3.5 million dollars, back in 2009 the Dow Jones Industrial Average for the year was 8,885. Today the Dow is at approximately 27,000. What a difference 11 years makes. Going back to an exemption rate from 11 years ago would have a cataclysmic impact on the estate for no other reason than the amount of asset appreciation that has occurred in the past 11 years. While this would cripple ordinary Americans estates it would prove to be a boon of new tax revenue for the Federal Government. When they say the largest wealth transfer in history is about to occur, this is what they are talking about.
For more information on estate planning, estate tax or to schedule a consultation please contact Antonoplos & Associates at 202-803-5676 or on the web at www.Antonlegal.com