iWe’re a little less than 50 days from the 2020 presidential election and many people are wondering what effect a potential change in leadership could have on their tax bill. If the Democrats take the White House many of the tax provisions enacted by the Tax Cut and Jobs Act of 2017 (“TCJA”) could be rolled back. Even if new legislation is not passed until late 2021, the new rules could be effective retroactive to January 1, 2021. The below chart provides a high-level comparison of the Biden and Trump tax proposals that would affect individual taxpayers.
Estate Tax
|
|
Biden |
Trump |
| Exemption Amount | Return exemption amount to the “historical norm.” Exemption before TCJA was $5 million (indexed for inflation). Exemption in 2009 was $3.5 million | Make TCJA provisions permanent ($10 million Exemption, indexed) |
| Basis Step-Up | Eliminate step-up in basis for inherited assets | Keep current step-up provisions |
Individual Income Tax
Biden |
Trump |
|
| Ordinary Income Tax Rate | Increase top rate to 39.6% for income over $400,000 | Make TCJA rates permanent (top rate at 37%) |
| Capital Gain Rate | Tax at ordinary income rates for taxpayers with income over $1 million | Keep top rate at 20% |
| Limit Value of Itemized Deductions | Reinstate itemized deductions, but cap value of deductions to 28% | Eliminated through 2025 |
| Self-Employment Tax | Apply the 12.4% Social Security tax on wages over $400,000; still no application of tax on income between $137,000 and $400,000 | Keep 12.4% rate applicable to earnings up to $137,000 |
Planning Considerations
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Review your current estate plan in light of a possible reduction in the estate and generation-skipping transfer tax exemption amounts to make sure that the plan will still provide optimum tax savings.
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For clients who have assets in excess of $12-13 million, you may consider gifting strategies in the short-term that take advantage of the increased exemption amount. Doing so will hedge against the risk that the exemption is reduced earlier than expected.
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Accelerate income-recognition events to take advantage of the lower capital gains rates in 2020 as a hedge against not qualifying for the capital gains rates in the future.
