With the polls tightening in a number of key states, it’s still anybody’s guess as to which candidate will prevail on Nov. 3, 2020. Whoever wins, there are sure to be changes ahead in tax rates and tax policy.
In a Sept. 14 Deloitte poll on the tax implications of the 2020 presidential election, 57.6% of respondents said that a Blue Wave — a Democrat sweep of the White House and both houses of Congress — would result in a higher corporate tax rate. More than half (57.6%) said they think it would result in a corporate tax rate over 28% by calendar year 2023, followed by just over 28% who think the rate would likely be somewhere between 21% and 27%.
COVID-19-generated legislation added to an already-soaring debt, according to Victoria Glover, CPA, a partner at the Washington National Tax Office of Deloitte Tax.
“I think future Congresses and administrations will have to figure out ways to handle deficits,” she said. “When debt and deficits become near or close to unsustainable, congressional lawmakers will need to consider whether additional tax increases, further spending cuts, or a combination of both will need to be enacted in order to properly address rising debt and deficits.”
Whatever the outcome of the elections, taxpayers and their advisors should prepare for the policy changes that result, according to Ani Hovanessian, chair of the New York Tax and Wealth Planning Group of law firm Venable.
“The [Tax Cuts and Jobs Act] decreased the highest tax rate on income from 39.6% to 37%,” she said. “[Democrat presidential contender Joe] Biden has said he would like to increase it back up to 39.6%. In a similar vein, corporate taxes went from 35% down to 21%. President Trump would like to decrease that rate by an additional percentage point, while Biden said it should be increased to 28%.”
Likewise, the candidates take a different approach to capital gains rates, Hovanessian noted. “Biden would increase the rate for long-term capital gains for those making more than $1 million annually to match the highest income tax bracket at 39.6%, almost double the current rate of 20%. Including the 3.8% [Net Investment Income] surtax, the rate would top out at 43.4%. Contrast this approach with Trump’s proposal to decrease the capital gains rate to 15%, and also to index capital gains for inflation.”
Here's an at-a-glance guide to the candidates' positions on individual taxes.
Tax advisors should sit down with their clients and make sure they are aware of what might happen, she suggested: “Look at the assets they hold to determine if they should change their holdings. We don’t want them to rush into tax-motivated decisions without knowing their current liquidity. Even if there is a Blue Wave and accompanying changes in law retroactive to Jan. 1, it could change back in a couple of years. Determine the client’s short-term and mid-term goals. If liquidity is important in the short term, see if they can convert to a Roth IRA so they can start taking distributions in the next couple of years.”
Given the sharp contrast in capital gains policy, if an individual is already thinking of selling some assets next year, they should pay close attention to the election, Hovanessian urged. “They may be motivated to sell this year,” she said. “There may be a 20% swing in the tax rate to take advantage of by selling this year as opposed to next year.”
While the two candidates are diametrically opposed on income tax and corporate tax, there are significant estate tax differences as well. The current estate tax exemption — the amount that can be transferred tax-free during a lifetime — is $11.58 million, or double that amount for married couples. Amounts over the exemption amount are taxed at the estate tax rate of 40%.
“Some states have their own estate tax regime,” Hovanessian observed. “For example, New York has rates ranging from 12% to 16% on assets over $5.8 million. There’s a lower exemption than the federal amount.”
Biden advocates eliminating the step-up in basis that allows the tax-free transfer at death of capital gains, Hovanessian noted. “For example, if an individual that owns stock they bought in 1990 for $100,000 dies in 2020 when the stock is worth $1 million, Biden would say that the heirs received the stock at the original basis of $100,000. If the heirs sell the next day, they would be subject to capital gains tax on $900,000, whereas under current law they would receive a step-up in basis and owe no tax.”
However, the proposal to eliminate the step-up in basis has been made before under previous administrations, without success, she observed. “We can’t know for certain what would happen. Taxes are an area where there are a lot of contentious issues back and forth during a campaign — this is not the first time a candidate has come up with the idea of eliminating the step-up.”
