• Natalie C. Papagni, CPA

Trump Vs. Biden Tax Proposals

Updated: Dec 26, 2021

While all Presidential elections are significant, the 2020 Presidential election holds great significance to affluent and upwardly-affluent families and individuals intending to exceed $ 400,000 in income from salary, bonus and equity awards in 2021 and beyond that take as much pride – if not more – in maximizing the annual bottom-line after-tax income figure they ultimately earn from their professional pursuits vs. top-line pre-tax income figures in box 1 of their W-2.

With the election days away, each candidate has been vocal about how they intend to influence tax policy and the proposals presented make it clear the amount of Federal and potentially state tax you will owe (all else being equal) in 2021 and beyond may be strongly influenced by the winner on Nov. 3rd. I include state tax in the discussion as many states chose to conform to all or a large percentage of enacted Federal tax law.

How significant may the impact be on your after-tax position?

Assuming all else being equal and no change in tax strategy, under a Biden administration analysis by Tax Foundation reveals the “Top 1%” of income earners may find their after-tax take home pay decrease by 11.3% +/-, with the next “Top 4%” finding their after-tax take-home pay decrease by 1.3% +/- . With the stakes for many in the five-figure range if there is a Biden victory (example: $500,000 x 11.3% = $ 56,500) Q4 ’20 2020/21 strategic tax planning, multi-scenario and multi-year tax projection and analysis work is more important than ever.

Under a Trump administration, assuming all else being equal and no change in tax strategy, analysis indicates the “Top 20%” of income earners may find their after-tax take home pay increase by 2.4%. Q4 ’20 2020/21 strategic tax planning, multi-scenario and multi-year tax projection and analysis work is still important, to ensure no stone has been left unturned, however assuming an effective 2020 tax strategy/plan has been implemented throughout the year the ROI from further time investment is projected to be less than if Biden will be inaugurated on Jan 20th, 2021.

Highlights of each Candidate’s Pre-Election Stated Tax Positions:

The TRUMP Proposal for Individuals and Families

Trump supports making permanent many of the tax provisions relevant to individuals included in the 2017 Tax Cuts and Jobs Act (TCJA) set to expire in 2025, including:

§ Current Federal and Estate tax Structures

§ The Expanded Child and Dependent Tax Credits and Disallowance of Dependent Exemptions

§ Increased Standard Deduction Amounts and the Disallowance of Personal Exemptions

§ Current Favorable AMT Rules

§ Continued Limitations on Itemized Deductions for Home Mortgage Interest, and

§ The State and Local Tax (SALT) Cap

Additionally, Trump indicates he is motivated to extend additional tax breaks, including:

Reducing the marginal tax rate for certain individuals in the 22% marginal tax bracket to 15%.

Forgiving Federal payroll taxes if they were temporarily deferred for individuals in 3rd and 4th quarter, 2020 by executive action dated August 1, 2020.

Certainly, unless Republicans gain control of the House and retain the Senate Trump’s tax cut proposals and interest in making the SALT cap permanent will be difficult to pass as they will face strong opposition from Congressional Democrats.

The BIDEN Plan for Individuals and Families

Biden supports increasing taxes on high-income earners. Policies he supports relevant exclusively to high-income earners include:

Raising the top individual margin rate on ordinary income to the pre-TCJA level of 39.6% for individuals making over $ 400,000. Interestingly, in 2017 single filers did not reach the top marginal bracket until taxable income reached $ 418,400, head of household filers did not reach to did not reach the bracket until taxable income reached $ 444,550, and married filing jointly filers at $ 470,700. It is not currently clear if the stated $400,000 applies to all, or a subset, of filing groups.

Reinstating the Pease Limitation – effectively limiting allowable itemized deductions to 28% of AGI.

Increasing the long-term capital gains tax rate to 39.6% for individuals earning over $ 1 million. Raising the combined with the 3.8% Net Investment Income Tax (NIIT), the effective tax rate on capital gains for this group to 43.4% - clearly and aggressive move.

Additional tax policies Biden supports:

Passing a bill proposed by Congress to eliminate the SALT cap deduction. This would be a strong benefit to itemizers (regardless of their income level). Importantly, note this provision would only be beneficial to individuals paying qualifying State and Local taxes at levels that would allow them to reach the 28% limitation for which without this provision there itemized deductions would only allow them to reach a lower percentage of AGI rate.

A refundable tax credit of up to $ 15,000 for qualifying first-time homebuyers that would be received at the time of purchase – versus later, when the relevant tax return is filed.

A refundable tax credit in an amount up to $ 8,000 for one qualifying child and $ 16,000 for two or more qualifying children for half of a family’s cost to care for children under the age of 13 and dependents with disabilities. The credit would begin to phase-out for families earning over $ 125,000.

Eliminating current tax provision allowing the step-up of basis for inherited assets.

Certainly, unless Democrats gain control of the Senate and retain House majority Biden’s tax proposals may be difficult to pass as they will face strong opposition from Congressional Republicans.

What You Need to in the Final Remaining Weeks of 2020

As changes in tax policy in 2021 can be expected regardless of who wins the election are expected, and many individuals have already or may experience unforeseen financial or lifestyle changes brought about by the COVID-19 pandemic in 2020, or have or plan to take advantage of opportunities previously not attractive or available, such as voluntary or involuntary career changes, working remotely or moving out of California permanently, buying or selling a home or residential rental property, or starting a primary or side business, multi-scenario, single/multi-state and multi-year tax strategy / planning, projection and analysis work in the final few weeks remaining in 2020 will be one of the most financially beneficial and effective activities most affluent and emerging affluent individuals will make in 2020.

If you have any questions relevant your 2020 or expected 2021 financial and or tax situation, and/or ready to engage in conversation and potentially strategic planning/modeling and analysis work in light of a Trump or Biden election victory and House and Senate majority outcomes, simply give us a call to get our conversation started. It is important to us to get your questions answered.

Cobalt PacWest | CPAs & Tax Advisors

Headquartered in Redwood Shores, CA Cobalt PacWest | CPAs specializes in strategic tax advisory, financial consulting, tax preparation and accounting services catering to the needs, forward interests and objectives of affluent and emerging affluent individuals and families, including executives and professionals Apple, Google, LinkedIn and Oracle, owners - entrepreneurs and closely-held business entities with quality, integrity and world-class service excellence.

Our core practice is centered on tax strategy/planning, multi-case and multi-year tax projections and analysis, federal and single/multi-state tax preparation, FBAR | FinCEN e-filings, and financial consulting for individuals and businesses. We leverage specialized knowledge in planning for those with executive-level compensation packages, concentrated stock positions, residential real estate property rentals and tax benefits available to owners of pass-through entities.

Cobalt PacWest

CPAs & Tax Advisors

3000 El Camino Real, Building 4

Palo Alto, CA 94306

650.930.9562 | 877.233.5678

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