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2020: Presidential Tax Plan

October 15, 2020

Democratic Presidential nominee Joe Biden has released a tax plan that could seek to increase taxes on high net worth individuals. Although it is a campaign platform, it provides insight into the intended direction and changes that could take effect.

Though it is Congress that writes tax and budget bills, so the House and Senate will have a say. If Biden is elected, tax policy outcomes will heavily depend on whether the Democrats capture a majority in the Senate (and the size of the majority).

In general, the available information about these proposals is limited. It’s clear that the overall plan will include a number of complete or partial repeals of President Trump’s 2017 Tax Cuts and Jobs Act (TCJA). It is also unknown when these proposals would take effect. It is commonly accepted that tax law changes passed late in 2021 can be expected to be retroactive to the beginning of the calendar year 2021. Taxpayers looking to plan around these changes should consider acting before the end of this year.

We’ll start with some potential Personal Income Tax Provisions and some opportunities to consider:

1. Long-term capital gain rates and qualified dividends would be taxed at ordinary income rates for taxpayers with more than $1 million in taxable income. This would eliminate the long-standing 20% preferred rate for long-term capital gains and qualified dividends for taxpayers in that highest bracket.

The opportunity? Rebalance your portfolio, tax-loss harvest your non-qualified accounts and look to see where to maximize your portfolio income without taking undue risks to see preferred tax treatment.

2. A Repeal Tax Cuts & Job’s Act’s tax cuts for taxpayers with income over $400,000. Taxpayers who are married filing jointly currently in the 35% and 37% brackets could see their rates increase to 39.6%.

The Opportunity? Roth conversions and insurance product distributions. With marginal rates potentially on the rise, with no doubt continued increases over time, those who have considered converting assets to Roth for estate planning purposes or social security planning may want to talk to their advisors and tax professionals to consider expediting the process.

3. Reinstitute the “Pease Limitations” on itemized deductions for taxpayers with income over $400,000 and cap the value of itemized deductions at 28% of value (AMT). Under current law, itemized deductions are not subject to this limitation — deductions are valued at the taxpayer’s top marginal rate.

The opportunity? Charitable gift giving. For those who are charitably inclined, you may have already seen a reduction on tax benefit due to the SALT cap however with no future change in state and local tax (SALT) plus a 28% Pease Limitation addition to itemized deductions, front-loading charitable contributions through trusts or endowments could be prudent.

4. The tax reform calls to eliminate the tax deductibility for 401(k)/IRA contributions and replace the deduction with a credit. The credit would be equal to the amount of the contribution multiplied by a fixed percentage (this fixed percentage would be lower, perhaps significantly lower than the high-income marginal rate). The idea here is to increase deductions for lower-income households while decreasing the deduction for higher-income households.

The Opportunity? Touch point with all of our clients who either have 401k’s with TCG or otherwise. Make sure that we do not “miss” a year or an opportunity to maximize our 401k contribution for high-income earners.

5. Eliminate stepped-up basis at death. With the Estate exemption potentially dropping it is unclear if this means that heirs will inherit the property at the decedent’s basis and potentially have large gains at a future sale or if death will trigger a taxable recognition event (potentially subject to the 39.6% rate).

The Opportunity? Estate Planning. With the Estate exemption dropping from approx. $11m down to approx. $5m, gifting away assets prior to death becomes more attractive. The issue with gifting assets (like a house, large equity portfolio) is that it is an irrevocable gift and thus loses the step up in basis at death in most cases. If the Estate exemption limits drop significantly, it then becomes clearer for clients to consider reducing Estate Tax liability.

6. Eliminate or limit Section 1031 Like-Kind Exchanges and other benefits for real estate used in a trade or business.

The Opportunity? This one is unclear, we need more specifics. However, clients looking to get out of personal real estate holdings into 1031 LPs, REITs or Opportunity Zones may lose their window if now done before year-end.


Potential Corporate Income Tax Provisions:

1. An Increase in the top corporate tax rate to 28% (from the current 21%).

2. Impose a 15% minimum tax on accounting profits for corporations with at least $100 million in revenue.

3. Increase tax rates on the profit of foreign subsidiaries of US companies.

4. A potential Phase out the “Qualified Business Income” Section 199A


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Note: The content contained on this piece is meant for general educational and informational purposes only and is not intended or designed to be specific tax, legal, financial or accounting advice. Please consult with a qualified professional regarding your particular situation.

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