Today’s podcast is in celebration of campaign season as we compare and contrast the Trump vs Biden tax plans. The team discusses the differences between the two plans in terms of corporate tax rates, 401k contributions, capital gains, estate planning and the death tax.
Under the Biden plan, the corporate tax rate will go from the current rate of 21% to 28%. One goal of the plan is to remove loopholes and prevent corporations from paying no tax. The Biden team proposes a minimum tax rate for corporations at 15%. It is difficult to predict or quantify what, if any, impact these tax changes might have on corporate stock valuations and, in turn, on the value of stock portfolios and retirement savings. Any effect on stock values probably would depend on the extent to which individual corporations had benefited from the provisions that the Biden plan would reduce or eliminate. However, according to the Bank of America global research team, if corporate tax rates are increased, they expect a reduction in corporate earnings of 9%. This is concerning because technology stocks are the biggest sector driving economic growth right now.
The tax rate for profits derived outside of the US will double for corporations to 21%. Tech stocks currently derive 43% of their income from the US market. Again, the Biden plan is concerning given that the technology sector is driving the growth in the market. The Biden plan also goes after antitrust laws by challenging firms like Facebook and whether they should own Instagram. The Biden admiration wants to be able to approve mergers and acquisitions. Coming down hard on the fastest growing segment in the world could impact those firm’s overall profitability, their stock price and, ultimately, your portfolio.
The plan also indicates that a Biden administration would promote tax provisions to penalize exporting jobs overseas and to incentivize investments in infrastructure and green energy, transportation and manufacturing. Businesses would be offered a variety of new tax credits, ranging from benefits to deal with workforce layoffs, to small business incentives and to provide retirement savings plans.
The highest current tax rate under President Trump is 29.6% and that would increase under Biden’s proposal to 39.6%. There will be a 12.4% tax increase of income over $400,000. That puts the federal tax rate for those making over $400,000 a year to over 50% tax. The majority of businesses in the US are small businesses and again, could have a greater impact to the overall economic recovery and your portfolio.
The Biden tax plan also emphasizes new and revised tax benefits for “working families.” A key element of the Biden policy is the use of tax credits, often refundable, rather than tax deductions, to counter the greater savings that deductions provide to higher-income taxpayers compared to lower- and middle-income individuals.
Depending on the design of the new provision, the impact on high-income taxpayers could be substantial. For example, if the proposed revision of the 401(k) contribution benefit entitled a taxpayer with a marginal tax rate of 35% to a 20% tax credit instead of the present law’s tax deduction, the tax savings for the current, maximum annual contribution of $19,500 would decline from $6,852 to $3,900.
Estate Planning & Capital Gains
The Biden tax plan entails two changes to the federal estate tax. It would reduce the estate tax exemption by approximately 50% from its current level of $11.58 million of estate assets, thereby restoring the threshold for taxable estates to its pre-Trump level. Tax experts generally believe that most very wealthy individuals already take advantage of sophisticated tax-planning strategies that reduce their estate-tax liabilities and will continue to do so. Therefore, the lower exemption level may result merely in expanded tax planning.
The second change would repeal the present law “step-up in basis” rule that increases the tax basis for inherited assets to their full fair market value upon death. This rule—which ‘carries over’ an asset’s tax basis from the testator to the heir—likely would entail a significantly greater overall tax burden with respect to transferred assets than would the decreased exemption.
The current rule benefits all heirs, including those receiving modest assets such as decedents’ residences or mutual fund shares from estates valued below the estate tax threshold. Under present law, inherited property receives a full fair market value tax basis. As a result, if the property has appreciated in value since its acquisition by the decedent, the inherent increase in the property’s value as of its owner’s death permanently escapes capital gains tax. If the heir subsequently sells the property, the heir’s taxable gain will be limited to the increase in value over the stepped-up tax basis.
Child Tax Credit expanded
The Biden plan would liberalize the Child and Dependent Care Tax Credit for qualified expenses. The credit would increase from a current maximum of $3,000 to $8,000, with a ceiling of $16,000 for multiple dependents. The Child Tax Credit would be made fully refundable and rise from $2,000 to $3,000 for children ages 6 to 17, with a credit of $3,600 allowed for children under age six. Present law threshold and phase-in limitations would be eliminated.
First Time Home buyer credit
The Biden plan would reinstate the first-time homebuyer tax credit, originally created to help housing in the Great Recession. This credit would be provided at a maximum of $15,000 for first-time home purchasers—and it would be refundable and advancable in order to assist buyers at the time of purchase, instead of making them wait until they file their taxes.
Taxes on individual incomes below $400,000 would not increase with the Biden plan. New and expanded tax benefits, outlined above, including provisions for child care, first-time homebuyers, educational debt relief, retirement savings, health insurance and long-term care could reduce taxes for average families.
The Biden plan would, however, increase taxes for most taxpayers with incomes of $400,000 or more. It would reinstate the pre-2017 top marginal tax rate of 39.6 %, substitute flat-rate tax credits for some deductions, including those contributions to retirement plans. Individuals with incomes of more than $1 million would pay the same rate on investment income as on wages, and equity and hedge fund managers would be subject to ordinary income rates on “carried interests.” In addition, the payroll tax for Social Security would apply to earnings of $400,000 or more (but not between the current wage base of $137,700—$142,800 in 2021—up to $400,000). The estate tax exemption would fall back to $5 million and step-up in basis at death would be repealed.
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