TRUST & ESTATE PLANNING

Are Tax Changes Ahead for Investors? Where the Candidates Stand Today

10.14.2020 - Craig Richards, CPA/PFS, CFP

With less than three weeks to go before the November 3rd elections, one of the possible outcomes is Democrats taking control of the White House, the House of Representatives and the Senate—or as some would call it, “A Blue Wave.”

Vice President Biden has not made tax policy his main focal point. But his campaign has provided an official release outlining how the tax landscape might change under his administration. He has gone on record stating that taxes would not increase for individuals earning less than $400,000.

Would the Democrats raise income taxes?

Today, the top ordinary income tax rate of 37% applies to individuals with taxable income of more than $518,400 and couples with more than $622,050. But if the Democrats take control, we will most likely see the top rate increase to 39.6% for individuals, which is where it was prior to the Tax Cuts and Jobs Act (TCJA) in 2018.

Would tax changes affect investors?

Currently, investors pay tax at preferential rates of 0%, 15% or 20% on qualified dividends and long-term capital gains. The current top rate of 20% is paid by married taxpayers with taxable income of over $496,600 and single taxpayers with taxable income over $441,450.

Vice President Biden has suggested that he would add another tax tier of 39.6% on qualified dividends and long-term capital gains for those with income over $1 million. In other words, there would be no preferential tax treatment on investment income for those with taxable income in excess of $1 million. Those investors would pay ordinary tax rates (which, as stated above, would increase to 39.6%).

Other income such as interest, short-term capital gains, wages and business income would continue to be taxed at ordinary income tax rates for individuals. Biden has also proposed increasing the corporate income tax rate to 28%, up from the current 21%. Prior to the TCJA, corporate rates were as high as 35%. He would also include a minimum 15% tax on corporate book income.

What tax changes would you expect if Republicans maintain control?

One of the few changes in tax law that President Trump has talked about publicly is further reducing the top rate for long-term capital gains taxes down to 15% from the current rate of 20%.  We also know that he is interested in making permanent the various changes brought about by the TCJA that are scheduled to expire after 2025.

What actions should taxpayers consider taking?

Depending on the outcome of the elections, certain high-income taxpayers may benefit from accelerating their income, most importantly long-term capital gains, into the current tax year. Today’s tax rates on long-term capital gains are almost half of what they might be under a Democratic administration.

We’ll know more about the likelihood of tax hikes in November. But taxpayers who could be affected by such a change should start talking to their advisors about taking capital gains and paying the current tax rate before the end of the year.

 


 

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TRUST & ESTATE PLANNING

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