It Doesn’t Matter Who Wins The Election – Higher Taxes Are Expected, So Get Ready.
Every four years when the U.S. presidential election approaches, Americans must think about the vast implications of the potential presidential outcome. With the economy struggling to stay afloat during the pandemic, candidates’ proposed tax policies take on more importance. While past election platforms have implied tax hikes or reductions to lure or sway voters, it’s highly likely that taxes will rise regardless of whether the Democrat or Republican party win in this election. This is primarily because of the excessive federal deficit and economic recovery spending from the health crisis.
Don’t be alarmed or take any action yet. High income, self-employed individuals often can reduce their taxes with retirement strategies that allow the highest tax-deductible contributions – which both lowers taxes and creates more financial capital for future income.
Former Vice President Joe Biden has proposed higher taxes for wealthier Americans and seeks to repeal parts of the TCJA. President Trump has not provided many details about second-term tax plans, but has indicated he would seek permanent status on some of the TCJA provisions. Trump also has discussed plans to expand existing tax breaks, create credits for specific industries and activities, and other undefined tax cuts for individuals.
The Need for Tax Hikes
The pandemic has caused enormous economic disruption, prompting Congress and President Trump to increase spending in response to the crisis. The deficit won’t be shrinking anytime soon – it’s projected to quadruple to $3.7 trillion, according to the Congressional Budget Office. At some point, no matter which political party is in power, the U.S. government will need to raise revenue, which often is in the form of taxes, to curtail the deficit.
Expect Tax Overhaul Regardless Who Wins
The one likely result (despite the winner), is that there will be adjustments to our current tax laws. A general tax increase seems to be an inevitable way to offset our recent, increased debt. Based on the current landscape, here are some potential outcomes for each candidate.
If Democrats Win the Election
Biden has proposed many tax changes and increases related to spending proposals for various issues including climate change, infrastructure, health care, education, and research and development. Most of his proposals revolve around raising income taxes on high earners as well as on businesses.
If Democrats win the 2020 presidential election, they favor building a more progressive tax system, which is stated in the Biden-Sanders Unity Task Force Recommendations in which taxes would be used as a tool to reduce inequality and concentrations of wealth and to pay for investments in U.S. productivity and fund government needs.
If Republicans Win the Election
Trump has eluded to the fact there will be a tax cut, but his campaign team has not revealed many details.
Trump deferred employee contributions to payroll taxes that fund Social Security benefits, meaning employees and employers are exempt from paying taxes and while this was just a deferral, Trump has said if he were reelected, he would forgive the payment of these taxes. Trump also has stated he wants to end payroll tax permanently.
Higher Taxes for Individuals Earning $400,000
Biden wants to increase tax rates for those earning more than $400,000, which will raise the top marginal rate back to the pre-2017 TCJA rate.
Biden’s tax plan seeks to keep Qualified Business Income (QBI) deductions for those with less than $400,000 in earnings, but phases out pass-through deductions for those with over $400,000 in earnings.
Trump has said he won’t raise taxes on people earning less than $400,000. Recently Trump has been in the spotlight regarding taxes, so it’s likely that more of his plans will be made public leading up to the election.
Corporate Tax Rate Increase?
Under Trump, the peak marginal corporate tax rate was slashed from 35% to 21%. Under the Biden tax plan, the corporate tax rate would be increased to 28%. Also Biden has suggested that he would impose a 15% minimum book tax on corporations with $100 million or greater in income.
Increasing the corporate tax rate to 28% would help raise about a third of the $3.3 trillion to $3.7 trillion in estimated extra revenue to pay for the deficit over the next decade.
Trump Administration Wants to Extend TCJA Provisions
The Trump administration has not unveiled a second-term tax strategy, but one thing that they aim to do is extend the 2017 Tax Cuts and Job Act provisions beyond 2025, which means the lower individual income tax rates would be extended across the board.
Republicans may push for a further reduction of the corporate rate, a payroll tax cut, immediate expensing for businesses that bring operations and jobs back to the United States, a middle-class tax cut, indexing capital gains to inflation and introducing new tax-free savings and investment accounts.
The Opportunity to Lower Your Taxes
No matter which candidate wins the 2020 presidency, the outcome will likely impact tax policy for many years.
A Defined Benefit or Cash Balance retirement plan is a tax solution that can save high-income, self-employed individuals big on taxes. Defined Benefit plans are a tax-advantaged plan that allow double or triple contributions and reduce taxable income by up to $100,000 a year. There are online tools that can help you get an estimate on how much money you can save on taxes. Now is the time to reevaluate your tax planning strategy.
As always, standing by to discuss or be of assistance.