Advertisement
Politics

2020 Election: A Redo on Taxes

Under Biden’s plan, tax hikes will be limited to people who make more than $400,000. Trump has also expressed an interest in tax relief for middle-class workers.

Joe Biden says his tax plan would increase taxes on the wealthy and offer breaks for the middle class, but at least one of his proposals could boost taxes farther down the income ladder.

A key component of Biden’s plan is that tax hikes will be limited to people who make more than $400,000. He wants to raise the highest individual income tax rate to 39.6% from 37%, restoring the top rate that was in place before the 2017 Tax Cuts and Jobs Act. (In 2020, the 37% top rate kicks in for single taxpayers with taxable income of more than $518,400, or for married couples with taxable income of more than $622,050.) Biden also wants to cap itemized deductions for the wealthiest Americans at 28% and end favorable capital gains rates for anyone with income of more than $1 million. Those taxpayers would pay their ordinary income rate of 39.7% on capital gains and dividends. Currently, investments and other assets held for more than a year are taxed at a rate of 0% to 23.8%, depending on income.

Advertisement - Article continues below

A plan to change the way inherited assets are taxed could have a broader impact. Now, when someone inherits stock, mutual funds or other assets, the cost basis of those assets is stepped up to their value on the date of the original owner’s death. For example, if the original owner purchased shares of stock for $10 and its value was $50 a share when he died, his heirs would only owe taxes on any increase in value over $50 when they sell the shares. Critics of the “step up” say it discourages individuals from selling investments that have increased in value because they can leave them to their heirs, tax-free. But in addition to eliminating a valuable tax break for heirs, eliminating the step-up could create compliance headaches, because heirs would have to track down the original cost of assets that may have been owned for many years.

Advertisement
Advertisement - Article continues below

Biden has also proposed a suite of tax breaks for low- and middle-income families, including:

Advertisement - Article continues below

- An $8,000 tax credit to help offset the costs of child care.

- A tax exclusion for student loans that have been forgiven. Currently, if a borrower’s loans are forgiven, the amount is treated as taxable income (there are exceptions for borrowers who are eligible for certain public service loan programs).

- A refundable tax credit for low- and middle-income workers who contribute to IRAs and employer-provided retirement savings plans. Biden says the current system, which allows all workers to deduct their contributions, primarily benefits wealthier workers.

- Catch-up contributions to retirement plans for caregivers of any age who leave the workforce for at least a year. Currently, catch-up contributions are limited to workers age 50 or older. Biden also proposes a $5,000 tax credit for family caregivers.

Trump’s tax plan. The Trump administration’s plan to release a package of tax proposals was put on hold as other developments—the coronavirus pandemic in particular—have taken center stage. But based on Trump’s public statements, one of his top tax priorities in his second term would be to make provisions in the Tax Cuts and Jobs Act permanent. Unless Congress acts, most of the individual tax cuts included in the act will expire in 2025.

Trump has also expressed an interest in providing more tax relief for middle-class workers. Earlier this year, National Economic Council Director Larry Kudlow said Trump was considering a “Tax Cuts 2.0” that would provide a second round of tax cuts focused on the middle class.

In the short term, though, most of Trump’s tax proposals are focused on stimulating the economy, which has been devastated by the pandemic. He has proposed stimulating the economy by cutting payroll taxes, which would increase the size of workers’ paychecks. He has also suggested he would support a $4,000 tax credit for Americans who travel domestically. The travel industry, which has been hard hit by the pandemic, says such a credit would encourage people to take vacations, but it’s unlikely to gain much support in Congress.

Sandra Block, Lisa Gerstner, Nellie S. Huang and Anne Smith contributed to this story.
Advertisement
Advertisement

Most Popular

7 Surprisingly Valuable Assets for a Happy Retirement
happy retirement

7 Surprisingly Valuable Assets for a Happy Retirement

If you want a long and fulfilling retirement, you need more than money. Here are the most valuable retirement assets to have (besides money), and how …
August 3, 2020
Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy
mortgages

Retired? Good Luck Getting a Mortgage, Even If You’re Wealthy

One 70-year-old’s story highlights the challenges. Prepare for more paperwork and hoops to jump through than you could imagine.
August 2, 2020
Turning 60 in 2020? Expect Lower Social Security Benefits
Coronavirus and Your Money

Turning 60 in 2020? Expect Lower Social Security Benefits

When you file for Social Security, the amount you receive may be lower.
July 30, 2020