As a taxpayer, you might find it helpful to follow the candidates’ policy proposals. And as an investor, you may want to steel yourself for an anticipated increase in market volatility in the weeks before and after the election.
Trump’s Tax Cuts
The president has campaigned to preserve his signature 2017 tax legislation, the Tax Cuts and Jobs Act (TCJA). The TCJA lowered tax rates for individuals at most income levels, roughly doubled the standard deduction, and eliminated the deduction for personal exemptions — so far fewer taxpayers now itemize on their tax returns.
The federal estate and gift tax exemption was also doubled, reaching $11.58 million in 2020 (adjusted for inflation). This is the amount that can be transferred to heirs free of federal tax. These changes to individual tax rates and the exemption are temporary and scheduled to revert back to pre-TCJA levels in 2026.
For businesses, the TCJA reduced corporate tax rates from a top rate of 35% to a flat rate of 21%, repealed the corporate alternative minimum tax, and enhanced deductions for capital investments. Pass-through businesses (including many self-employed individuals) received a new deduction equal to 20% of their qualified business income. TCJA changes affecting businesses are permanent.
Regarding second-term proposals, the president has expressed support for additional middle-class tax cuts, reductions in the capital gains tax, expansion of the Opportunity Zones program, and tax credits for companies that bring jobs back from China, but few details are available.2
Joe Biden contends that most of the TCJA tax benefits went to big businesses and the wealthy. He has proposed tax increases for corporations and high-income households to help pay for his climate, infrastructure, R&D, health, and education plans.3
Biden would return the top personal income tax rate to 39.6% from 37%, which currently applies to income above $518,400 for single filers and $622,050 for joint filers. The tax benefit of itemizing deductions would also be limited for those with incomes above $400,000. The 20% deduction for qualified business income would phase out above the same $400,000 threshold. A TCJA provision that caps the itemized deduction for state and local taxes at $10,000 would be repealed. Targeted tax credits would be offered to help make child care and housing more affordable for the middle class.4
Biden also wants to end the preferential tax treatment of long-term capital gains and qualified dividends for households with incomes above $1 million. Capital gains above that threshold would be taxed as ordinary income at 39.6% instead of today’s 20% rate (plus 3.8% net investment income tax). The step-up in basis for inherited capital assets might also be eliminated, making more capital gains taxable after death.5
Social Security is funded by a 12.4% payroll tax — split between employers and employees — on wage and self-employment income, up to an annual cap that is adjusted for inflation ($137,700 in 2020). To address the program’s growing funding deficit, Biden would also impose the payroll tax on income earned above $400,000.6 He has proposed raising the corporate tax rate from 21% to 28%, reinstating a 15% minimum tax on profits exceeding $100 million, and increasing taxes on foreign profits.7
2–7) Tax Foundation, August 20 and 25, 2020
8) Federal Reserve, September 16, 2020