All Eyes on the US Election: Tax Proposal Client Planning Alert
The upcoming US presidential election is generating tremendous public interest, as the US electorate and the world evaluate the policies proposed by each candidate. This election, taxes are an especially relevant topic, as many of the provisions of the Tax Cuts and Jobs Act are scheduled to expire soon. Each candidate has announced particular reforms that they would seek to implement if they become President, many of which will have implications for the US income tax and US estate tax. Yet with the deluge of election coverage, it's easy to get lost searching for each candidate's proposals.
Because we know taxes are an important topic for many of our clients, and since tax planning is a core piece of every individual financial plan, we have summarized the proposed tax reforms announced by each of the two major candidates for United States President. This article highlights key US income tax and US estate tax proposals by each candidate based on our current understanding of their stated positions, and discusses how individuals can best plan in an environment of uncertainty. As always, clients should consult their individual legal and tax advisors before undertaking any planning strategy.
What the Candidates Agree On
Both candidates have indicated they would end the taxation of tips on restaurant and hospitality workers. According to the Tax Foundation, for tax year 2018 approximately 6.1 million taxpayers reported a total of $38.3 billion in taxable tip income.
Both candidates have indicated they would expand the child tax credit, but would do so in different ways.
Ms. Harris has proposed a plan which would expand the tax credit to $6,000 for children under the age of 1, $3,600 for children ages 2 through 5, and $3,000 for older children. Mr. Trump has proposed a plan which would expand the child tax credit to $5,000 per child, and would apply at all income levels without a phase-out for higher earners.
Tax Reform Proposals By Donald Trump
Mr. Trump has indicated he would make permanent the tax cuts enacted under the Tax Cuts and Jobs Act of 2017. This would include making permanent the doubling of the standard deduction, and various changes to itemized deductions, including the $10,000 cap on state and local tax, the mortgage interest deduction cap, and the elimination of miscellaneous personal itemized deductions such as investment fees and union dues. It would also make permanent the expanded unified credit, which is approximately $13.6 million for tax year 2024 (indexed annually for inflation), and which is currently scheduled to "sunset" on January 1, 2026 to its pre-2017 levels (which will be one-half the current levels, indexed annually for inflation).
Mr. Trump has also indicated he would lower the corporate tax rate from 21% to 20%, and he would further lower the corporate tax rate to 15% for companies that make their products in the United States.
Mr. Trump has indicated he would eliminate taxes on Social Security benefits. Under current law, individuals drawing Social Security benefits are required to pay taxes on 50-85% of their benefits, depending on their income level.
Mr. Trump has indicated he would impose baseline tariffs on all foreign-made goods imported into the US, and in public statements has indicated that the level of the tariffs could be approximately 10-20%.
Tax Reform Proposals By Kamala Harris
Ms. Harris has proposed increasing the maximum tax rate for long-term capital gains to 28% for taxable income in excess of $1 million per year. Currently, the maximum tax rate for long-term capital gains is 20%.
Ms. Harris has also proposed raising the maximum Net
Investment Income Tax (NIIT) to 5% on income in excess of $400,000 (currently the rate is 3.8%, but potentially applies after $200,000 for single filers and $250,000 for married filers).
Ms. Harris has proposed raising the corporate tax rate to 28%, which is higher than the current rate of 21%, but would be less than the rate of 35% which existed prior to the enactment of the TCJA.
Ms. Harris has proposed raising the excise tax on stock buybacks. Under current law, the excise tax is 1%, and Ms. Harris has proposed raising the excess tax to 4%.
Ms. Harris has indicated she would extend the tax breaks under the TCJA as they relate to individuals earning less than $400,000 per year. The implication of this is she may not extend these tax breaks to wealthier individuals, including the expanded unified credit for the US estate tax and generation-skipping transfer tax, and instead would allow the temporary expansion to sunset on January 1, 2026.
Ms. Harris has proposed increasing the business deduction for startups to $50,000. Under current law, the tax deduction is $5,000. She has also proposed providing 400,000 first-generation homebuyers with $25,000 in down payment assistance and a $10,000 tax credit for other first-time homebuyers. It is not yet known how the down payment assistance would be implemented, but some tax policy experts suggest it could be in the form of a tax credit.
What Individuals Can Do Now
Whether any of these proposals ultimately become law depends on the priorities of the elected candidate and whether a bill reflecting such priorities can be enacted. In some cases, such as the Tax Cuts and Jobs Act (TCJA), parts of which is scheduled to sunset at the end of 2025, the timing of legislation is critical: if nothing occurs before January 1, 2026, the tax brackets and rates will return to their pre-TCJA levels.
For individuals who would be directly impacted by the halving of the federal unified credit, time is of the essence to lock in the current available credit at its historical high. For others, it may be a good time to speak with an HSBC Relationship Manager about strategies to help mitigate future tax exposure, such as realizing gains in advance of a possible increase in the capital gains tax rate. In all cases, having a comprehensive plan in place is incredibly important, and it is equally important to have older plans reviewed periodically to ensure that they are still well suited to the family's current goals. Families who have not yet put together an estate plan are encouraged to meet with estate planning advisors soon to ensure that their wealth planning goals have been considered and drafted into a Last Will and Testament, estate planning trusts, and/or other legal documents.
At HSBC, our team is dedicated to assisting clients on the full breath of wealth management topics, including comprehensive financial planning and optimization in keeping with your goals. We can discuss these developments with you and discuss any opportunities for thoughtful, proactive planning done in conjunction with your personal legal and tax advisors. If you would like to learn more, please reach out to your Relationship Manager to inquire further.
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