Election 2020: What’s in store for taxes?

Our experts discuss how various post-election scenarios could affect personal and business taxes.

Podcast: Tax policies focus on changes from 2017 Tax Cuts and Jobs Act

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TIAA Perspectives Podcast Episode 11: Election 2020: What’s in store for taxes? Hosted by Jim Daniello, CFP®, Wealth Management Director for TIAA. Joined by Jonathan Fishburn and Colleen Carcone--both wealth planning strategy directors for TIAA. - [Jim] Hi, everyone. I'm Jim Daniello, a wealth management director for TIAA. Thanks for joining me for another installment of the TIAA Perspectives podcast. Today, we're going to take a look at the upcoming election, and specifically, what could happen to tax policy, depending on how control of the White House, Senate, and House ends up. As you know, taxes come in many forms, and today we'll discuss personal income taxes, corporate income taxes, the capital gains tax, and the federal estate tax. The results of the election could impact all of these, but we'll also tackle a couple of other really important questions for investors. If something does happen to tax law, when will it happen? And what, if anything, should investors be discussing with a financial professional to help plan? Joining me today, to make sense of it all, are two directors of wealth planning strategies at TIAA, Colleen Carcone and Jonathan Fishburn. Colleen, Jonathan, thanks for being here today. Jonathan, let's start with you, and let's first talk about personal income taxes. We can start with the status quo. What happens if President Donald Trump is reelected and the Republicans keep control of the Senate as well? - [Jonathan] Thanks, Jim. And first of all, thanks for having me on today. I think if President Trump is reelected, you'd have to believe one of his first goals would be to get the personal changes to the tax laws from the Tax Cuts and Jobs Act made permanent. Remember, that when the legislation was passed in 2017, the corporate tax changes were made permanent, but the individual tax provisions are set to sunset in 2025, meaning they will revert back to their 2017 levels. However, one important thing to remember about tax law changes is that they have to start in the House of Representatives. There doesn't appear to be a high chance that the House flips from Democratic Party control, and it's unlikely House Democrats would be supportive of the lower tax rates for wealthier individuals being made permanent. President Trump has also voiced support for making permanent cuts to payroll taxes, which he gave businesses the opportunity to do on a temporary basis this fall. Of course, revenue from payroll taxes is one of the main funders of Social Security. And it's unclear what would need to happen to make up for that lost revenue if payroll tax cuts became permanent. - [Jim] Okay, what about if the Democratic nominee, former Vice President Joe Biden, wins the Presidency? I imagine his plans stay the same, whether Democrats take control of the Senate or whether Republicans maintain control. But I would think the likelihood of him being able to implement his ideas in full is a lot different. - [Jonathan] Absolutely, Jim. It's going to matter whether we have split government or a single-party control of both Houses of Congress and the White House. Former Vice President Biden has said that he intends to raise taxes on individuals who make more than $400,000, making them pay a greater share. I would think he would start by trying to return the tax rates for those higher earners back to where they were before the 2017 tax bill. But if the Republicans maintained control of the Senate, that could be challenging and it's more likely we'd see some sort of compromised bill. One thing about tax policy is that it's not all or nothing. You always have the ability to make adjustments to rates or credits in order to come up with some sort of compromise. So, no matter what happens in the Senate, I don't believe, especially given how many people are struggling financially due to the coronavirus pandemic, that there would be much appetite for raising taxes on the middle class. - [Colleen] You know, you're right, Jon. And former Vice President Biden isn't only looking at changing personal income tax rates, he would like to impose the FICA tax, which is a 12.4% payroll tax typically split between employers and employees on earned income above $400,000. So, high earners could get hit two ways. Remember, Biden has said he wants high-income earners to pay more, but he's also committed to trying to cut taxes to help people, especially the middle class. To that extent, he's proposed increasing the maximum refundable amount for the child tax credit, from $2,000 per child to either $3,000 or $3,600 per child, depending on their age. Additionally, it would be awarded in installments each month. The Biden Campaign has also proposed a tax credit of up to $15,000 to help first time home buyers, although all the details haven't been spelled out yet. A similar program was last put into place in 2008, as we entered the Great Recession, and expired in 2010. What's interesting about Biden's proposal is that it would create a tax credit that could be used at the time of purchase. Whereas the old credits weren't claimed until the buyers filed their income taxes the following year after their purchase. - [Jim] Great points, Colleen. It's easy to focus on the income tax rates, but there are credits to think about as well. Former Vice President Biden has also said he would eliminate the $10,000 cap on itemized deductions for state and local taxes, which was a major point of contention in the Tax Cuts and Jobs Act for those living in states with high property and state taxes. And, who knows what could happen to state's own income tax rates, given that many states are facing financial crises of their own because of what they've had to spend related to the pandemic. But for now, let's take a quick look at corporate taxes. Those changes were permanent. So, I would guess a status quo election wouldn't have much of an impact, but what would happen if the power shifts, Colleen? - [Colleen] Well, even though the corporate-side was made permanent, nothing is ever truly permanent when it comes to tax policy and laws. Biden has said that he would like to increase the maximum corporate tax to 28%. The interesting thing about that number is that it's still lower than the 35% maximum rate before the last round of tax cuts. And it's not much higher than what the Republicans initially suggested during negotiations for the Tax Cuts and Jobs Act, which was 25%. President Trump sort of single-handedly got legislators to bump that down to 21% that ended up law. - [Jim] Thanks, Colleen. I know we're talking about corporations here, but what about small businesses? About 95% of businesses are pass-throughs, which don't file as corporations, but instead are taxed at personal income tax rates. - [Jonathan] That's a great point, Jim. There's so much variety in small businesses, depending on what the owners take as income for themselves. As a complement to the reduced corporate tax rates, the 2017 tax bill established a tax deduction for qualified business income from those so-called pass-through entities like LLCs and sole proprietorships. The Biden proposal, however, calls for eliminating taxpayer's ability to deduct up to 20% of that qualified business income. Again, looking at that group with income above $400,000. - [Jim] Okay, let's shift gears into estate taxes. We know Trump's previous tax bill doubled the threshold at which the federal estate tax takes effect, but there's more at play than just the exemption amount, right? - [Colleen] Absolutely, Jim. I think if President Trump is reelected, you'd see the same thing here is what he'd want to do with the personal income tax changes, make them permanent. Former Vice President Biden on the other hand, would prefer to bring his federal estate tax threshold to what he's calling, historical norms. He hasn't released a number yet, but some have speculated it could be $3.5 million or $5 million per individual. And this could mean more estates would have to file and potentially ultimately pay those tax. According to the Tax Policy Center, in 2017, which was the last year of filing before the Tax Cuts and Jobs Act took effect, there were 11,300 estate tax returns filed, of which 5,500 of them were taxable. In 2018, that number dropped to 4,000 returns, of which only 1,900 were taxable. But the other piece that's just as important for how people transfer their wealth is the proposed change in the basis step-up. Today, if you leave assets to a beneficiary when you die, they inherit not only the asset, but they inherit it at the value it held when you died. So, let's say you purchased some stock for $10 per share. And on the day you die, it's worth $100 per share. If you were to leave that stock to your son, and if he were to turn around and sell it for $100 dollars per share, he would owe nothing in long-term capital gains taxes because he inherited the shares with a stepped-up basis. However, if the basis step-up is eliminated, in the same scenario, either you or your beneficiary would be paying capital gains rates based on a $90 per share profit at some point in time. The Biden Campaign has not indicated whether the estate would have to pay that tax immediately, or if there would be a carry over and the tax would become due when the beneficiary sells that asset. - [Jonathan] That's right. And it could fundamentally change the way that people pass down wealth and their estates. And we're not just talking about shares of stock. We're talking about homes and businesses that have appreciated in value too. Should you cash out and pay the taxes yourself, or do you let your heirs handle the potential tax burden later on? That decision could also be based on income levels of both the person leaving the wealth and the person inheriting it. - [Jim] Right. Today, long-term capital gains have their own tax rates of 0%, 15% or 20%, depending on your income level. And that's before the net investment income tax, of course. So, someone making less money, would pay less in taxes on those appreciated shares. But capital gains taxes could see some changes too, correct? - [Jonathan] Absolutely, they could. President Trump would love to reduce capital gains tax rates during a second term, and also index capital gains thresholds to inflation, which is not currently done. Former Vice President Biden, on the other hand, has proposed applying the higher ordinary income tax rates, instead of capital gains tax rates, for people making more than a million dollars. That would mean people in Biden's proposed highest tax bracket could be paying nearly double the amount of tax on capital gains, 39.6% compared to 20%. And again, that's even before considering the 3.8% net investment income tax. - [Colleen] We always say that you shouldn't let the tax tail wag the dog, which means taxes aren't the only consideration when you're making investment decisions. But for some people, that type of change is certainly likely to influence how and where they invest. - [Jim] Those are all great points and definitely the type of things investors should be talking about with their financial advisor, CPA, tax attorney, and others on their financial teams. So, we've talked a lot about various proposals and what the Presidential candidates might want to do. And certainly, there's a big difference between whether the President and Senate are of the same party or not, in terms of what will actually happen, and how these plans could shift. But one thing to remember is that none of this happens overnight, right? From a timing perspective, how important is tax policy? Is this something that gets started in the first 100 days? - [Colleen] Jim, I do think it's important to make that distinction. The distinction between what might be proposed and what might be realistic. But even beyond that, we're in unprecedented time here with the coronavirus pandemic and the havoc that it's brought on the economy and on people's livelihoods. The CARES Act cost somewhere around $2 trillion. And most people would argue that additional stimulus is probably needed to get people back on their feet and to help those businesses that have struggled. Taxes might typically be a first 100 days type of issue, but they may not be after this inauguration, given the immediate need to get the pandemic under control and to rebuild the economy. However, if the incoming administration waits too long to get started, then all of a sudden, we're into the midterm election cycle, and another one-third of the Senate is gonna be up for reelection. - [Jonathan] That's right. Whether we have a split or a single-party government, makes a big difference as well. With single-party leadership, once that policy gets started, it probably goes through negotiations a lot quicker than a split government. For Vice President Biden, tax changes could be important because additional revenue from raising taxes on higher earners would help fund other programs that are important to him and the Democrats. The other aspect to consider if Biden wins is, how strong of a mandate does he win with? Typically, changes are not retroactive. That means that even if legislation for new tax laws is passed as early as January 21st, changes to things like personal or corporate tax rates, wouldn't likely apply until January 1st, 2022. Meaning investors would have time to implement whatever changes they and their financial advisors might deem necessary. But this is anything but a typical year. And some commentators are speculating that changes could be effective as early as January 1st, 2021. - [Jim] So our TIAA clients will likely have some time to make their own personal decisions about their money, once they see which way things might be headed. Colleen, you mentioned the old adage about not letting the tax tail wag the dog. But still, this is something that investors should be thinking about, right? It's certainly worth a discussion with their financial advisor. - [Colleen] Oh absolutely, Jim. Taxes should always be a consideration as you work with your financial advisor on your long-term wealth plan. They just shouldn't be the only consideration. And when it comes to taxes, one of the keys is what we call tax diversification, meaning you have different types of accounts that are all taxed in different ways, so that as your life changes, you could pull from the account that best fits your needs, not only from an income standpoint, but from a tax perspective too. Changes in taxes could impact how you save or what goals you might prioritize at a given time. For example, let's say the tax treatment of capital gains changes, but the rules around 529 College Plans stay the same, then maybe you'd want to think about putting money into a 529 plan and reaping the tax advantages. Those are the types of things that you can talk to your financial advisor about. Your advisor could run scenario modeling to help you understand the impact of your decisions, not only in the short-term, but for the long-term as well. - [Jonathan] That's a great point, Colleen. And I'd add that one thing we didn't talk about was how the tax treatment of retirement savings could even change. Currently, contributions to your 403 and 401 plans are made with pre-tax dollars, which decreases your taxable income. Former Vice President Biden has proposed eliminating the pre-tax contributions in favor of a flat tax credit. At the same time, both the House and Senate are working on legislation, sometimes referred to as Retirement 2.0, as a follow-up to the SECURE Act that passed last year. So, many of these things might not change the way you fundamentally look at saving or investing, but they could change some of the specific strategies you use, to put yourself in the best financial position possible. - [Jim] It's certainly a good idea to be prepared and have those conversations. The value of good planning is having that long-term plan that is flexible enough that it gives you those options when they arise, to make changes and put yourself in that prime position. Well, this has been a great discussion, Jon and Colleen. And I want to thank you for sharing your insights with us today. Thank you all for listening in, and for spending your time with us. And, for more insights from TIAA on the election, you can visit TIAA.org, and look for our elections page. Have a great day, everyone. [END] Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances. Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser. ©2020 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017 1347571
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Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC.
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.