5 October 2020
How might Trump and Biden tax policies impact on taxpayer’s paychecks, tax returns, investment portfolios and savings?
With the US presidential elections now on the horizon, former Vice President Joe Biden, the Democratic presidential nominee, and President Donald Trump from the Republican camp are citing their final pre-election manifestos ahead of the 3 November election. Tax issues are high on the agenda for both, so it is worth taking a look at their respective proposals.
According to a number of commentators the Biden policies can be viewed as being that if you’re rich or if you’re a corporation, you’re going to pay more tax. If you’re middle-income or lower-income, you’ll pay either what you pay now, or you’ll pay less depending on your specific circumstances. The details of the Trump administration tax plans are sketchy and the mandate appears to be around cutting taxes, but without being specific as to how. So, what do we know about their current proposals and how may they potentially impact a taxpayer’s paycheck, investment portfolio, tax return, pension and savings?
Social security and Medicare
The first impact of each tax proposition will be seen in an individual’s take home pay. Currently US taxpayers are liable to have a 6.2% Social Security payment deducted, with the employer match funding an additional 6.2%, which combine to make a 12.4% payment up to the first $137,700 in earnings. Both parties also contribute 1.45% each for Medicare expenses.
For workers earning less than $104,000 a year, Trump has currently allowed employees to defer their 6.2% payment between September and December, resulting in the employed receiving a larger paycheck now. With the tax due to be paid next year, in addition to the returning payroll taxes, he is now pushing to have a bill passed that cancels the need for the deferred taxes to be repaid. The Biden policy in this area, is to re-start the 12.4% Social Security tax for those taxpayers earning over $400,000.
Income tax rates and allowable deductions
In another push to hit the US’s top earners, Joe Biden is also suggesting “raise(ing) taxes for anybody making over $400,000” in addition to increasing the top income tax bracket from its current 37% to 39.6%. Stating strongly that “The very wealthy should pay a fair share. Corporations should pay a fair share,” Biden has said that he will not raise taxes for those with an income below $400,000; but the new rates would result in 0.9% average decrease in after-tax income. For those above the $400,000 watershed, these changes would result in an after-tax income drop of 17.7%.
Biden has also stated that he will cap the value of itemized deductions on tax returns at 28%, even if a taxpayer comes under a higher rate tax bracket. Currently taxpayers may choose whether to use a standard deduction format, or an itemized format that includes mortgage interest, medical expenses, state and local taxes expenses and charitable contributions. 43% of taxpayers who earn between $50,000 and $100,000 chose to itemize their deduction, against 80% of the more affluent taxpayers who bring in an annual income of between $100,000 to $500,000. The view here is that this would avoid him having to choose which tax deductions should be increased or decreased.
Other current tax deductions are also being targeted by Biden; and he proposes to limit them for the more affluent, but expand them for the lower rate taxpayers. An example of this is a proposed $15,000 limit on first time homebuyers credit and an increase in tax credit for children from the current temporary rate of $2,000 to $4,000.
In the absence of specific tax amends from the Trump camp, the White House budgets for 2019 through to the 2021 tax year are assuming that the current tax rates will become permanent. Trump has however indicated that he is also looking at helping middle income families with a tax cut.
But how may the different policies affect an investment portfolio? Trump has already said that he is ”looking very seriously” at cutting capital gains tax. Another potential change he has suggested is to index the basis for capital gains tax, so that this will adjust in line with inflation and an individual would only pay gains tax on appreciated value. And, he is also proposing to widen the ‘opportunity zones’ that provide investors with preferential tax rates. This programme was part of his Tax Cuts and Jobs Act and was created to encourage investment in “economically distressed” areas.
In contrast Biden wants to set CGT for taxpayers that annually make in excess of $1 million at 39.6% – it is currently set at 20% with an additional 3.8% for net investment income tax.
In setting up the SECURE Act, President Trump has already instigated a number of provisions to enable individuals to strengthen their retirement security across the United States. And, although he has not currently announced any ongoing tax proposals for retirement savings, the ‘Setting Every Community Up for Retirement Enhancement’ legislation allows more employers to provide annuities as a 401(k) investment option. This law also raised the minimum retirement age for pension distribution from age 70.5 up to age 72, and provides tax credits to businesses with policies to automatically sign employees up to their retirement plan.
As an alternate option, Biden’s retirement planning proposal calls for a refundable tax credit of 26% to apply to each dollar deposited into an IRA or 401(k), and a tax credit deposited into the individual’s retirement account will then match fund the contributions. Currently, 401(k) contributions are taxed at the higher rates. Therefore, a flat credit could be of more benefit and have a larger impact for lower-income earners, whilst lowering the benefits for higher-income earners. But, Biden’s proposal will not change the contribution limits or affect the Roth IRA rules, where after-tax money goes into the account and may then be withdrawn tax-free.
Impact for internationally resident US citizens?
In terms of deciding how to cast your vote in November, the policies set out above are likely to be very relevant. However, for internationally resident US citizens the actual cash impact of these proposed changes are likely to be minimal. This is because of the generally higher rate of income taxes in the UK compared to the US and the effect of the double taxation agreement.
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