Presidential Tax Proposals
Every time we near another presidential election, accountants often are asked about the impact that candidates’ platforms will have on the pocketbooks of our clients, friends, and acquaintances. Primarily, these questions deal with the presidential tax proposals. This article highlights a number of the tax-related proposals made by Vice President Kamala Harris and former President Donald Trump, and will do so by comparing them to the existing treatment of those features under current law.
A few caveats before we begin:
- Recall that a president generally does not have the power to unilaterally make laws. While some tax-related powers are reserved for the president’s executive branch of government (like certain rules made by the IRS via Treasury Regulations), the underlying laws are found in the Internal Revenue Code, created by the legislative branch (Congress). Yes, any successful bill’s path crosses home plate with a trip through the Oval Office, and often the president initiates policy on the front end by pitching the text of a law to a Congressional sponsor. However, an oppositional House or Senate easily can prevent a candidate’s plans from seeing the light of day. With veto power, a president has far more power denying the creation of a law than actually creating one; that power is held collectively by the 535 members of Congress. The message: View the candidate’s proposals as a wish list, rather than the circumstances you will wake up to on November 6th.
- Tax rules are often complicated, containing cutoffs, phaseouts, and exceptions within exceptions. This article does not dive deeply into those details, and instead provides only a very general overview of the characteristics of the tax features discussed. Some of the candidate’s plans relate to how they will handle certain existing provisions that are scheduled to “sunset” (expire) within the next year or two. They might want to extend the provision, allow it to revert to earlier “settings,” or extend it with modifications. The Tax Cuts and Jobs Act of 2017 is an example of legislation containing many sunsetting features; many of its provisions expire at the end of 2025. Note: Sunsetting provisions are common, usually with a ten-year or shorter window, which under certain circumstances can provide a somewhat more relaxed (although often contentious) set of rules for Congress to navigate when creating laws that impact the nation’s budget.
- The candidates’ tax plans often are hard to nail down. Although weighted heavily toward explaining the reasons for the proposed changes rather than the specifics of how the changes would work, Harris’ plans are reasonably well explained on her campaign website, and portions of them have their roots in President Biden’s budget proposals. Trump’s plans are a bit more of a moving target because they have not been accumulated and reduced to writing on his website, and instead must be pieced together from other sources, primarily including text from various speeches. In spite of this, the specifics of some of his plans can be easier to discern, because they take a form closer to “all or nothing” than Harris’ plans. In other words, many of his proposals would apply to taxpayers at all income levels. Harris has proposed tax decreases and other benefits for low-income individuals and tax increases for wealthy and higher earner individuals and large corporations. But the levels at which many of those features would apply are unknown, although Harris has promised no tax increases to those earning less than $400,000.
- This article generally avoids the assumption that the candidates support proposals made by others whose interests may be aligned with theirs, such as the goals laid out in President Biden’s budget proposal or 2025 Project. While some overlap is logical, we instead focus on proposals that the candidates themselves have articulated.
- Finally, BNN and your author are not trying to influence readers’ opinions of the candidates, overtly or subtly. It would be foolish to ostracize half of our readers, even if we were trying to push an agenda (we aren’t). But two people can read the same sentence and come away with very different impressions of what it conveys, and it is nearly impossible to choose wording that comprehensively prevents this, especially when it comes to politics, which sadly have become so polarized. We encourage readers to avoid pulling apparent bias from an article that underwent sincere efforts to avoid it.
With that, here is a comparison highlighting some of the candidates’ tax plans:
| Feature | Current Treatment | Harris Proposal | Trump Proposal |
|---|---|---|---|
| Tax Cuts and Jobs Act (“TCJA” or the “Act”) | This wide-ranging tax law was passed early in Trump’s presidency. Many of its features (but not all) expire automatically at the end of 2025. Some of these features will be discussed further below. | Appears to propose extending the Act’s taxpayer-friendly provisions, but in a manner that benefits only individuals earning $400,000 or less. | Appears to propose making most features permanent. |
| Top tax rate for taxable C-corps | Flat tax of 21%. | Increase to 28%. | Reduce to 20% (15% for entities manufacturing within the U.S.). |
| Excess business losses | Starting 2021 and expiring after 2028, this rule limits the amount of business losses that individuals can use, in a given year, to offset their nonbusiness income. This usually applies to owners of passthrough entities, and the inflation-indexed cap allowed usable losses of $289,000 for 2023 ($578,000 for joint filers). The excess over this amount may be carried forward for potential future use. | Make the limitation permanent. | Unknown |
| Bonus depreciation | Included in TCJA, this allows immediate, current year deduction of a portion of business equipment/capital costs (the balance being deducted via depreciation over the balance of the asset’s tax life). The Act phases this benefit out over a 10 year period (2017-2027), starting with a 100% write-off in 2017 and ending at 0% in 2027 (the 2024 amount is 60%). | Unclear, but recent Democratic proposals in Congress suggest willingness to extend this in some manner. This would be difficult to implement only for those earning $400,000 or less, because the cap is imposed at the entity level, and some owners of passthrough entities may have income over $400,000, while other owners of the same entity don’t. | Trump’s plan to permanently extend TCJA does not clarify treatment of this item, because TCJA created a staged phaseout of this benefit. (At what stage, or percentage, would the deduction be “locked in?”) His proposal may suggest full reinstatement only for entities producing goods within U.S. borders, but many in his party have pushed for broad, full reinstatement. |
| Like-kind exchanges | Generally gain from the sale of property is taxable, but some taxable gain can be deferred if (1) real estate is exchanged, and (2) property of a “like kind” is received instead of cash (the premise being that it is difficult for the transaction to self-fund its own tax if the transaction itself didn’t generate cash). Instead, the eventuality of taxable gain is “locked in” for a future date by assigning a lower cost basis to the new property. | No deferral for gains exceeding $500,000. | No changes suggested. |
| Business startup costs | Before fully beginning operations, a business often incurs significant costs. Those costs generally must be capitalized and amortized over a 15-year period beginning with the commencement of operations. An exception exists that allows immediate deduction of as much as $5,000. If overall startup costs exceed $50,000, the portion immediately deductible is reduced or eliminated. The balance is amortized. | Increase the immediately-deductible amount from $5,000 to $50,000. | No changes suggested. |
| R&D (research & development) costs | Currently R&D costs must be capitalized, and in lieu of immediate deduction, are amortized over a 5 or 10 year period, depending on whether the outlays are domestic or international in nature. | No changes suggested. | Proposes a full write-off in the year a cost is incurred. |
| Top individual tax rate | Currently 37%, scheduled to increase to 39.6% after 2025. | Appears to reinstate top rate of 39.6%, but only for individuals earning $400,000 or more. | 37% |
| Capital gain rate on assets sold | Historically, long-term capital gains have been taxed at a lower rate than other so-called “ordinary” income. The rates vary based on income, and the top capital gain rate currently is 20%. Tax is imposed only when a gain is realized (property is sold). Certain dividends qualify for this treatment as well. | Increase to 28% for those with taxable income above $1 million. | No changes suggested. |
| Capital gain rate on unrealized gains | This tax does not exist. Other than when a transfer takes place (asset is sold, gifted, or bequeathed at death), increases in value are not taxed. | Impose a capital gain tax on unrealized gains upon the individual’s death, for gains above $5 million ($10 million for joint filers). Note: It is unclear, but assumed, that this income tax would be assessed in addition to any separately-computed estate tax imposed at death. | No changes suggested. |
| Medicare taxes | Above certain income levels, an individual’s or trust’s investment income is subject to both the regular tax and a 3.8% surcharge. | Increase the surcharge from 3.8% to 5%. | No changes suggested. |
| Taxation of Social Security benefits received | The taxable portion of a recipient’s SSA benefits depends on that recipient’s overall income (as specifically defined). If overall income is low enough, none of the benefits are taxed. If high enough ($34,000 or $44,000, depending on filing status), 85% of SSA income is taxed. In a small bracket in the middle, 50% of the benefits are taxed. | No changes suggested. | Exclude all SSA benefits from taxation. |
| Tip income | Treated as taxable wages. | Exempt tip income from income taxes, but not from Social Security or Medicare taxes. The exception would apply only to service and hospitality workers earning $75,000 or less. | Treat tip income as nontaxable (at least from income tax; payroll tax unclear). |
| Overtime pay | Treated as taxable wages. | No changes suggested. | Tax-free. |
| Interest paid on personal automobile loans | Other than loans directly related to a business, interest on auto loans is nondeductible. | No changes suggested. | Allow as an itemized or above-the-line deduction. |
| First-time homebuyer credit | This benefit does not currently exist, although a short-lived credit up to $8,000 did exist around 14 years ago. | Allow a credit of $25,000, spread over four years, for first-time homebuyers “who have paid their rent on time for two years.” The benefit may be increased for homebuyers whose parents never owned a home. | No changes suggested. |
| Child tax credit (“CTC”) | A $2,000 per child credit is allowed for parents of children ages 16 and younger, which begins to phase out for filers with incomes exceeding $200,000 ($400,000 for joint filers). | Appears to propose reversion of the credit to earlier terms that recently expired, which, among other characteristics (1) increases the credit to $3,000 or $3,600 depending on the child’s age; (2) allows the entire credit to be “refundable” (not only reducing or eliminating a person’s tax, but creating a sort of negative tax that produces a net refund); and (3) extends the age of eligibility to include 17 year-olds. A new category would be added, creating a credit of $6,000 for newborns. | There appears to be no changes proposed, although V.P. candidate J.D. Vance mentioned an idea (that Trump appears to support) to increase the credit to $5,000. |
| Professions exempt from tax | Pay earned by members of the armed forces while serving in combat zones is exempt from federal income taxation. | No changes suggested. | Donald Trump indicated he would consider exempting military members, veterans, law enforcement, and first responders from taxation. |
| Tariffs on imports | Tariffs are strange animals, because if certain criteria are met, the president can impose this “tax” without the approval of Congress. A tariff is a fee assessed on the importer of goods made outside the U.S., often applying to specific goods or countries of origin. They receive less attention than conventional taxes, but are relatively common, in use now by the Biden administration and essentially all of his predecessors. | No changes suggested. | Tariffs of 10% – 20% proposed on most imported goods from any country, and a rate of 60% for goods coming from China. |
| Taxation of foreign income | The U.S. is one of only two countries that taxes its citizens regardless of where they live, including foreign income earned while living outside of the U.S. Most other countries impose taxes only on those who live there. Although some U.S. tax breaks mitigate it somewhat, U.S. citizens living abroad can be taxed on the same income in both countries. | No changes suggested. | Proposes ending double-taxation, although specifics are unknown. |
| SALT deduction | Beginning with the TCJA in 2017, currently only the first $10,000 of state and local income tax (“SALT”) and real estate tax may reduce federal taxable income as an itemized deduction. Previously it was nearly unlimited, and is scheduled to revert back to unlimited after 2025. | Unknown | Although favoring extension of most of the components of the TCJA legislation that he passed in 2017, Trump appears willing to let the SALT cap expire, reverting to full deduction. |
| Estate/gift tax | The TCJA nearly doubled the lifetime exemption, which is the amount (cash or property value) that a person may give away during life or at death before incurring an estate or gift tax. That exemption (which is indexed for inflation) currently is close to $14 million, but is scheduled to revert to around $7 million when that portion of the TCJA sunsets in 2026. The top rate was not altered by the TCJA, holding steady at 40%. | Specific plans for the exemption are unknown, although Harris’ proposed capital gain tax on unrealized gains at death kicks in at lower gain levels than both the current or scheduled exemption amounts, which relate to overall value. It is unclear whether the proposed unrealized capital gains tax would dovetail somehow with the estate tax or be stacked on top of it. | Generally, Trump wants most of the TCJA features to be extended without expiration, and the increased exemption appears to be one of them. |
For more information, please contact Stanley Rose or your BNN tax advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.