With less than a month to go before the election it appears we are headed for another Presidential photo finish, this time between Vice President Harris and former President Donald Trump. We also have elections to see who will control the Senate as well as the House of Representatives. In any Presidential election year, tax proposals from both candidates are extremely important. With the Sunsetting of former President Trump’s 2017 Tax Cuts and Jobs Act (TCJA) at the end of 2025, future tax policy is even more cloudy than usual for an election cycle. Sections of the TCJA that expire at the end of 2025 include lower individual income tax rates, the $10,000 cap on the state and local tax (SALT) deduction, a higher standard deduction, and increased estate tax exclusion. We explored this topic in detail in last quarter’s Financial Planning article.
It is important to note at the beginning of this conversation that Congress must write the tax law. The Presidential candidate’s proposal is only a starting point for next year’s tax debate. Let’s examine both candidates on a variety of critical tax issues for voters.
Individual Income Tax Rates
The TCJA has seven individual income tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. If the Tax Cuts and Job Act expires, they will revert back to: 10%, 15%, 25%, 28%, 33%, 35% and the highest marginal checks in at 39.6%.
Trump would like to make permanent the individual tax cuts from the TCJA 2017 bill he signed into law.
Harris would like to lower the entry point to the top bracket to annual incomes of $400,000 for individuals and $450,000 for couples back to the pre-TCJA highest rate of 39.6%.
If higher individual tax rates do come to fruition in 2026 we will see many taxpayers accelerate some income in 2025.
Social Security Taxes
Currently up to 85% of Social Security benefits can be taxed for a single person with income over $34,000 or a couple with combined income above $44,000. The income tax on Social Security benefits hit 50% of recipients in 2023, up from 10% in 1983 when Congress passed the tax according to the Social Security Administration.
Trump has floated the idea of eliminating all taxes on Social Security benefits at a cost of $1.5 Trillion over the next decade.
Harris has supported Biden Administration proposals to subject those making more than $400,000 in earnings to Social Security taxes to help with the Social Security Trust fund. Under current law, the Social Security Payroll tax is capped at $168,600 for wages and self-employment income. Social Security is projected to lack funds to pay all of its obligations in less than a decade, triggering automatic benefit cuts unless Congress intervenes.
Capital Gains Taxes
The current top long-term capital gains rate (investments held for more than a year) is 20%. Harris’ suggestion is to raise the highest long-term capital gain rate to 28% for those who make more than $1 Million per year.
Her tax plan also includes an increase of the net investment income tax (NIIT) to 5% for those making over $400,000 per year. The net investment income tax is a 3.8% additional tax on certain net investment income when you have a modified gross adjusted income of $200,000 for a single filer or $250,000 married filing jointly. You will notice that many of her tax proposals are aimed at those making over $400,000 per year, which mimics the Biden Administration’s Build Back Better Bill. For those with incomes above $1 Million, it is a combined all-in top rate of 33% that Harris is calling for, with 28% for capital gains plus 5% for NIIT.
Harris has also endorsed a “Billionaire’s tax,” which would impose a minimum tax rate on those with more than $100 Million in assets. It would require taxing unrealized capital gains. Our Washington insiders believe there is very little chance that any of Harris’ capital gains proposals would pass, even with a Democratic sweep in November.
Trump has offered no changes to capital gains tax rates.
State and Local Income Tax (SALT)
The Tax Cuts and Jobs Act limited the deduction for State and Local Income Taxes to $10,000 per return. Married couples do not get to double the deduction to $20,000. It is $10,000 per return. Many taxpayers pay significantly more than this with high real estate and personal property taxes in states like California, New York, and New Jersey.
Trump has recently said he would restore the SALT deduction without a cap even though it was his TCJA of 2017 that placed the $10,000 SALT cap into law. Harris plans to keep the cap in place. If the TCJA sunsets, the SALT cap expires and the standard deduction is halved, more taxpayers would shift back to itemizing their deductions in tax year 2026.
Corporate Taxes
The TCJA of 2017 cut tax rates for corporate income tax from a top rate of 35% to 21%. These tax cuts do not sunset like many other of the provisions. Trump would like to cut corporate taxes again, this time to 20%. Under his proposal, companies could potentially receive a 15% tax rate if they manufacture their products in the US.
Harris would like to raise corporate taxes from 21% to 28%. Her other corporate tax proposals include raising the corporate alternative minimum tax rate from 15% to 21% and increasing the stock buyback excise tax from the current 1% to 4%.
To level the playing field between the taxation of C corporation income taxed under the new law at 21%, the Tax Cuts and Jobs Act introduced Section 199A pass-through business deduction. The Qualified Business Income (QBI) allows a taxpayer to obtain a 20% deduction against QBI pass-through business income. The maximum deduction cannot exceed 20% of the owner’s taxable income, less capital gains and dividends. Trump would like to make the Section 199A from the TCJA pass-through business deduction permanent. Harris has suggested making the TCJA provisions permanent only to the extent that those earning less than $400,000 see no tax increase. She has not made a specific proposal for Section 199A.
Limitations on Like-Kind Exchanges
Harris has discussed limiting 1031 Like-Kind Exchanges to $500,000 in gains for individuals, or $1 Million for married individuals filing jointly. Section 1031 of the Internal Revenue Code (IRC) exempts an investor from making a tax payment on a gain if the proceeds from the sale of the property are reinvested in a similar property within 180 days of the sale. You are deferring taxes on a 1031 exchange, not eliminating them.
No Taxes on Tips
Trump suggested during a June campaign stop in Vegas “No taxes on tips.” This would exclude tips from both income tax and payroll tax. Harris has also offered up a proposal for no taxes for service and hospitality worker tips from income, but not payroll taxes.
Focus on Your Plan!
There will be more clarity on tax proposals by January 2025 when we have a new President sworn in. There is a myriad of potential outcomes given how the Presidential, Senate, and House of Representative elections break. We could have a potential sweep by either party or have a divided government with the Tax Cut and Job Act Sunsetting if Congress can’t comprise. I want to highlight this point: if Congress does nothing the TCJA sunsets. Having discussions now about potential financial planning and tax strategies will help us prepare for whatever comes out of Washington DC next year. Contact the Bedell Frazier Financial Planning department today.
Thomas Howard
