Election 2020: How Do the Candidates’ Tax Plans Compare?

With the 2020 U.S. presidential elections now just weeks away, investors may be wondering how the tax plans of the two main candidates compare—and what, if anything, they should do to get ahead of any potential changes to tax law.

Before digging into the tax proposals on offer from President Donald Trump and former Vice President Joe Biden, let’s address the latter question first: We don’t recommend making changes to tax and financial plans in response to campaign proposals.

“The outcome of the election is far from settled, and the future course of any changes to tax law remains highly uncertain,” says Michael Townsend, Schwab’s vice president of legislative and regulatory affairs. “The president and next Congress won’t be sworn in until January, and it will take time for any new tax proposals to gather support.”

However, it’s also worth noting that by historical standards, taxes are currently quite low, and so we do recommend that investors consider revisiting their financial plans and talking with their tax advisors to make sure they are investing and saving as tax-efficiently as possible, says Hayden Adams, CPA, director of tax and financial planning at the Schwab Center for Financial Research.

“For high-income earners, in particular, it can be helpful to think about how a potential future increase in taxes could affect their finances, just as part of their normal financial housekeeping,” he adds.

With that in mind, let’s look at how the candidates’ proposals stack up:

Trump’s plans

As you might expect, a second term for Trump probably wouldn’t mean major changes to tax law following his signing of the 2017 Tax Cuts and Jobs Act (TCJA) earlier in his presidency. That law, which lowered tax rates and doubled the standard deduction, among other adjustments, should be familiar by now.

Trump’s second-term agenda calls for making much of the TCJA’s features permanent, instead of letting them expire in 2025, per current law. Trump has also indicated interest in cutting taxes even further for both individuals (specifically, for middle-income households) and businesses. However, these proposals are light on detail at this point.

Biden’s plans

A Biden win would likely mean more significant changes could be on the table. In general, most households wouldn’t see major changes under the policy plans announced so far. However, higher-income households could see their taxes rise if a Biden administration got all of its proposals written into law.  

Here are some of his major proposals, as well as some strategies investors could consider if they were concerned taxes could rise in the future—no matter the cause:

Tax proposal Potential strategies for investors who believe taxes may be higher in the future:
Raising the top marginal tax rate to 39.6% from 37% now for income over $400,000.
  • If you can afford to defer any investment losses or deductions to future tax years, it could make sense to do so if you believe you could be in a higher tax bracket in the future.
  • Given our historically low taxes, it could also make sense to initiate a Roth conversion if that is part of your strategy for generating tax-advantaged income in the future.
Taxing capital gains and qualified dividends for incomes over $1 million at the higher 39.6% ordinary income tax rate.
  • If you have investment gains you’d like to tap and can take advantage of lower capital gains rates, then it could make sense to do so while tax rates are low.
  • If you can afford to defer any investment losses or deductions to future tax years, it could make sense to do so if you believe you could be in a higher tax bracket in the future.
Capping itemized deductions at 28% of income.
  • If this change were to become law, investors could consider moving up planned deductions if they thought the proposed income limit would lead to the loss of that deduction in the future.
Increasing tax credits for middle- to low-income households.
  • These tax credits would have income limitations, and there would be little higher-income households could do to qualify for them.
Collecting additional payroll taxes for Social Security after $400,000 of income.
  • If this were to become law, there is little high-earners could do to avoid it, beyond looking for ways to reduce their regular taxable income.
  • Owners of pass-through businesses (such as LLCs and partnerships) could talk with their tax advisor and lawyer about restructuring as an S-corporation if they were concerned about Social Security taxes.
Lowering the federal estate tax exemption by 50% or more and eliminating the “stepped-up” basis on transfers of appreciated property at death. Under current law, when an investor leaves an asset to an heir, the value of the investment resets to the market value at the time of death, effectively erasing any taxable gains earned since the original purchase. 
  • Without knowing what the future holds and if your financial situation permits, you could consider making gifts this year to lock in the historically high estate tax exemption of $11.58 million.
Changing the tax deduction for 401(k) contributions to a tax credit (this has been discussed, but there are no formal proposals).
  • For this year, continue making normal contributions to 401(k)s.
  • Depending on your current tax bracket and expectations for future tax rates, consider contributions to a Roth 401(k).

Increasing the corporate tax rate to a flat 28% from 21% now, and creating a minimum corporate tax of 15% of companies’ book income if they don’t any report taxable income.

  • Investors should review their portfolios and ensure they are properly diversified to help mitigate any negative impact from reduced corporate profits due to potentially higher taxes in the future.

 

Again, this is just a snapshot of Biden’s proposals now. The road between proposal and law can be a long one, and these may never become law.

Moreover, Biden’s tax proposals likely won’t have a chance if Congress remains divided as it is now, with Republicans controlling the Senate and Democrats having the majority in the House of Representatives. And even if Democrats were to win control of the White House and both chambers of Congress in 2021, the party isn’t uniformly in favor of all of Biden’s proposals.

“Any bills that come together would have to pass Congress with majority support and be signed into law by the president,” Michael says. “Even if Democrats controlled everything, it’s far from certain these particular ideas could win unanimous support within the party. Considerable negotiations would be needed to reach consensus and these proposals would in all likelihood change significantly.”

But it’s always worthwhile to make sure your tax planning accounts for your current financial situation, as well as your expectations for the future.

What to do now

We think it’s generally a good idea to avoid getting distracted by election-season proposals—there’s a reason we say “Ignore the Noise” as part of our Investing Principles—and instead stay focused on maintaining a diverse portfolio allocation guided by a wealth management plan. If you have particular concerns, then take this time to talk them over with an advisor. And if you don’t have a financial plan, then we strongly suggest you create one.

 

About the author

Schwab Center for Financial Research