October 15, 2020 – New York, United States
Encyclopedia Brown, the Election, and Taxes
There’s a wonderfully imaginative series of children’s books for “tweens” called Encyclopedia Brown. In the series, a young sleuth solves mysteries occurring in his home town with the help of the reader. That is, in the middle of every story, there is a choice to be made by the reader to choose one of two outcomes. If you choose outcome A, then Encyclopedia Brown solves the mystery. If you choose outcome B, Brown does not solve the mystery immediately. Instead, the reader has to make further choices to come to the correct solution. In a similar vein, voters in the next presidential election will have two choices to make as to this country’s next leader. If we choose candidate A, there will be one set of outcomes, which will be the predictable extension of a legacy. If we choose Candidate B, there will be another series of outcomes that may propel the country on a new course for the future.
The future of tax policy is also dependent on the choices Americans will make in November. One outcome will result in taxes being unsurprisingly attuned with some variation to maintain its present trajectory perpetuating an already recognized fiscal policy. Alternatively, the US will be faced with an entirely different set of tax rules and regulations, which will reflect the establishment of a new fiscal policy. In any event, whomever sits in the Oval Office comes January, innovations of tax policy will be a response to the ailing economy, a consequence of the Covid-19 pandemic.
President Trump has touted his achievements in his campaign focusing on, among other accomplishments, the 2017 tax law changes. The Tax Cuts and Jobs Act lowered the taxes on businesses and individuals. Trump has attributed this monument of legislation to the economic growth seen in 2018 and 2019 and the simultaneous drop in the unemployment rate from 4.1% to 3.5% during those pre-Covid 19 years. With this successful run behind him, the President has been making campaign promises to cut taxes even more during his second term if elected. This is a promise being made in spite of the impact the pandemic has had on the national economy.
Former Vice-President Biden has said he will continue the tax cuts that have been so favorable to America’s middle class. However, his contention is that in spite of the boost the new tax legislation has had on middle income Americans, it has also created an economic boon for wealthier Americans who did not need it. As such, there would be a sharp increase in taxes on corporations in addition to those families wherein earnings and income exceed $400,000 a year. Biden’s ultimate goal in implementing such a plan is to finance education, health care, and other social programs for the next decade. The issue with Biden’s plan is the tax revenue has a significant shortfall in that it will not meet the goal of raising the $3 to $4 trillion necessary for financing these programs. To compensate for such a shortfall, Biden would at least in the short-term expand America’s budget deficit as a means to economic stimulation.
The tax policies espoused by either one of the two candidates have their positive and negative effects on the economy in theory. However, in practice, such tax measures will be ineffective without a full control of congress. A Republican president and congress will translate into further tax cuts, whilst a Democratic president and congress would bring an increase in taxes. In any event, both candidates have laid out a tax blueprint with a vision that such approaches to the Tax Code will ultimately be implemented. Both plans address corporate, individual, and estate taxes.
The president is of the firm belief that his corporate tax cut from 35% to 21%, the greater flexibility to deduct capital-investment costs, and the bringing home of foreign profits all acted together to boost the economy. Therefore, he has proposed to keep the tax cut at its current 21% rate. Conversely, Biden, like many Democrats, is not in support of the tax cut stating that it is too steep. His proposal is to raise the tax to 28%, introduce a new minimum tax an US companies, and raise taxes on the foreign income of US multinationals. In response to the ailing economy, both candidates are in agreement that tax policy needs to incentivize manufacturing domestically.
In addressing the issue of foreign taxes, Biden has proposed a measure with three separate components. He has recommended the levy of an additional surtax of 10% on the profits earned on manufactured goods produced overseas. Further, he has proposed that the profits earned on services provided at call centers abroad be taxed as well. The surtax is applicable if the goods and services overseas are sold back to the US. In the end, between the 28% corporate tax and this 10% surtax, corporations with operations overseas will pay 38% in taxes. Conversely, as part of the Made in America program, Biden wants companies to have a 10% advanceable credit on a broad range of investments that are designed to create manufacturing jobs in the US. Lastly, Biden’s plan would tighten the enforcement of taxing US companies that are taking advantage of tax loopholes to shield their foreign derived profits from taxation.
Trump’s position on international taxation of US corporations aligns with the general premise that manufacturing and profits derived overseas need to be repatriated to the US. His proposals are not as descript as Biden’s. However, he has stated that he will punish American companies that export jobs overseas. Further, he would reward firms via tax credits to repatriate work from China to the US in an effort to decouple the world’s two largest economies.
Individual taxation in its current state has a top marginal tax rate of 37% for income over $518,400 for individuals and $622,050 for married couples filing jointly. The current individual income tax rates are scheduled to end in 2025 when the tax rates will revert to pre-TCJA levels. Trump wants to extend the cuts beyond 2025 and at the same time enact a 10% middle-class tax cut lowering the 22% marginal tax rate to 15%. The 22% marginal tax rate in 2020 applies to income over $40,125 for individuals and $80,250 for married couples filing jointly. Biden has proposed a tax on wealthier individuals and married couples by raising the top marginal tax rate to 39.6% for those with incomes over $400,000. In relation to capital gains taxes, Trump has put forth the idea of a tax rate cut from the highest rate of 23.8% to either 15% or 18.8%. On the other hand, Biden has recommended a top capital gains rate of 39.6% for those earning over $1 million.
As far as deductions and credits, Trump would like to extend the higher basic standard deduction that was introduced with the passage of the 2017 act. Biden would like to repeal the 20% deduction for income from pass-through businesses as it applies to high income households and impose new limits on itemized deductions. Simultaneously, he has suggested that some tax cuts are in order. For example, he would repeal the $10,000 cap on the state and local tax deduction, a measure that hurt a lot of taxpayers in states with high tax rates like in the New York metropolitan area. He has also offered targeted tax credits for middle-income households, tax cut measures that would incentivize people to save more for retirement, and increased credits for child care and first-time home purchases.
Trump, under executive order this past August, placed a moratorium on payroll taxes to be deferred until next year. This measure was in order to assist businesses from having to shell out their required portion for FICA during the pandemic and ensuing economic crisis. Under his new tax plan, he would request that Congress forgive any payroll taxes in deferment status. In a likewise effort to address payroll taxes and ramp up the Social Security system, Biden has proposed that income earners of $400,000 or more would pay the full 12.4% Social Security tax. Under current law, the tax is applied to the first $137,000 of income. In essence, the passage of such regulation would create a donut hole of sorts such that any income between $137,000 and $400,000 would not be subject to the tax.
Some of the more drastic changes proposed by Biden affect estate and gift taxes. This is an area that has become less relevant for many people since the thresholds for tax liability have been driven higher with the TCJA. Included within the TCJA was a sunset provision that would revert estate and gift tax changes to pre-TCJA levels. Trump has made his position clear on this point that the current exemption amount would extend well beyond 2025, which is the sunset year. Biden is suggesting that an elimination of the step-up in cost basis upon death for inherited assets would create increased revenue. This consequently compensates for reduced revenue resulting from the higher tax exemptions on estates. In furtherance of this measure, unrealized gains on securities would be taxed at death to discourage people from holding on to assets for tax reasons.
Each and every voter this election year is stepping into the shoes of Encyclopedia Brown. Upon casting our votes, each one of us is motivated to choose a candidate that will create the best possible outcome for the future. Some pick a candidate because they are in agreement with their foreign policies, others elect candidates based on their stance on domestic policy and yet some will only consider the tax consequence of choosing one candidate over another. As a country we can only hope that whatever the choice, the outcome will be favorable on all fronts including taxes. All being well, we will not then be lead on a detoured pathway only to discover in the end that we made the wrong choice.
 10- to 12-year-olds, but these days, children as young as 7 or 8.
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.