With the election looming soon, we thought it is a good time to look at the current tax laws versus both Republican and Democratic proposed tax law changes. In December 2017, The Tax Cuts and Jobs Act (TCJA) was passed. This act temporarily changed several tax laws and is set to expire in 2025.
Tax brackets were expanded, with the highest tax bracket dropping from 39.6% to 37%. The Democratic tax proposal would raise the highest tax bracket back to 39.6%. The Republican tax proposal would keep the current highest tax bracket at 37% and make the TCJA brackets permanent.
Capital gains tax rates are currently capped at 0, 15, or 20%, depending on your ordinary income. The Republican tax proposal would keep the current structure in place. Currently, the 20% rate applies to individuals with taxable income greater than $441,500. The Democratic tax proposal would eliminate the 20% tax rate on long-term capital gains and apply ordinary income tax rates for individuals with taxable income over $1,000,000.
TCJA doubled the standard deduction amount. It limited mortgage interest itemized deduction and real estate, state, and local taxes paid (SALT) to $10,000. Mortgage and home equity loan interest is limited. TCJA also eliminated theft and personal casualty losses, tax preparation fees, and unreimbursed employee expenses. Many of you experienced the change from itemizing to taking the standard deduction due to these limitations, significantly increasing the amount of taxes being paid for some.
The Democratic proposal would eliminate the cap of $10,000 on SALT tax deductions. The Democratic proposal would cap itemized deductions for single and married couples filing joint with tax brackets over 28%. The amount of itemized deductions would gradually be lowered based on your tax bracket. Anyone under 28% would not have a cap on itemized deductions. They are also recommending reinstatement of mortgage interest deduction up to $1,000,000. The Republican tax proposal would keep the existing structure in place with SALT cap and mortgage interest limited to $750,000.
Currently, anyone who inherits non-retirement accounts receives a full step-up in basis. Consider if you inherited stocks that were purchased 30 years ago for $3.00 per share. If, when the owner of the account passes away, the shares were worth $300.00 each, your basis is now $300.00 per share. If you were to inherit the stock and immediately sell the stock, you would have little to no gain to pay taxes on.
If you did not have a step-up in basis, your basis would be $3.00 per share. If you were to sell the shares after immediately inheriting them, you would have a profit that tax needed to be paid on. In our example, you would pay taxes on $297 a share, the difference between the $300 and $3. The Democratic proposal would repeal the step-up in basis. Any inherited basis would be the basis the original owner paid. The Republican proposal wants to make the step-up in basis permanent.
Social Security payroll tax is currently 6.2% on employee wages up to $137,700. The Republican proposal keeps the current 6.2% on wages up to $137,700. The Democratic proposal would add an additional 12.4% Social Security payroll tax for taxpayers with earned income greater than $400,000. Under their proposal, no Social Security taxes will be paid on earned income between $137,701 and $400,000.
The Democratic tax proposal has not commented on the estate tax exemption. The current estate tax exemption amount is $11,580,000 per individual. The Republican proposal would keep the current exemption amount in place, indexed for inflation.
Corporations, partnerships, LLCs, and other business entities may also be impacted. TCJA instituted a 20% reduction on the amount of net profit that a small business had to pay taxes on, known as QBI. The Republican proposal is seeking to permanently maintain the 20% deduction for small businesses. The Democratic proposal would phase out that 20% deduction for small business owners with taxable income greater than $400,000.
The Republican proposal would keep the corporate tax rate at the current rate of 21%. The Democratic proposal would raise the corporate income tax rate from 21% to 28%. Their proposal calls for a minimum income tax on corporations with book profits of $100 million or higher. The Republican proposal does not create a minimum corporate income tax.
There are proposed changes in both parties’ platforms that will impact your tax liability, both negatively and positively. The consideration of taxes is only one area to consider in your voting choice. Everyone has their own opinions and political beliefs. We only ask before you vote on November 3rd, whether in person or by mail in vote, take the time to do your research and understand the impact your vote can have on your future taxes. If you are not registered to vote, please register and make your voice count!