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Tax News and Notes August 2020

Tax laws change so frequently it can be hard to keep up with everything. There have been a number of notable announcements recently so we thought we’d summarize some of the important ones here.

Joe Biden’s Tax Plans

Joe Biden has released a tax policy proposal for his presidential campaign. His plan would increase taxes overall for nearly all individual taxpayers, but most of the increase would hit higher income taxpayers. Here are a few of the major items for individuals:

  1. The top tax rate would revert back to 39.6% from the current 37%.

  2. The social security payroll tax, which currently stops at $137,700 of income, would be reinstated once your income exceeds $400,000.

  3. Capital gains for taxpayers with over $1,000,000 in income would be taxed at the top ordinary tax rate of 39.6%, instead of the current 20% top capital gains tax rate.

  4. The step-up in basis of assets at death would be eliminated, with any unrealized capital gains subject to tax at death.

  5. The tax benefit of itemized deductions would be capped at 28% of value and the Pease limitation on itemized deductions for taxable income above $400k would be restored.

It’s important to keep in mind that even if Biden wins the election, he would still need to get this proposal passed by Congress before it could be put into law. The odds of that happening depend partly on what happens in the Senate during the election. 

If you are a high income taxpayer, you should be thinking about ways you might be able to accelerate income and/or capital gains into this year. It likely makes sense to wait until later in the year to take any action. However, there won’t be much time after the election to take action, especially if the results are drawn out due to the expected high number of mail-in ballots this year.

President Trump’s Tax Plans

Counter to Joe Biden’s proposal to increase taxes, President Trump recently said at a press conference that his administration is “looking very seriously at a capital-gains tax cut, and also an income-tax cut for middle-income families.” This isn’t the first time he has floated the idea of a capital gains tax cut, in fact I covered this proposal two years ago. We don’t know exactly what he meant by the tax cut for middle-income families, and this could just be political posturing before the election.

While it’s unlikely any additional tax relief happens before the election, if President Trump wins reelection we would likely see his administration pursue these additional tax cuts. This makes tax planning in 2020 even more difficult, as a Biden win would likely mean higher taxes and a Trump win would mean lower taxes. The best strategy at this point is to think about what actions, if any, you might want to take before year-end, under either scenario.

Next Stimulus Bill - Heroes VS HEALS

There are currently two stimulus bills being debated in congress, with the Democrats backing the Heroes Act and Republicans backing the HEALS act.  There are a lot of similarities between the two bills, but the two sides remain far apart in negotiations. However, with an election coming up and our economy still struggling due to the pandemic, we expect negotiations to continue and an agreement to be made eventually. Here are some of the provisions included in the two bills:

  • Stimulus Checks - Both bills include another stimulus check of $1,200 for taxpayers who earned less than $75k ($150k for joint filers). 

  • Dependent Stimulus Checks - Both bills also include stimulus checks for dependents, with no age limit this time. The Heroes act would include $1,200 per dependent with a maximum of 3, while the HEALS act would include $500 with no limit.

  • Unemployment Benefits - The Heroes act would continue the additional $600 per week in unemployment benefits, while the HEALS act would initially give an additional $200 per week through September, then match 70% of lost wages.

  • Paycheck Protection Program - Both bills would expand eligibility for this program and eliminate the 75% payroll requirement.

  • Return to Work Bonus - The HEALS act could include a bonus of up to $450 for unemployed workers who secure a new job or are rehired.

Payroll Tax Holiday

Included in a series of executive orders recently signed by President Trump is a “payroll tax holiday”. Under the order, any employee who makes less than $4,000 before taxes per bi-weekly pay period is eligible for a deferral of payroll taxes from September 1st through December 31, 2020. While this is just a deferral of payroll taxes, President Trump has indicated he will work to make this a permanent cut if he is reelected in November.

We don’t currently have any guidance from the Treasury on how exactly this will be implemented, but the order says employers should stop withholding the employee portion of payroll taxes starting in September. There is also no clarity on how the taxes will then be paid back when the deferral ends on December 31st.  In addition to the logistical challenges of this order, it could face legal challenges as well. This Bloomberg article covers the many reasons the Treasury needs to issue further guidance on this so stay tuned...

RMD Rollover Reminder

While many of the above items are lacking clarity, this one is quite clear. If you already took your required minimum distribution for the year, but would like to put it back into your retirement account, you have until August 31st to do so. The CARES Act eliminated required minimum distributions for 2020 and in June the IRS announced relief for those individuals who took their RMD’s prior to the CARES Act. If you don't need the cash from the distribution, it might make sense to lower your tax bill by putting that money back in your retirement account.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.