Below is the usual weekly summation, the main positives being that stimulus talks continue and jobless claims fell. As usual, the main negative is the continuing rapid spikes in COVID cases, particularly in rural areas. The bonus this Sunday night is a very good article from this week's Barron's explaining in detail the similarities and differences between the two candidates' tax plans. Hope everyone got through the chilly and wet weekend.
Succinct Summation of Week’s Events 10.23.20
Succinct Summations for the week ending October 23rd, 2020
Positives:
1. Markets find their footing as stimulus talks continue;
2. Jobless claims fell 55k w/o/w from 842k to 787k.
3. Housing market index stands at 85 for October, above expectations.
4. Existing home sales came in at 6.540M in September, above expectations.
5. PMI Composite stands at 55.5 for October, above expectations.
Negatives:
1. National infection Covid-19 rate is spiking, especially in rural areas.
2. Home mortgage apps fell 2.0% w/o/w, the fourth straight weekly decline.
3. Housing starts came in at 1.415M for September, below expectations.
4. Index of leading indicators rose 0.7% m/o/m, previous increase.
10-25-20 Trump’s Tax Plan vs. Biden’s Tax Policy: How Much You Would Pay Under Each | Barron's
Here’s
How Much You Would Pay Under Biden’s and Trump’s Tax Plans
By Karen Hube
Updated Oct. 23, 2020 7:24 pm ET /
Original Oct. 23, 2020 4:40 pm ET
Tax policy is taking
center stage in the final days before the U.S. presidential election. A lot
gets accomplished—or partially accomplished, or at least attempted—through the
tax code; this year, the two presidential candidates are claiming it as a tool
to lift the nation out of its deep and lingering economic slump.
Their ideas are, not
surprisingly, starkly different: Former Vice President Joe Biden has a detailed
plan to raise taxes on corporations and the top 1% of individual earners, and
to provide a host of clearly outlined tax breaks to moderate- and lower-income
families to ease the financial straits brought on by the pandemic and
incentivize spending to help recharge the economy.
·
How Their Plans Would Help—and Hurt—the Economy
In contrast, President
Donald Trump argues that any tax increase for the wealthy would be ruinous to
the economy. He says that he wants to keep the lower taxes enacted in 2017 in
the Tax Cuts and Jobs Act, or TCJA—which expires at the end of 2025—and pass even
more tax cuts, but he hasn’t released details.
Here’s how each
candidate’s tax policy would affect different segments of the population.
Top Earners
Biden plans to raise
the top marginal individual income-tax rate from 37% to 39.6%, which was the
top rate until the TCJA went into effect in 2018. Biden would essentially
accelerate the expiration of the 37% rate—which applies to taxable income of
more than $518,400 for individuals and $622,050 for married couples. All other
brackets would remain at today’s levels: 35%, 32%, 24% 22%, 12%, and 10%. These
rates are applied to taxable income, the amount after all deductions
have been taken.
Top earners would also
get pinched with a new Social Security tax, which, when combined with the
Medicare tax, is referred to as the payroll tax. Currently, the 12.4% Social
Security tax is applied to up to $137,700 of income. Salaried employees split
the tax with their employers, paying 6.2% each. The employees’ share is
deducted from their paychecks. Selfemployed workers pay the entire amount.
Under the Biden plan, the payroll tax would also apply to income over $400,000,
creating a donut hole in the policy: Income from $137,700 to $400,000 wouldn’t
be subject to the levy.
Biden would also trim
deductions for people with income of more than $400,000 in several ways.
His plan imposes a 28%
cap on the value of itemized deductions. So, in the top tax bracket, every
deductible dollar would be reduced by 28%, instead of 39.6%.
It also reinstates a
phase-out of deductions referred to as the Pease Limitation for top earners,
which effectively reduces deductions on every dollar by three cents.
Finally, owners of
pass-through entities such as S corporations or partnerships with income of
more than $400,000 would lose a 20% deduction enacted under the TCJA.
Trump’s plan for top
earners is to extend the provisions under the TCJA beyond their scheduled
expiration, maintaining the top tax rate at 37% and the 20% deduction for
pass-through owners.
According to an analysis by The
Tax Foundation, under Biden’s plan the nation’s top 1% of earners
would see their annual after-tax income decrease by 11.3%; the next 4% of top
earners would see after-tax income drop by 1.3%. Under Trump, by leaving the
TCJA as is, the top 20% of earners would see a 2.4% increase in after-tax
income.
Middle-Income Folks
Biden released his
initial tax plan in April, but has updated it to address the financial
hardships related to this year’s economic contraction. He proposes a long list
of new or enhanced tax credits. Among them:
• A temporary increase
(which would expire after the economy recovers) in the child tax credit from a
nonrefundable $2,000 per child up to age 16 to a refundable $3,600 per kid up
to age 6 and $3,000 for kids up to age 17. A refundable credit is paid as a
refund, even if the person doesn’t owe taxes.
• An increase in the
value of the child and dependent care tax credit from a maximum nonrefundable
$2,100 for two or more children, to a maximum refundable $8,000.
• A $5,000 credit for
informal caregivers.
• A $15,000 credit for
first-time home buyers, and a credit to ensure that rent and utility bills
don’t exceed 30% of monthly income.
• Expanding
eligibility of the Earned Income Tax Credit to childless workers over age 65.
Currently, the credit isn’t available to these taxpayers.
There is no
intentional tax increase for folks earning less than $400,000 in Biden’s plan,
but it is still a work in progress, says Garrett Watson, senior policy analyst
at The Tax Foundation, a nonpartisan think tank. “All of Biden’s proposals try
to avoid a higher tax bill for taxpayers earning less than $400,000,” Watson
observes. “If there are places where they result in a higher tax bill, they’ve
said they’ll fix that.”
Read
the sidebar: The Economy Is Slumping. Here’s How Trump’s and Biden’s Tax Plans Would
Help — and Hurt.
As for Trump, he plans
to extend the current law and has said he wants to cut taxes on the middle
class, but hasn’t disclosed specifics. He has also vowed to push through
permanent cuts to the payroll tax, which is used to fund Social Security and
Medicare.
In August, the
president issued an executive memorandum to allow employers to defer payroll
taxes for anyone earning less than $4,000 biweekly for the rest of 2020.
However, few companies and employers are taking advantage of the temporary
measure, citing administrative complications.
According to the Tax
Foundation’s analysis, Biden’s plan would increase after-tax income for the
bottom 20% of earners by 10.8% through 2025; the next quintile would see a 3.6%
bump.
Under the TCJA, the
bottom 20% of earners are likely to see less than a 1% increase in after-tax
income, and the next quintile, an increase of 1% to 1.5%.
Investors
Under Biden’s plan,
investment profits that exceed $1 million would be taxed at regular income-tax
rates of up to 39.6%, rather than the current highest capital-gains tax rate of
20%. For gains below $1 million, the current long-term rate—for investments
held for more than one year—would still apply.
Biden’s plan keeps the
capital-gains tax rate the same for the bottom 99% of earners: Married couples
who have taxable income of less than $80,000 won’t owe any capital-gains tax;
when taxable income is more than $80,000 but less than $496,600, a 15% tax
applies to gains. Couples with income between $496,600 and $1 million would pay
a 20% tax.
Trump says that he
wants to cut capital-gains taxes. While he hasn’t issued any details,
capital-gains tax cuts generally disproportionately favor wealthier folks,
because they are far more likely to have money in regular, taxable brokerage
accounts, and more money in them. Money held in individual retirement accounts,
401(k)s, and other tax-deferred plans are never subject to capital-gains taxes;
investors generally don’t pay income tax on the contributions, gains grow
tax-free, and money withdrawn is taxed at ordinary income-tax rates.
Benefactors and Heirs
Most of Biden’s plan
is aimed at taxing the wealthy more, and reducing taxes for people earning less
than $400,000 a year and who don’t regularly incur millions in capital gains.
Much of his proposal is based on repealing the TCJA, and working from there.
The same is true of his approach to the estate tax, but his approach to how
assets are passed on after death is perhaps the most controversial, and least
detailed, part of his plan.
The TCJA doubled the
$5.49 million per person estate-tax exemption and adjusted it for inflation;
now, any individual can leave an estate up to $11.58 million without incurring
the estate tax. The figure is $23.16 million per couple. Biden plans to return
the exemption to its 2009 level of $3.5 million per person, and raise the
estate tax rate to 45% from 40%.
Estate tax is paid by
the estate itself, before the assets are divvied up and given to the heirs.
Typically, heirs don’t owe any tax on property they inherit, even if they sell
it right away.
Here’s where things
get a little surprising, and light on specifics: Biden’s plan would also
eliminate the step-up in cost basis at death. Under current law, the cost
basis, or purchase price, of assets is reset to the current market value at the
owner’s death. Heirs may inherit an asset with massive embedded capital gains,
but that capital-gains clock is reset to zero on the date of death, and tax is
owed only on appreciation after that. For instance, if you inherit the home
your parents bought for $50,000 and, at their death, was worth $800,000, your
cost basis would be “stepped up” to $800,000. If you sold it right away, you
would not owe any tax.
Biden’s plan changes
that and raises a host of concerns and confusion. “Some in the industry are
calling this a stealth estate tax, or a double tax,” says Ali Hutchinson,
managing director at Brown Brothers Harriman. That’s because the levy is
assessed based on the estate’s fair market value. Example: An estate of $6
million would owe estate tax on about $500,000—the $6 million minus the
proposed $5.49 million exemption—before it is distributed to the heirs. They
would inherit the property with the original cost basis, so, whenever they
sold, they’d owe capital-gains tax on the profit off the original purchase price.
In other words, the same assets would be taxed twice.
It is unclear in the
language of Biden’s plan if capital-gains taxes would be owed upon death of
their owner, regardless of whether the assets were sold, or if the taxes would
be triggered when heirs sell the assets.
“This change would be
a very big deal. It would change the way people manage portfolios,” Hutchinson
says. “We have people going through crazy contortions to not realize gains
toward the end of their lives—hedging strategies, borrowing. This could turn
planning on its head.”
Clay Stevens, director
of strategic planning at Aspiriant, doubts that the step-up will be eliminated.
“They tried to get rid of it in the early 1980s, but realized it was an
administrative nightmare,” he says. For taxpayers, finding the cost basis for
all inherited assets is one problem. And for the Internal Revenue Service, “the
assumption is the cost basis is zero, unless it can be proved otherwise.”
Typically, tax laws
take effect in the calendar year after they are passed, so, if Biden is
elected, it’s possible that new rules could be enacted in 2022—though there
certainly will be some adjustments made from here.
Email: editors@barrons.com
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