This has been one of the most unsettling years on record for most Americans. The coronavirus disease 2019 (COVID-19) pandemic has completely upended societal norms, cost the lives of more than 186,000 Americans, and displaced more than 20 million workers.
It's also an election year. In just 58 days, Americans will head to their local voting booths or mail in their ballots to determine the path the U.S. will take over the coming four years -- and that all starts with the presidency.
President Trump eyes big tax changes if he wins a second term
Though incumbent Republican Donald Trump has been trailing in most polls over the past couple of months, he was in this position leading up to the 2016 election and still won. With the policy proposals of both Democrat Joe Biden and Trump coming into greater focus, it pays to understand how these plans could impact you and your wallet.
Having already examined the many ways former Vice President Joe Biden would change America's tax policy, let's now take a closer look at the five tax changes Donald Trump wants to make if reelected for a second term.
Before diving in, keep in mind that the Tax Cuts and Jobs Act is Trump's hallmark piece of legislation. The TCJA enacted the broadest overhaul of the U.S. tax code in more than three decades, with an emphasis on reducing individual and corporate tax liability in order to drive economic growth. Peak corporate marginal tax rates were lowered from 35% to 21%, and most individuals saw a decrease in their effective tax rate as standard deductions doubled.
Trump's tax plan for a second term revolves around another round of tax cuts, as well as a focus on tax credits that would reward companies for hiring and manufacturing in the United States.
1. Defer or halt payroll tax collection
The first tax change in Trump's arsenal is something he's currently attempting to unilaterally implement: a payroll tax deferral.
The payroll tax, which applies to earned income (wages and salary, but not investment income), is the primary revenue generator for Social Security and Medicare. Last year, the 12.4% payroll tax on earned income up to $132,900 brought in $944.5 billion of the $1.06 trillion that Social Security collected.
Trump's very near-term plan, which was issued via executive order, is deferring payroll tax collection. Trump is trying to boost the paychecks of working Americans throughout the remainder of 2020, but these workers will have to make up the deferred tax in 2021.
The president has also pushed for a payroll tax holiday of varying lengths, or possibly even permanent elimination. With a payroll tax holiday, workers' paychecks would increase, and they wouldn't be on the hook to repay. The downside of either the holiday or full elimination is that Social Security and Medicare, which are both already on thin ice financially, would find themselves in an even deeper hole.
2. Cut the top-end capital gains tax and/or index capital gains
President Trump has floated the idea of reducing the capital gains tax for high earners, as well as possibly indexing capital gains to inflation.
As it stands today, short-term capital gains for an asset held for 365 or fewer days default to ordinary federal rates, whereas long-term capital gains tax rates fall into one of the three following categories for single filers in the 2020 tax year:
- 0% for $0 to $40,000 in taxable income
- 15% for $40,001 to $441,450 in taxable income
- 20% for $441,451 or more in taxable income
With Trump's proposal, the upper bracket (20%) would fall to 15%, which the president and his team surmise will encourage economic growth.
Further, Trump and his advisors have tinkered with the idea of indexing long-term capital gains to inflation. For instance, if you invested $2,000 in a stock in 2010 and then sell it for $4,000 in 2020, and inflation has increased by 25% over the past decade, your cost basis of $2,000 would also rise by 25% to $2,500. Instead of paying capital gains on the $2,000 gain, you'd owe capital gains tax on the indexed difference, which in this case is $1,500.
3. A reduction in taxes on the middle class
Donald Trump would also like to see middle-income Americans receive a second round of income tax breaks.
As previously noted, the TCJA reduced the effective tax rate for select brackets and widened the amount of income applicable to a marginal tax bracket in certain instances. While not every middle-income individual or family benefited due to the simplification of the tax code and the removal of certain credits and deductions, the vast majority saw a modest reduction in their federal tax liability.
In mid-February, the president suggested that he'd like to pass along a roughly 10% tax cut to middle-income Americans. The president and his team didn't outline any specific taxable income levels at which this reduction would take place. But providing an additional round of cuts to middle-income earners may be an even more pressing issue now given the financial toll exacted by COVID-19.
4. Push a Made in America tax credit/expensing credit
Though Trump has been light on specifics, a key component of his second-term tax plan is the introduction of tax credits and incentives specifically designed to get businesses to bring manufacturing back to the U.S. from China.
One of the only details released about the plan thus far is that it includes a provision enabling pharmaceutical and robotics companies to take 100% expense deductions on certain assets. It's uncertain which specific assets would qualify, but it's clear that Trump wants to see essential manufacturing conducted within the United States.
Also of note, Trump's Made in America tax credits aren't being given any particular time frame. In other words, it could be a temporary tax credit that will eventually sunset, or perhaps one that gets signed permanently into law. If Trump wins reelection, the high probability that Democrats will retain control of the House makes a permanent addition of this business tax credit very unlikely.
5. Expand Opportunity Zones
Trump's fifth and final tax change proposal is an expansion of the opportunity zone federal incentive created under the TCJA.
Opportunity zones are meant to spur investment in undercapitalized communities by providing capital gains benefits to individual and corporate investors. For instance, investment in opportunity zones allows for the temporary deferral of capital gains all the way to 2026, or whenever the asset is sold. Opportunity zone investors also see their cost basis stepped up over time, which reduces the amount of capital gains subject to taxation.
Under Trump's latest proposal, tax benefits associated with economically challenged areas would be expanded to spur additional investment. Once again, no specific dollar levels or percentages have been discussed.
A lot can happen between now and Election Day, but it still pays to know how your pocketbook might be affected if Donald Trump is reelected in November.