The impact of the US election on US taxes

Biden proposals

Beyond a pledge to make the US tax code fairer, and to expand the use of tax credits to support working families and encourage clean energy, the Democratic party platform for 2020 contains few specifics. However, some key proposals have been included in various speeches and interviews given by Joe Biden:

• Return the top rate of income tax to 39.6% from the current 37%.
• Eliminate the beneficial rate on capital gains and dividends where income exceeds $1 million (a version of the “Buffett” rule). This could increase the rate of tax from a current 23.8% to 43.4%.
• Restore the itemised deduction for state and local taxes that were capped at $10,000 by the 2017 reforms.
• At the same time, Biden proposes to limit the tax benefit of itemised deductions to 28%, perhaps similar to the idea of UK basic rate relief.
• On the US estate tax, Biden has proposed to eliminate the basis step up to market value for capital assets currently given at death. It is worth noting the UK is also seriously considering this proposal.
• Although less clear, there are indications that the current lifetime estate and gift tax exemption would be lowered to around $5 million or even less.
• More generally, there have been indications that the Democrats would look to curb favourable estate planning ideas, including the use of trusts and various valuation discounts for closely held businesses.
• Biden has proposed raising the US corporate tax rate to 28%. This would also impact Americans who own foreign companies abroad in jurisdictions like the UK. Currently, there is often little US tax due as the corporations pay a rate of UK corporation tax similar to the US rate.

What about if Trump wins?

Would you be right to think that there will be no significant changes? It’s not entirely certain. In the first instance, the US budget deficit is increasing through a combination of the 2017 tax cuts and the impact of the cost of COVID-19 to the US economy and treasury so far. Taxes might have to rise if the fiscal pressure becomes too great.

Perhaps more likely, Trump spent a lot of time in the 2016 campaign discussing big infrastructure projects such as highways, bridges, dams, and perhaps technology infrastructure, such as improving broad band in rural areas of the country. None of this has happened. If he gets a second term, he might be ready to cut a deal to raise taxes in order to fund a major package of infrastructure improvements.

What should you do?

At the moment there is too much uncertainty to suggest specific action until the full results of the election are known. However, individuals already considering tax planning moves such as making gifts or selling assets may want to accelerate these to lock in the certainty of the current rules.  

It is also not possible to know the timing of when legislation can be passed to implement any tax policy changes. Whoever takes office on 20 January 2021 will have a lot on their plate. It seems unlikely that changes to income taxes can be brought in so rapidly as to be retroactive for all of 2021. However, transaction based taxes, such as capital gains and estate and gifts taxes could be made effective from a specific date.  

We will update our clients and contacts with a further article once the results of the election are known. 

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