The national conventions for both political parties' presidential candidates have wrapped up and their platforms have finally been released. With campaign season in full swing, many voters are wondering about the presidential candidates' tax proposals. Unfortunately, the details of the dueling proposals are somewhat limited — and economists don't always agree on the long-term effects of various tax policies. Here's a general rundown of some notable differences in how the candidates would handle taxes, based on their promises and information that's currently available.
Taxes on Unrealized Gains and Capital Gains One DNC proposal that has gotten significant media attention is Harris's plan to impose capital gains tax on unrealized gains. Specifically, she proposes taxing appreciation on assets owned but not yet sold, but only the wealthiest taxpayers would be affected. Those with net worth exceeding $100 million would pay a tax of at least 25% of their income and their unrealized capital gains. In addition, Harris has proposed changing the long-term capital gains rate for individuals with more than $1 million in income. If the change is enacted, these individuals would pay 28% on investment sales on assets held more than one year (up from the current top rate of 20%). Unrealized gains at death would be taxed, too, subject to a $5 million exemption ($10 million for married couples) and certain other exemptions (for example, for surviving spouses, family businesses and residences). |
Expiring TCJA Provisions
One reason that taxes are in the spotlight this election year is that many of the provisions in the far-reaching Tax Cuts and Jobs Act (TCJA) are scheduled to expire after 2025. Noteworthy examples of expiring tax provisions that affect individual and noncorporate small business taxpayers are:
Lower marginal tax rates,
Increased standard deductions, and
The qualified business income (QBI) deduction for sole proprietors and owners of "pass-through" entities.
For purposes of the QBI deduction, pass-through entities include S corporations, partnerships and limited liability companies, as well as sole proprietorships.
GOP position. Former President Donald Trump backs the GOP platform, which promises to make the higher standard deduction and the doubled child credit permanent. Moreover, Trump recently expressed support for a proposal set forth by his running mate J.D. Vance that would increase the child credit to $5,000 per child.
Trump also has said he would make the TCJA's individual and estate tax cuts permanent and reduce taxes further, without specifying particular provisions. In addition, he has frequently praised the benefits of the QBI deduction for small business owners in various speeches and interviews since the TCJA was signed into law in December 2017. So, he likely favors extending this provision or making it permanent.
DNC position. As a presidential candidate, Vice President Kamala Harris embraces the DNC platform, which vows not to increase taxes for individuals making less than $400,000. This means she would need to support the continuation of certain TCJA tax breaks, including the higher standard deduction and lower marginal tax rates for people who make less than $400,000 per year.
She has endorsed President Biden's proposed fiscal year 2025 budget, which would return the top individual marginal income tax rate for single filers earning more than $400,000 ($450,000 for joint filers) to the pre-TCJA rate of 39.6%. In addition, she would increase the additional Medicare tax rate on earnings above $400,000 to 5%, making the top marginal rate 44.6%. In addition, the budget proposes increasing the 3.8% tax on net investment income to 5% for investment income over $400,000.
As part of the DNC plan to help lower taxes on families, Harris has proposed increasing the child credit from $2,000 under the TCJA to $3,600 for qualifying children ages two to six and $3,000 for all other qualifying children. She would add a $6,000 newborn credit for the first year of a child's life. Harris also supports expanding the earned income tax credit and premium tax credits to subsidize health insurance.
The DNC platform promises to make the wealthy "pay their fair share" of federal taxes. Part of that promise includes ending the stepped-up basis for inherited assets. This means unrealized gains on inherited assets would be subject to capital gains tax. The gain would equal the difference between the asset's fair market value at the time of inheritance and the decedent's tax basis in the asset (typically, the original purchase price). (See "Taxes on Unrealized Gains and Capital Gains" at right.)
Corporate Tax
The TCJA permanently reduced the top corporate tax rate from 35% to a flat corporate tax rate of 21%. This rate applies to C corporations and personal service corporations. The law also eliminated the corporate alternative minimum tax (AMT). For tax years starting after December 31, 2022, the Inflation Reduction Act (IRA) introduced a permanent corporate AMT of 15% on corporations with average annual financial statement income exceeding $1 billion.
RNC position. During a major economic address on September 5, Trump proposed lowering the corporate tax rate from its current 21% to 15% for "companies that make their product in America." He also would like to eliminate the new corporate AMT under the IRA.
DNC position. The DNC platform promises to make "big corporations pay their fair share" of federal taxes. Harris supports increasing the corporate tax rate to 28%, which is still below the pre-TCJA rate of 35%. She would increase the IRA's corporate AMT from 15% to 21%.
Harris also would increase the excise tax on stock repurchases from 1% to 4%. This tax is based on the repurchased stock's current fair market value. By increasing the rate, Harris hopes to reduce the difference in the tax treatment of buybacks and dividends. In addition, Harris plans to prevent businesses from deducting the compensation of employees making more than $1 million per year.
Tariffs
Tariffs are another hot topic this election season. A tariff is a tax on goods and services imported from other countries. Governments use tariffs to generate revenue, protect domestic industries and exert pressure on other countries during trade negotiations. The United States already imposes tariffs on many foreign-made goods.
RNC position. Trump consistently has called for higher tariffs on U.S. imports. He would impose a universal baseline tariff of 10% on all imported goods, with a 60% tariff on imports from China. In speeches, he's proposed different tariff amounts on imported cars. Trump also has proposed eliminating federal income taxes and replacing them with tariffs. Domestic products wouldn't be subject to Trump's tariffs, thereby encouraging consumers and businesses to buy from U.S. manufacturers and discouraging businesses from expatriating overseas.
DNC position. Harris has countered that raising tariffs would result in price hikes on the tens of millions of Americans who currently make too little to pay federal income taxes. The DNC platform says, "Trump's extreme import tariffs … will make life more expensive for folks nationwide," and estimates that his plan would increase annual costs for working families by $2,500.
Taxes on Tip Income and Social Security
There's bipartisan support for eliminating federal taxes on tips for restaurant and hospitality workers. However, the candidates differ somewhat in their proposals for handling taxes on tip income. Critics have questioned both proposals, pointing out that they might prompt employers to reduce tipped workers' wages, among other problems.
RNC position. Trump was the first candidate to propose eliminating federal taxes on tips for restaurant and hospitality workers. Under Trump's plan, tip income wouldn't be subject to either federal income or payroll taxes.
DNC position. During campaign speeches, Harris also has promised to exempt tips from federal income taxes, although her proposal isn't included in the DNC platform. Harris's plan includes an income limit and other provisions to prevent wealthy individuals from restructuring their wages or bonuses to avoid taxation.
Social Security. Trump has suggested excluding Social Security benefits from taxation, too. Harris hasn't yet proposed any changes to the taxation of Social Security benefits.
Housing Incentives
The shortage of affordable housing for working families and first-time homebuyers is another major concern this election season. Home prices have soared in many parts of the country, and interest rates are significantly higher than they were four years ago.
RNC position. Trump has referenced possible tax incentives for first-time buyers but hasn't provided specifics. The GOP platform says they will "reduce mortgage rates by slashing inflation, open limited portions of federal lands to allow for new home construction, promote homeownership through tax incentives and support for first-time buyers, and cut unnecessary regulations that raise housing costs." These broad promises leave much to interpretation.
DNC position. The DNC platform proposes offering a $10,000 mortgage-relief tax credit for first-time homebuyers and those selling their first homes. Harris also wants to provide $25,000 in down-payment assistance for buyers from families that haven't previously owned homes. In addition, she's calling for a tax incentive for homebuilders that build starter homes sold to first-time homebuyers. However, critics say these measures could drive up demand — and home prices.
Other Tax Breaks
Starting a business. Under current law, entrepreneurs can deduct $5,000 of start-up expenses and then spread the remaining start-up costs over a period of years. Noting that the average cost of starting a business is $40,000, Harris has proposed increasing the deduction for start-up expenses to $50,000. The proposal would allow new businesses to allocate the deduction over a period of years, or claim the full deduction if they're profitable.
Electric cars. Trump said that if elected, he would consider ending the tax credit of up to $7,500 for purchasing an electric vehicle (EV). Meanwhile, Harris has indicated support for EVs. The $7,500 credit was enacted as part of the IRA, which contains other provisions that Trump has said he would like to repeal.
Word of Caution
These are only some of the candidates' tax-related proposals. For all the campaign trail bluster, remember that tax changes are enacted by Congress — and politicians sometimes are unable or unwilling to fulfill campaign promises after they're elected. Whether any of the proposals outlined above ever come to fruition, even if the proponent is elected, remains to be seen. Stay tuned for the latest developments as more details of the candidates' proposals are unveiled this fall.
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