Ballot boxes. Campaign posters. Donkeys. Elephants. The upcoming presidential election is monopolizing the media and likely many water-cooler conversations as well. Whatever your political beliefs, understanding how proposed tax plans will impact your tax situation, your business and your estate plan will help you be better informed regardless of who is elected. While the candidates do not have the power to determine tax law without Congress, their platforms contain a framework of the tax laws they hope to influence.
Assuming Hillary Clinton and Donald Trump are the two candidates most likely to appear on your ballots, an examination of the candidates’ platforms reveal distinctions in several areas, including complexity of tax law, income taxes and capital gains taxes and estate taxes and planning.
Tax laws are notoriously complex. Most taxpayers find filling out tax forms time-consuming, complicated and frustrating and either rely on a professional accountant or cross their fingers and hope they did everything correctly.
- Clinton’s attempt to create more parity between classes would add new tax rules, unfortunately increasing the complexity of the tax filing process.
- Trump’s goal is to simplify the tax code for low to middle income taxpayers by reducing the number of tax brackets from seven to four and eliminating a number of deductions.
Income Taxes and Capital Gains Taxes
Clinton’s tax plan would mostly impact the wealthy.
- She hopes to implement a plan that would increase taxes for those with an annual adjusted gross income of more than $5 million with an additional 4% tax. Taxpayers earning more than $1 million would have a minimum tax rate of 30%.
- Her proposal would have a significant impact on capital gains tax. Currently, assets held for less than one year are subject to ordinary tax, which can be as high as 43.4%. However, the tax rate is limited to 23.8% for assets held longer than one year. With Clinton’s plan, the capital gains rate on assets held between 1 and 5 years would be higher than the current 23.8% rate, decreasing the longer the asset is held. Under this proposal, investors would need to hold investments longer to avoid higher capital gains taxes.
- Clinton has suggested that there may be tax breaks for the middle class as well, especially around issues like college savings, but those details have not yet been announced.
Trump’s plan would mostly impact the lower class and the extremely wealthy.
- Trump’s proposal would cut taxes at every income level, but high income taxpayers would receive the biggest cuts.
- Those making less than $25,000 a year as a single person or less than $50,000 as a married couple filing jointly would not be required to file or pay Federal income taxes.
- The maximum rate on all business income would be 15%. For S corporation, LLC, or partnership business owners, business income taxes are based on the tax bracket of the business owner. For many middle class taxpayers, this means their business income is taxed at a 25% or 28% rate. With Trump’s plan, regardless of the business owners’ income tax bracket, business income would never be taxed at a rate higher than 15%.
- Trump would repeal the alternative minimum tax and Medicare surtax. The Medicare surtax is .9% on wages earned and 3.8% on investment income earned for higher income taxpayers. The surtax applies to single taxpayers earning more than $200,000 a year and married filing jointly taxpayers earning more than $250,000 a year.
Estate Taxes and Planning
Clinton and Trump express radically different intentions regarding estate taxes. Currently, an estate valued at $5.45 million or less is not subject to federal tax at the time of death. Anything over $5.45 million is subject to a 40% federal tax rate.
- Clinton wants estates valued at $3.5 million or more to be subject to tax and to increase the top tax rate to 45%. Additionally, she would cap the lifetime gift exemption at $1 million.
- Trump intends to eliminate the estate tax entirely.
Federal Budget and National Debt
According to economists, the current proposals are quite different in one other aspect: the impact of the proposals on the federal budget. As reported by the Tax Policy Center, Clinton’s plan as proposed would increase revenue by $1.1 trillion over the next decade while Trump’s plan as proposed would reduce federal revenue by $9.5 trillion over the next decade.
For more information on the candidates’ plans, visit Tax Policy Center, an organization that provides independent analysis of tax issues.