Election season 2020 is in full swing. Over the next few weeks, both parties will be hard at work, trying to win your vote for their presidential candidate.
As you watch social media ads and listen to interviews and debates, pay close attention to the candidates’ federal tax plans. Their stances could have a major impact on the amount of taxes you’ll owe in the future and how much you can transfer to loved ones without triggering federal gift or estate taxes.
Also remember that tax laws can be used to help promote policy initiatives. In some instances, you might be willing to accept tax increases in the name of causes that you care about, such as clean energy, universal health care or school choice.
Here’s a quick summary of recent federal tax law changes and how the candidates would like to build on — or change — the rules that affect the amount of taxes that you and your family will owe in 2021 and beyond.
Where Are We Today?
The GOP-backed Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. It included a number of temporary federal tax cuts and breaks for individuals and families for 2018 through 2025, such as:
Lower rates. The TCJA reduced most individual income tax rates, with new thresholds for each bracket. Currently, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
Higher standard deduction. The TCJA nearly doubled the standard deduction amounts to $12,000 for single filers, $18,000 for heads of household and $24,000 for joint filers, with annual inflation adjustments. For 2020, the inflation-adjusted standard deductions are $12,400 for single filers, $18,650 for heads of households and $24,800 for joint filers. As a result, more taxpayers currently claim the standard deduction in lieu of itemizing. (However, the TCJA also suspended personal exemptions for 2018-2025.)
Credits for children and dependents. The TCJA doubled the refundable child tax credit to $2,000 per eligible child and increased the income phase-out thresholds to be eligible. An additional $500 credit may be available for other qualified dependents, including a 17- or 18-year-old child, a full-time student under age 24, a disabled child of any age and certain nonchild relatives. (However, the TCJA also suspended dependent exemptions.)
More-favorable AMT rules. The TCJA retained the alternative minimum tax (AMT) for individuals, but it raised both the exemption amounts and the exemption phaseout thresholds. As a result, fewer people are subject to the AMT under current law.
Gift and estate tax cuts. The law increased the unified federal gift and estate exemption from $5 million to $10 million, indexed for inflation. For 2020, the inflation-indexed unified exemption is $11.58 million ($23.16 million for married couples). As a result, fewer families will owe federal gift or estate taxes under current law.
The TCJA also included offsetting, revenue-generating provisions, including new limits on itemized write-offs for home mortgage interest and a new limit on state and local tax (SALT) itemized deductions. These changes have adversely affected homeowners with large mortgages and residents of high-tax states.
Important: Most of the TCJA provisions that affect individuals are scheduled to expire after 2025.
In March 2020, Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. It provided direct payments to certain individuals and families, temporarily expanded unemployment benefits for workers and waived retirement account required minimum distributions for 2020. The law also allows IRA owners and qualified retirement plan participants to take certain tax-free, coronavirus-related withdrawals in 2020. These changes are intended to provide temporary financial relief during the pandemic.
The candidates’ current positions on individual tax matters may sometimes contrast with their parties’ platforms, so it’s important to watch their statements and websites closely. More details may be revealed during interviews, ads and debates in the coming weeks.
No matter who wins the presidency, your tax advisor can help you implement planning strategies to keep your tax bill as low as possible.
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