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By Numbers Blog

Tax Law Changes

During their presidential debates, President-elect Joe Biden and President Donald Trump highlighted their plans for the U.S. It’s not surprising that both parties have completely different policies regarding tax. They both put forth plans on how to restructure the economy after the severe destabilization caused by COVID-19. However, their approaches are different.

Biden intends to increase wealth taxes and upgrade the U.S infrastructure with the revenue generated. While Trump, on the other hand, plans on reducing taxes and increasing China’s tariffs. Additionally, they have conflicting ideas on lowering unemployment and recession, which was caused by the pandemic. Trump is against the concept of state or federal restraints on small businesses.

Furthermore, Trump strongly rejected shutting down the country because of the virus. Neither did Biden agree on shutting down the country. Instead, he thinks the federal or states constraints on small businesses shouldn’t be eased.

For bookkeeping and accounting needs, understanding the differences between Biden and Trump’s tax plans is important. If you run a small business, pay close attention.

THE DIFFERENCE BETWEEN TRUMP AND BIDEN’S TAX PLAN

With Joe Biden winning this year’s election, there’s no doubt that some income groups will face a tax increase. Biden’s tax plan includes increasing corporate tax and income gains. While Trump, during his presidential debate, proposed to do the opposite. He claimed that he plans on securing the TCJA (Tax Cuts and Jobs Act of 2017).

Here we discuss both party’s tax plans and their differences:

ITEMIZED DEDUCTIONS

The Tax Cut and Jobs Act won’t be expiring until 2025. Presently, the itemized deductions under this act include:

  • Home equity loans that weren’t used to improve a residence, buy, or build won’t have interest deduction.
  • Pease limitation on the itemized deduction will be suspended.
  • Miscellaneous deductions that are subject to the 2% floor will be suspended.
  • Before TCJA, charitable contributions limitations were 50%. It’ll be increased to 60% of AGI.

Trump’s tax plan intends to maintain TCJA provisions. Also, he plans to prevent the expiration of TCJA by 2025. In contrast, Biden proposed a new cap implementation. Notably, he proposed the Pease limitation restoration, itemized deduction of 28% for taxpayers who earn above $400,000.

Furthermore, Biden proposed to repeal the income tax rate for wealthy individuals. For accounting purposes, it means that the top rate will go from 37% to 39.6%, which it originally was.

CORPORATE TAXES

Under the TCJA, the rate of corporate tax is presently 21%. Trump tax plan doesn’t propose any change to corporate tax since the present tax rate is permanent. Also, unlike other TCJA provisions, the present corporate tax rate isn’t likely to remain.

Biden proposed an implementation of a 28% corporate tax rate. The corporate tax rate was reduced from 35% to 21% by the TCJA. He doesn’t plan to take it back to 35%, but instead to increase it marginally to 28%.

Additionally, his tax plan proposed that corporations pay 15% minimum income tax or their usual corporate income tax. The new tax plan will be for corporations with nothing less than $100 million in book income.

SOCIAL SECURITY AND EMPLOYMENT TAXES

At the moment, there’s a social security tax of 12.4% on self-employment and wage income. For a wage earner, the tax is split equally between them and their employers. While those that are self-employed pay the tax 100% by themselves. The tax is only on incomes up to $137,000, which is the inflation-adjusted amount for 2020.

Biden proposed the implementation of the 12.4 security tax for people whose earnings are above $400,000. This has significant bookkeeping implications. It means that those who don’t earn up to that amount won’t be subject to the 12.4% tax. However, it’s not clear if wage earners who earn over $400,000 will split the 12.4% tax equally with their employers.

On the other hand, before the election, Trump gave orders to the Secretary of Treasury to postpone the withholding, payment, and deposit of the employees’ social security tax. It only applies to people who earn up to $104,000.

GIFT AND ESTATE TAXES

The TCJA increased the amount of basic exclusion ($11.58 million) in 2020. Trump’s tax plan seeks to maintain all the changes the TCJA made. In contrast, Biden proposed to reduce GST and estate exemption to $3.5 million. Also, gift tax exemption will be reduced to $1 million under his administration.

Additionally, on taxable estates, Trump proposed to maintain the current law. Contrastingly, taxable estates will face a 40% to 80% increase in tax rates under Biden’s administration. Also, his tax plan includes doing away with basis step-up. It means that unattained capital gains will only be taxed at death.

DEPENDENT CARE CREDIT

The TCJA only permits individuals to claim a credit of $2000 for each child. Also, it enables individuals to claim a credit of $500 for dependents. Each of these credits is subject to phaseouts of income.

Trump’s tax plan proposes to maintain this credit structure and also prevent its 2025 expiration. In contrast, Biden plans on expanding the care credit for dependents. His plan includes increasing the care credit for a child to $8000 and $16,000 for more than two children.

CONCLUSION

In summary, Trump and Biden have contrasting policies when it comes to tax. In terms of accounting and bookkeeping, Biden seeks to increase the corporate tax rate from 21% to 28%. Also, he plans to tax ordinary income and capital gains at an equal rate.

With the results of the presidential election favoring Biden, a change is inevitable. It’s essential we begin to make adequate preparation for the changes. Also, it may require some modifications for your tax and bookkeeping needs.

Additionally, you may realize that you need professional assistance. It may become a bit difficult to handle the bookkeeping and accounting needs for your small business. If you do decide you need help, let the team at Hall Accounting Company know and we will set up a time to discuss. Please reach out to Josh Hall at Josh.Hall@HallAcctCo.com or Jeremy Hall at Jeremy.Hall@HallAcctCo.Com for more information. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered.


FUTURE IMPORTANT DEADLINES

02/01/21
Deadline for employers to mail out W-2 Forms to their employees and for businesses to furnish 1099 Forms reporting non-employee compensation, bank interest, dividends, and distributions from a retirement plan

03/01/21

Deadline for businesses to mail Forms 1099 and 1096 to the IRS

03/15/21

Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065) or to request an automatic six-month extension of time to file (Form 7004)

03/31/21

Deadline for businesses to e-file Forms 1099 and 1096 to the IRS, except Form 1099-NEC

04/15/21

Deadline to file individual tax returns (Form 1040) for the tax year 2020 or to request an automatic extension (Form 4868) for an extra six months to file your return, and for payment of any tax due, and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020, or to request an automatic six-month extension of time to file (Form 7004) for corporations that use the calendar year as their tax year

04/15/21

Deadline for household employers who paid $2,200 or more in wages in 2020 to file Schedule H for Form 1040

04/15/21

Deadline for first-quarter estimated tax payments for the 2021 tax year

06/15/21

Deadline for second-quarter estimated tax payments for the 2021 tax year

09/15/21

Deadline for third-quarter estimated tax payments for the 2021 tax year

09/15/21

Deadline for S-Corporate tax returns (Form 1120-S) for tax year 2020 for S-Corporations that use the calendar year as their tax year, and for filing Partnership tax returns (Form 1065)

10/15/21

Final extended deadline to file individual tax returns for the year 2020 (Form 1040), and for Deadline for corporate tax returns (Forms 1120 and 1120-A) for tax year 2020 for corporations that use the calendar year as their tax year