While the Trump administration has not yet released a formal tax proposal during the 2020 presidential campaign, President Trump has floated several ideas for potential policy changes over the past couple of years. Retirement Director Ben Rizzuto discusses these ideas and what investors should consider from a tax planning perspective if Trump gains a second term.
Recently my colleague Matt Sommer provided a review of Joe Biden’s Tax Plan. As a complement to that piece, I would like to outline some of the tax policy changes the Trump administration has proposed in recent years.
While he has not yet released a formal tax proposal for his second term in the lead-up to the Nov. 3 election, President Trump has talked about his Tax Cuts 2.0 plan many times over the past couple of years. Trump’s comments and his campaign’s second-term agenda provide insight into some of the issues the administration may focus on.
Should Trump gain a second term, the administration’s main area of focus will likely be on making permanent the temporary provisions associated with the Tax Cuts and Jobs Act (TCJA) passed in 2017 – many of which are set to expire over the next several years. For example, the TCJA increased the estate tax exclusion limit to $11.58 million, but this is set to expire in 2026. Additionally, the reduction of individual income tax rates, the increase in the standard deduction and the expanded child tax credit established by the TCJA are all set to revert to their previous forms in 2026.1
The president has on many occasions expressed his desire to increase take-home pay. Most recently, this took the form of an executive order that postponed payroll taxes for employees from September 1, 2020, through the end of the year. The deferral affects individuals with incomes below $4,000 during a biweekly pay period, calculated on a pre-tax basis.
While this is a temporary deferral, the president has indicated he intends to make the cut permanent: At an August 8, 2020 signing ceremony at the Trump National Golf Course in Bedminster, NJ, Trump stated, “If I’m victorious on Nov. 3, I plan to forgive these taxes and make permanent cuts to the payroll tax. So I’m going to make them all permanent."2
It’s important to note that there has been strong bipartisan opposition to the idea of making permanent cuts to the payroll tax, since doing so would require Congressional approval. From a retirement planning standpoint, the change would directly affect Social Security because payroll taxes are used to finance this and other social-insurance programs. Based on current calculations, the Social Security trust fund would likely be able to pay full retirement and survivors benefits until 2034; however, the elimination of the payroll tax with no alternative income source could significantly speed the trust’s depletion.
Capital Gains Taxes
President Trump has proposed reducing the capital gains tax from the current 20% rate to 15% as well as indexing it to inflation. (It is not clear whether this would be inclusive of the 3.8% Net Investment Income Tax.)
Regarding indexing capital gains for inflation, under current policy, households owe taxes on the full nominal value of certain capital gains; however, Trump’s proposal would index the asset basis to inflation, leaving only the real value of any capital gain as taxable income. A study by the Penn Wharton Budget Model found that indexing capital gains for inflation would benefit the top 1% of households in the U.S. as they would receive 86% of the benefit. The study also calculated that the policy could reduce tax revenue by as much as $102 billion over the next decade.3
President Trump’s full-year 2021 budget proposal outlines several changes that could impact those who currently hold or are seeking to secure student loans to fund their education.4
We’ve written about the Public Service Loan Forgiveness program and Income Driven Loan Repayment in the past (Are Your Student Loans Forgivable?). Trump’s 2021 proposal would end subsidized student loans and the Public Service Loan Forgiveness program, which allows borrowers to have student loans forgiven after a certain number of years of public service or working for a nonprofit employer. The president’s proposal would also increase the amount of discretionary income student loan borrowers would be required to pay from 10% to 12.5% for Income-Driven Repayment (IDR) plans. (Joe Biden has proposed that borrowers pay 5% of their discretionary income.)
Lastly, the Trump proposal would shorten the undergraduate loan period from a 20-year repayment term to 15 years and increase the graduate loan period from a 25-year repayment term to 30 years.
Overall, these proposals would cut funding for student loan programs by $170 billion over 10 years and increase borrowing costs, which highlights the importance of prudent educational planning and saving in the future.5
Reading the Tea Leaves
With no formal proposal available at this point, it’s difficult to put the ideas and comments made by the Trump administration into a tidy chart that we can compare to the Biden proposals, but we can at least read the tea leaves to help better plan for the future.
Those tea leaves present several important considerations:
Bigger Paychecks, Extra Savings: Should the Trump administration eventually implement ideas like the payroll tax cut and possible income tax reductions for middle-income taxpayers, many investors could end up holding larger paychecks. If that is the case, it makes sense to earmark the surplus for savings, investments and longer-term financial goals. If nothing else, making sure these additional funds get set aside rather than spent could help stave off any future tax issues.
Education Planning: The proposed changes to student loans highlight how important education planning will be in the future. Making sure 529 plans are opened and funded is a first step. Along with that, Roth assets held by parents or grandparents could be used to pay for qualified education expenses, and if account owners are over 59½, no income taxes would apply. Finally, parents and students should consider increasing their research of grants and scholarships to help make educational pursuits more affordable.
Estate Planning: The fact that the $11.58 million exclusion amount will be around for the next several years provides high-net-worth families the ability to put larger amounts of money into trusts or make significant charitable contributions to help ensure financial legacies are preserved and tax liabilities are limited. Charitable Remainder Trusts are one option that can aid families, especially with the demise of the “Stretch” IRA via the 2019 SECURE Act. Additionally, Spousal Lifetime Access Trusts can provide access to income and/or principal for the needs of a surviving spouse and are funded in the form of a tax-free gift while the donor is still alive.
Tax Flexibility: Finally, the ideas presented by the Trump administration and the proposals contained in the Biden Tax Plan highlight how important tax diversification and flexibility will be going forward – regardless of the election outcome. Clients need to continue to build pots of assets that enjoy different tax treatments. Whether these are traditional, Roth or non-qualified accounts, having these assets available in the future can provide valuable optionality. Asset location is another important consideration: Making sure investments are held in the “right” types of accounts can help provide more tax efficient after-tax returns.
Although the election is fast approaching, the Trump administration may put out a formal tax proposal between now and Nov. 3 (and if so, we will provide an update). Until then, the tactics outlined above can help investors both take advantage of the current situation and prepare for whatever changes lie ahead.
1Tax Foundation. “President Trump Outlines Second Term Tax Ideas.” August 25, 2020.
2Whitehouse.gov. “Remarks by President Trump in Press Briefing.” August 8, 2020.
3Ricco, J. Penn Wharton. “Indexing Capital Gains to Inflation.” March 23, 2018.
4Whitehouse.gov. “A Budget for America’s Future.” Fiscal Year 2021.
5Kantrowitz, M. “President Trump’s FY2021 Budget Cuts Funding for Student Loans.” February 11, 2020.
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