Trump v. Biden Tax Plans

The US presidential election is shaping up to be likely one of the most contentious and consequential in modern history, making its potential policy, growth and market implications top of mind. Although President Trump hasn’t released a formal plan yet, he has generally expressed his intent to preserve, and expand on, the Tax Cuts and Jobs Act (TCJA) passed in 2017. Joe Biden has put forward a few proposals to raise revenue, as well as several proposals to provide targeted tax breaks for lower- and middle-class individuals while increasing taxes on those making over $400,000 per year as well as corporations. It’s also important to keep in mind the fundamental role of Congress in passing tax legislation.  Depending on the makeup of the White House, Senate, and House of Representatives, passing tax legislation may be challenging. Below we have summarized the key points of each parties’ tax proposals.

Generally, it is not advisable to take any action now based on what might happen in the November election. However, we do know that regardless of the outcome of the elections; the winners won’t be taking office until 2021. It is prudent to have a strategy in place that you can execute if needed as the timeline will be tight, especially during a pandemic.

If Democrats take control of the White House and both chambers of Congress, year-end tax planning for high earners in 2020 will likely be all pulling forward as much income and as many deductions as possible. One of the most impactful pieces of Biden’s tax policy is the increase in taxes on capital gains for those earning over $1 million per year. If a taxpayer has income plus capital gains in a year that, when added together, exceed the $1 million mark, all capital gains above $1 million would be subject to ordinary income tax rates, as opposed to the current top capital gains rate of 20%. One way for high earners or those looking to sell highly appreciated assets to avoid those gains being taxed at the proposed new top rate of 39.6% is to sell those assets and realize gains in 2020–before the potential change in rates becomes effective.

Another major piece of Biden’s legislation would be the reduction of the estate tax limit. Clients who have estates over $5 million per person or who own hard-to-value assets, such as a private business, may wish to engage in gifting while the lifetime gifting limit is at $11.58 million per person. The IRS has already stated that it won’t ‘claw back’ previous transfers of assets if the exemption amount goes back to its pre-TCJA levels, so a client could choose to make a large gift now and lock in that higher exemption amount without triggering any transfer taxes.

Once a lower limit is in effect, clients will need to begin exploring more complex wealth transfer vehicles such as the use of Grantor Retained Annuity Trusts (GRATs), Charitable Lead Annuity Trusts (CLATs), and sales to Intentionally Defective Grantor Trusts (IDGTs).

Year-end Roth IRA conversions could also become a particularly attractive option for some high earners, as Roth conversions represent an easy way for a taxpayer to pull forward what would otherwise be future income into the current year. In this strategy, an individual would convert a portion of their traditional tax-deferred IRA into a tax-free Roth IRA and pay the taxes on the conversion in 2020. Once converted, Roth IRA distributions are tax-free while traditional IRA distributions remain taxed as ordinary income.

There are a lot of variables to consider and predictions, while helpful for planning, are only forecasts about what might be expected to happen in the future. We recommend you start planning now and wait until after the election to take action, if at all. We believe election year tax planning should be about speeding up or slowing down something you were already thinking about doing anyway. Don’t allow fear to cause you to take actions you would not have considered otherwise because even if your political calculations prove correct, that does not mean the expected tax policy will automatically follow. Anything can happen in politics. Our best advice is to start planning now but stay resilient and incorporate flexibility into your plans so they can accommodate different outcomes.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov. The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market.

July Market Update

Despite documented Covid-19 cases hitting new records around the country, equities have continued to power higher, led by technology shares and positive trial results for a virus treatment. Adding to the string of positive economic surprises, the nonmanufacturing Purchasing Managers’ Index, a measure of business conditions, posted its biggest monthly gain and moved back into expansion. However, as new COVID-19 cases rise and several states slow down or roll back reopening measures, the economic recovery is likely to start losing some momentum. Uncertainty around the path of the virus and the political outcome of the U.S. elections will likely linger over the coming months, but low interest rates and monetary and fiscal stimulus should help sustain the economic recovery later this year and into 2021.

Recent high-frequency economic data continues to show gradual increases in the number of people flying, staying in hotels and eating out at restaurants. Data for May revealed sharp improvements in activity, particularly in retail spending. Monthly auto sales rose in June relative to May, as did construction employment. However, all of these activities remain well below pre-pandemic levels and a recent surge in new cases could slow further gains from here.

https://www.ftportfolios.com/retail/blogs/economics/index.aspx?ID=5448&Print=Y

Unemployment

Thursday’s jobs report showed a record 4.8 million monthly gain in non-farm payrolls for June following a 2.7 million rise in May. However, this still represents just 34% of the 22.1 million jobs lost in the prior two months. Provisions in the CARES act could also impact the pace of recovery over the next few months. In particular, two rounds of the Paycheck Protection Program created $518 billion in forgivable loans for small businesses. Originally, a key provision of these loans is that the money had to be spent within eight weeks of the loan origination date and 75% of it had to be spent on payrolls. Although the time period has since been extended, for many businesses the changes came after they had already began spending/rehiring and we may see an uptick in unemployment as those PP funds dry up and businesses are unable to keep those workers on payroll without additional help from Congress.

Stimulus

Congress has yet to approve a new stimulus package and the terms of a new package could substantially impact the pace of recovery. In terms of timing, Congress returns from its July break on July 20th but then goes into recess between August 10th and September 7th, so if a bill is passed it would most likely be in early August. If Congress fails to pass further stimulus, then the economic rebound could slow more sharply in the months ahead, with the unemployment rate potentially rising back into the teens.

Vaccines

According to the Milken Institute, there are currently 179 different vaccines being developed for Covid-19, including 17 now in clinical trials. These vaccines include traditional vaccines along with a number of novel approaches. While it is very difficult to gauge the success of any one of these efforts, the variety of the techniques, along with the resources being devoted to them suggests that some vaccines will likely be approved around the world in either late 2020 or early 2021.

Election

We began this year expecting to discuss the 2020 presidential election almost exclusively. However, the rise and spread of COVID-19 has derailed most of those conversations, rightly so, and has changed the backdrop of the 2020 election dramatically. Given the events that have unfolded, the next president will have a different policy agenda than he would have at the beginning of the year. While most of the national attention is focused on the virus, the results of the 2020 election will be very consequential for the recovery and rebound efforts ahead.

The odds of President Trump being re-elected have changed in light of COVID-19. An incumbent president has won reelection 65% of the time since the Civil War. However, in all instances in which the incumbent lost, there was a recession or depression during their term. The impacts of COVID-19 have pushed the U.S. economy into recession. The labor market is facing an unemployment rate at its highest since the Great Depression. While this could greatly diminish the chances of a Trump victory, the critical swing factor will be the public perception of the president’s management of this crisis, particularly among his voter base.

Social distancing will also threaten voter turnout, which is critical for a Democratic presidential victory. Mail in voting could become much more pervasive, although expanding and changing voting measures is a hotly contested partisan issue. Not to mention, scaling up mail in voting requires immense preparation starting immediately. A win for Joe Biden in November’s presidential election could weigh on the stock market but, with the Democrats standing little chance of winning a filibuster-proof majority in the Senate, we don’t expect the election outcome to have a major bearing on policy.

Conclusion

Given all the uncertainties surrounding Covid-19, the economy and the election, we recommend investors maintain a somewhat defensive and very diversified stance in one of the most difficult and unusual years in modern history. The next two quarters should answer many questions with regard to the race to produce a vaccine for COVID-19 as well as the pace and shape of the U.S. and global recoveries. However, your financial goals stretch well beyond this calendar year, so your investment decisions should be guided by your longer-term strategy, not simply the next several months. At the same time, disciplined portfolio positioning and periodic adjustments can help keep you on track toward your goals as we navigate the remainder of this historic year.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov. The S&P 500, or simply the S&P, is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices, and many consider it to be one of the best representations of the U.S. stock market.

PAYCHECK PROTECTION PROGRAM

The Paycheck Protection Program (“PPP”) authorizes forgivable loans to small businesses to pay their employees during the COVID-19 crisis. The following contains recommended strategies for using those funds in compliance with the rules of the program.

The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. SBA will forgive loans if certain criteria are met and the money is used for specific qualifying expenses. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.The loan amount is based on 2.5 times your average monthly payroll up to a maximum of $10mm. Payroll includes U.S. based  W-2 employees up to $100k per employee. Sole proprietors should use 2019 Schedule C income to determine loan amount.

You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. You should consult with your local lender as to whether it is participating in the program. 

Once you have been approved for the funds and the distribution is made to your account, you have 8 weeks to meet the criteria for loan forgiveness under the program. If you do not meet the requirements, a portion or all of your distribution will convert into a 2 year loan at 1% interest with a 6-month deferral. 

Here are some tips to ensure compliance and maximum forgiveness with the PPP rules:

To receive loan forgiveness, you have 8 weeks starting on the day the loan is disbursed into your account to spend the funds on qualifying expenses.

At least 75% of your loan must go towards:

  • Gross pay;
  • ER paid health care;
  • ER match retirement;
  • State unemployment tax;
  • Severance pay

Up to 25% of your loan may go towards:

  • Rent
  • Business loan interest
  • Utilities

Maximize qualified expenditures during the 8-week period to meet the 75% requirement by paying wages more frequently, making retirement contributions, and early bonuses if necessary. Be sure not to exceed the 100k cap on total gross wages. If you cannot meet these expense requirements, the portion of your loan deemed not forgivable will convert into a 2 year loan at 1% with a 6 month deferment period.

It’s important to track these expenses to ensure you do qualify for maximum forgiveness on the loan. It is the borrower’s responsibility to provide proof of qualifying expenses. First, we recommend you set up a separate bank account to track what your spending for future audits to avoid claw backs and disallowed costs. A clear audit trail with separate dedicated bank account easiest way to go. Where possible, avoid commingling of funds with your existing business assets. If you have already deposited the funds into your regular business account, we recommend you move the funds you have not yet used into a separate account and create a clear audit trail of the funds you have already spent as well as the transfer into the new account. Also, be sure to write down the reasons your businesses needed the loan to support your attestation that your business was impacted by Covid-19. In the event of an audit, you will want to have clear evidence that your business was adversely affected.

There are two major reductions that can effect your loan forgiveness. Loan forgiveness will be reduced if either of the following occurs:

Employees who made less than $100,000 of compensation in 2019 have their compensation reduced by 25% or greater or the number of full-time employee equivalents is less than the same number of employees during either (you may choose the more favorable period):

     February 15, 2019 through June 30, 2019; or

     January 1, 2020 through February 29, 2020.

Treasury Department has stated that you can hire employees back by June 30, 2020 and still qualify for forgiveness.

Avoid double dipping into other programs designed to help small business. The Employee Retention Credit is not allowed if you take a Payroll Protection Program loan. In general, higher average payroll tends to favor using the PPP, while lower salaries may make using the Employee Retention Credit a better move. In either case, you cannot use both. If you have all or a portion of your PPP loan forgiven, you cannot use the deferral of payroll taxes provision. If you receive a PPP loan and use it to pay your own compensation, you likely will not qualify to receive unemployment assistance until the loan has ‘run out’.

Do not misuse PPP funds. If you realize you made an error, contact your bank to remedy the error immediately. Misuse of PPP funds is subject to criminal penalties.

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.

Moving for Tax Breaks

In recent years, high-tax states began to suspect a tax-dodging trend as more taxpayers changed residences while still maintaining ties to their former home states. As a result, these states have been more aggressive with their residency audits. Increasingly, states are challenging former residents who attempt to change their domicile to another state.

Although the rules vary among states, generally speaking, most states define a “resident” as an individual who is in the state for other than a temporary or transitory purpose. States consider a person’s “domicile” to be the place of his or her permanent home to which he or she intends to return to whenever absent from the state for a period of time. Most claim the right to tax an individual’s income if they are believed to be a resident and domiciled in that state.

  • Location of employment
  • Location of business relationships and transactions
  • Serving on the board of directors for a business or charity
  • Residence—whether a person’s former residence was sold, rented, or retained, and whether he or she rented or purchased real property in the new state
  • The amount of time spent in the state versus amount of time spent outside the state (183-day rule)
  • Where the taxpayer is registered to vote
  • Location of the school a family’s child attends
  • Memberships in country clubs and social organizations
  • Where charges are incurred, location of bank accounts, investments, and ATM withdrawals
  • Freeway fast-lane pass charges
  • Records of airline frequent-flier miles
  • Jurisdiction issuing a driver’s license, vehicle registration, professional license, or union membership
  • Church attendance and membership
  • Location of doctors, dentists, accountants, and attorneys
  • Official mailing address and where mail is received

Each state also has specific rules that can trigger audits. Three major red flags are 1.) a significant increase in taxable income in the year of residency change; 2.) a spouse with a different state of residency; and 3.) filing a resident state return in the first year after a move and then filing a non-resident state return the next year.

Taxpayers have the burden of proving which states they spend time in during the year. If you live elsewhere but travel on a regular and frequent basis to another state, it is a good idea to maintain a diary that clearly indicates the dates you are in a specific state, accompanied by supporting records such as transportation tickets and receipts.

Just as establishing as many ties as possible to the new state can be helpful when a change of domicile is desired, it’s also helpful to try and sever ties to the old domicile. When domicile challenges arise, they almost always revolve around the old state being unwilling to give up its status as “domicile,” rather than an issue of the new state refusing to accept that status.

Unfortunately, there’s no single bright-line test that can be used to “prove” a change in domicile, because it’s based on a determination of “intent” that simply isn’t always clear. But the good news is that there is a long list of “dos” and “don’ts” that individuals can follow to help give themselves the best opportunity at proving a bona fide change that can result in lower income taxes, lower real estate taxes, enhanced creditor protection, and other valuable benefits.

Important Disclaimer

Callan Capital does not provide individual tax or legal advice, nor does it provide financing services. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. Callan Capital outsources to lending and financial institutions that directly provide our clients with, securities based financing, residential and commercial financing and cash management services. For more information, please refer to our most recent Form ADV Part 2A which may be found at http://www.adviserinfo.sec.gov.