Personal Finance

Taxes: Hillary Clinton vs. Donald Trump

Income Tax
Income Tax

Ready or not, the presidential election that will decide who becomes the 45th president of the United States is just one month away. Regardless of who wins, we're bound to see history made with either Democratic nominee Hillary Clinton becoming the first woman president or Republican Donald Trump ascending to the Oval Office despite having no political or military background.

Hillary Clinton vs. Donald Trump on taxes

As we near the Nov. 8 election date, the issues most important to the American people are coming to the forefront -- perhaps none more so than taxes. Every American who earns income has a financial interest in how each candidate plans to grow the U.S. economy while generating enough federal tax revenue to fund critical programs and meet the government's obligations.

With this in mind, let's take a closer look at both candidates' very different approaches to federal tax reform.

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Now, let's have a look at Clinton's proposed tax reform:

Table by author. Data source: Internal Revenue Service.

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As you can see, Clinton aims to add a 4% surtax on earned income above $5 million, which would add an eighth progressive bracket and bring the new highest ordinary income tax rate to 43.6%. The remainder of the tax brackets for earned income below $5 million (at least with respect to ordinary income) would remain unchanged.

Table by author. Data source: Tax Foundation, Hillary Clinton campaign website.

Clinton has also trumpeted the "Buffett Rule," which would ensure that those with $1 million or more in income pay at least a 30% tax rate.

2. Capital gains tax reform

In addition to taxing ordinary income for the very well-to-do, Clinton has proposed altering the long-term capital gain tax benefits for those people with at least $5 million in earned income.

Under the current system, short-term capital gains on investments are taxed at your peak ordinary tax bracket, while long-term capital gains (defined as profits on the sale of assets held for at least 366 days) are taxed at a substantially lower rate. If your peak ordinary income falls into the 10% or 15% bracket, you'll owe 0% in long-term capital gains. If you're peak ordinary income is in the 25%, 28%, 33%, or 35% bracket, then your long-term capital gains tax rate is 15%. Finally, if you're in the highest current ordinary income tax bracket, then your long-term capital gains tax rate is 20%.

Under Clinton's proposal, medium-term and long-term capital gains for people with incomes of $5 million or more would be taxed at a substantially higher rate. Investors wouldn't see any reduction in long-term capital gains taxes until they held their investment for at least two years, and they wouldn't see the current 20% rate unless they were to hold for six or more years.

Additionally, high-income earners would almost assuredly be subject to the net investment income tax of 3.8%, as well as the aforementioned 4% surtax on earned income above $5 million in a given year.

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Table by author. Data source: Tax Foundation. "Marginal Tax Rate" = capital gains tax rate before net investment income tax and surtax on incomes exceeding $5 million.

3. Estate tax reform

Clinton is also taking aim at estate tax reform. She proposes boosting the estate tax rate to 45% from 40% on estates valued at more than $5.45 million per person (the federal exemption level in 2016). A more recent proposal would impose a 50% tax on estates over $10 million a person, a 55% tax on estates over $50 million per person, and a 65% tax on estates over $500 million for an individual or $1 billion for joint filers.

4. Social Security payroll tax reform

Fourth, Clinton aims to reform the Social Security payroll tax. Currently, earned income up to $118,500 is taxed at a rate of 12.4% (usually split down the middle between you and your employer), meaning any income above this amount is free and clear of being taxed by Social Security.

Income Corporate Tax Law Paper With Gavel Getty

Image source: Getty Images.

Trump has also taken exception with the estate tax, which he proposes eliminating. However, Trump does note on his campaign website that capital gains valued at over $10 million that were held until death would be subject to tax.

Trump also has plans to eliminate the Alternative Minimum Tax, which is a supplemental income tax imposed by the IRS on wealthier individuals who may be using a variety of tax loopholes to lower their effective tax rate to an artificially low level.

4. Big standard deduction increases for Americans (and parents), with a few exceptions

Finally, Trump's tax plan aims to boost standard deductions for everyone, with an added bonus for parents.

Aside from eliminating the head-of-household filing status and personal exemptions, single filers will see their standard deduction rise from $6,300 in 2016 to $15,000. Meanwhile, joint filers would see their standard deduction increase from $12,600 in 2016 to $30,000.

Trump has also proposed specific tax breaks for parents concerning child-care costs. Under Trump's tax proposal, Americans would be able to take above-the-line deductions on child-care expenses for children under the age of 13. These deductions would be capped at the state average dependent on the age of the child, and it would not be allowed for individuals with incomes over $250,000, or couples with more than $500,000 in income.

Trump also favors spending rebates for certain child-care expenses that lower-income families could claim through the Earned Income Tax Credit. Single filers earning up to $31,200, and married filers with up to $62,400 in income would qualify, and the ceiling on income would increase each year with inflation.

Which candidate has the better tax plan? Now that you have the facts, it's up to you and more than 219 million other voters to decide.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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