Let’s talk about income tax brackets, child tax credits, Social Security, and the potential expiration of the Tax Cuts & Jobs Act
Will Trump’s tax cuts impact you?
Thinking about a new presidency and the tax policy changes it will bring–and of course how that could impact your money–can definitely seem like a lot to wrap your head around, so lets set the stage for this article before you fully dive in:
Having been a financial advisor for 25+ years (and running Hendershott Wealth through more than five presidential turnovers) I’ve had the opportunity to witness my fair share of political wrangling. Every politician on the campaign trail makes a laundry list of promises, and when he or she takes office, we watch to see what policies actually shake out.
With each election and inauguration, I’ve witnessed the pressure people feel to take immediate action based on proposed policies from incoming politicians–and, like every other election, I want to remind you that until proposed policies are actually put into action, they are simply intentions.
When it comes to your money, I don’t want you to act on–or even spend much time thinking about–campaign promises or potential policies. I only want you to pay attention and act when those promises turn into legislation.
If/when policy or legislation changes are enacted in the coming months and years regarding taxes, Social Security, student debt, healthcare, interest rates, etc., my team and I will publish timely, evidence-based education and insights here on the blog, as well as on the Love, your Money® Podcast and in our weekly Money Love Notes.
And, of course, we’ll be facilitating strategic actions based on that legislation for our comprehensive wealth management clients.
We’re committed to staying educated about any legislative changes around tax and trade policies that will impact your money–and we take that responsibility seriously.
At Hendershott Wealth Management, our politics are the politics of hard-working, tax-paying Americans everywhere… what we like to call the politics of YOU. That means we pay attention to the political shifts that will impact your money and lifestyle, prioritizing:
- Your ability to defer income, tax free, into accounts where you can build wealth,
- You paying reasonable and fair taxes, which should provide you with the infrastructure and services you and your community can make good use of,
- Your ability to do the other things you want to do to live a life you love, including investing in real estate, securing a mortgage, getting good healthcare, driving safe cars, and even starting and running businesses.
In essence, we care about your ability to create your own American dream and thrive.
With this article, we want to step outside of drama-fueled headlines that are created to capture your attention (sometimes at the cost of your best interest!) to explore the proposed policies from the upcoming Trump administration–and what they could mean for the economy, and your money.
We’re not going to unpack each and every campaign promise (we’ll have future articles + podcast episodes to help with that as legislation is enacted!), but we are going to take time to review the potential changes that will have the greatest impact on the average American taxpayer – including our clients – and their wealth.
Now, let’s dive in!
Note:
While you won’t get specific investment advice in this article, I did record a bonus episode of the Love, your Money® Podcast back in November that shares my approach and investment strategy when it comes to political events like an election, how I deal with all the feelings that are along for the ride, and what I advise you do–or, more accurately, don’t–take action on.
Bookmark it for listening after you’ve read this article, and then take a deep breath. We’re in for the ride with you.
🔗 BONUS Episode | Pulse Check: The 2024 Election and Your Money
The Tax Cuts & Jobs Act
There are many provisions of the 2017 Tax Cuts & Jobs Act (TCJA), which Trump spearheaded in his first presidency, that are set to sunset (expire) at the end of 2025, so the administration may have a focus on extending those tax cuts.
Among the Tax Cuts and Jobs Act’s provisions set to expire are:
- The top income tax rate of 37%
- The top capital gains rate of 20%
- The $10,000 State and Local Taxes (SALT) deduction limit
- Higher standard deductions for married and single tax payers
- Higher federal estate and gift tax exemptions
- The flat 21% corporate tax rate
- Higher child tax credit and credit for non-child dependents
There is a lot packed in there–and the TCJA is something we’ll be talking more about in future articles and podcast episodes. For now, let’s look at the implications of one aspect of the impending TCJA sunset.
How the expiration of the TCJA’s State and Local Taxes (SALT) cap might impact your tax bracket
If the TCJA sunsets at the end of 2025, the State and Local Taxes (SALT) deduction limit will be removed and unlimited deductions to state and local taxes will be restored.
For taxpayers who have been relegated to taking the standard deduction since the TCJA was passed, the sunset of the SALT limitations may allow you to once again itemize your deductions – including your state income taxes and property taxes – and potentially pay less federal tax.
Deductible taxes include state, local, and foreign taxes on income, and state and local taxes on property.
According to the Tax Foundation, for itemizers with incomes exceeding $200,000, the average SALT reported before the cap was instated was highest in New York ($103,575), Connecticut ($79,344), and California ($78,246).
Let’s look at a look at a hypothetical scenario for a client in California, filing as married filing jointly and assuming the SALT cap sunsets and all other rules and tax brackets from TCJA stay the same:
This client has an AGI (adjusted gross income) of $485,000. Their deductible state and local taxes are $57,343 – but SALT has capped them at $10,000, and their other deductions total $24,000. Since their itemized deductions are less than the standard deduction, they claim the standard deduction.
With the SALT cap removed at the end of 2025, they’d be able to deduct the entire $57,343 paid in taxes in addition to their other deductions.
- They’d pay $15,181 less in federal taxes
- They’d pay $6,493 less in state taxes
Because the unlimited SALT deduction would lower their taxable income by $47k, their federal effective tax rate would drop from 21.83% to 20.64%, and their effective state tax rate would shift from 7.8% to 7.6%.
Again, to provide this outcome, all other rules from TCJA would have to stay the same. If TCJA sunsets as a whole, more households will be subject to AMT (Alternative Minimum Tax) rules and other regulations, which would further impact tax brackets.
In other words, it’s unlikely that the removal of the SALT cap would be a siloed event.
To estimate potential outcomes for your specific scenario, it’s best to consult your CPA or a financial planner who provides tax planning services. (Don’t have one you trust? Let’s chat.)
Trump’s potential tax policy impact
Income tax
Trump proposed cutting individual income taxes–the largest single source of revenue for the federal government since 1944. According to the Tax Policy Center, in 2022, individual income tax accounted for 54% of the $4.9 trillion revenue brought in on the federal level.
Other potential changes for individuals include eliminating income taxes on tips. (An exciting proposition for people who work in the service and hospitality industries.) There has also been talk about eliminating income taxes for police, firefighters, veterans, and recipients of Social Security benefits.
The TCJA, as mentioned earlier, introduced the $10,000 State and Local Taxes (SALT) deduction limit. If it does sunset at the end of the year, that cap will be eliminated, resulting in a reduction in taxable income, as illustrated in the example above.
Child tax credit
Another potential change for personal taxes comes from an idea talked about by VP J.D. Vance, who has suggested he’d like to increase the Child Tax Credit from $2,000 to $5,000.
Data shows the expansion of the child tax credit in 2021 reduced child poverty by more than one-third, despite issues of low-income families not receiving the full credit.
Corporate tax policy
For businesses, Trump has discussed reducing the corporate tax rate, introducing new research and development tax credits for businesses, and allowing new business owners to write off 100% of expenses during their first year of business.
Estate planning & inheritance tax policy changes in 2025
The TCJA temporarily raised the federal estate and lifetime gift tax exemption to $13.6 million per person until 2025, meaning you can leave an inheritance up to that amount to your heirs without incurring the federal estate tax–which can be up to 40%.
If the TCJA expires on December 31, 2025, that amount will revert back to $5,490,000 per person (adjusted for inflation) in 2026.
If it appears the exemption will decline that significantly, we will be doing some intentional planning with our high net worth clients and their estate planning attorneys in 2025 to utilize some of that larger exemption while it’s available.
Some of these strategies include making bequests to heirs or charities while you are alive, or using more complex tools such as Spousal Lifetime Access Trusts, Charitable Remainder Unit Trusts and Charitable Remainder Annuity Trusts.
Changes to federal tax on Social Security benefits
Trump has promised to eliminate taxes on Social Security benefits. For this to happen, he’d need at least 60 Senate votes to pass, requiring Democratic support.
From the IRS website, here’s a current breakdown of how Social Security benefits are taxed (“single” includes single, head of household, or qualifying widow or widower):
- If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on your Social Security benefits.
- For combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of benefits can be taxed.
- With combined income above $34,000 (single) or above $44,000 (joint filing), up to 85% of benefits can be taxed.
According to a detailed analysis from the Tax Foundation, in the long run on a dynamic basis, all income groups would see a slight increase in after-tax incomes, averaging about 0.9 percent (as shown in the chart, below), while the estimated reduction in tax revenue–which funds the Social Security and Medicare programs–would be about $1.4 trillion from 2025 to 2034.
Other analyses by the Tax Policy Center suggest the repeal of tax on Social Security benefits would lower taxes for US households by an average of $550 per year, with a price tag of $1.5 trillion over the next decade.
We’ll be keeping a close eye on what transpires here for both our retired and near-retirement clients.
Tariffs, trade policy shifts, and Trump’s reciprocal trade act
Tariffs have been Trump’s go-to proposed strategy to offset proposed tax cuts.
Tariffs have been around for a long time. There are decades of data showing that tariffs come with far-reaching, complex impacts, which most often negatively impact consumers.
If the US were to increase tariffs by 10% for China and 20% for Mexico and Canada as promised on the campaign trail, here’s a likely scenario:
Let’s say someone in the United States who is building a home imports lumber from a Canadian firm priced at $100 USD. In a world where Canadian imports are subject to 20% tariffs, a third-party importer would now have to pay $20 to the US Customs Office and the American consumer would ultimately pay $120 for that same amount of lumber.
After that, the ripple effects of tariffs are far-reaching.
Historical data has shown that tariffs such as the simplified example reduce competition and increase costs for businesses, leading to higher prices on the same goods for everyday consumers (i.e. paying more for the same thing you bought yesterday), changes in the workforce, and more.
According to the Tax Foundation, “Based on the conventional revenue estimates for 2025, a 10 percent tariff would increase taxes on US households by $1,253 on average and a 20 percent tariff would increase taxes on US households by $2,045 on average.”
Tariffs are an example of a concentrated benefit/diffused cost situation.
Using the lumber example from above, U.S. lumber companies have an incentive to keep that tariff in place–their lumber is now more affordable than Canadian lumber. With less competition, they have the concentrated benefit of either keeping their prices the same and selling a whole lot more lumber, or being able to raise their prices (without improving their products) and bring in excess profits.
The cost is diffused downstream, with the industries that rely on that lumber and the consumers buying those products paying the increased prices.
More from FEE (Foundation for Economic Education): Concentrated Benefits and Diffused Costs Explain the Persistence of Tariffs
We’ll continue to report on how potential and enacted tariffs may affect your personal finances.
So, what do the potential Trump tax and trade policies mean for YOUR financial planning needs?
We haven’t yet mentioned the impact of some of the proposed policies on the federal deficit that’s been a century in the making–a major concern for our country.
Just like household debt is bad for you and your financial plans, too much federal debt is bad for us as Americans.
Overspending is a bipartisan issue, and the truth is, political administrations come and go.
What ultimately impacts your American dream most is your personal finances. When you have a diversified portfolio you’re confident in and you’ve adequately protected your wealth, you can insulate yourself from external volatility and drama and truly live in your financial freedom.
So, setting aside the buzz around the incoming administration and campaign promises, the question I want to leave you with is this:
How confident are you in your portfolio?
If you’re feeling certain in its ability to weather news cycles and policy changes, cheers!
If you’re feeling rather uncertain, it might be a good time to schedule a conversation with a comprehensive, holistic, fiduciary financial advisor.
Together, we can review the overall risk profile of your portfolio and recommend specific actions to strengthen your position and alleviate your stress in the years ahead.
No matter which policies come to life (and which never see the light of day!), we’re committed to staying educated about how they’ll impact your money, so we can ensure all of your financial bases are covered.
The best approach to wealth management/financial decision making
is working with professionals who have your best interests in mind.
Reach out to our team of fiduciary advisors today. Together, we have more than 68 years of experience in the financial industry.
Our goal is to bring you elegant solutions and recommendations that are well-researched and evidence-based–and to keep those recommendations up-to-date as tides change.
Book a no-obligation chat today. We’ll help you determine your next best step.
All investing involves risk, including the potential loss of principal. There is no guarantee that any investment plan or strategy will be successful. Advisory services provided by Hendershott Wealth Management, LLC (“HWM”), an investment advisor registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
All written content in this article is for information purposes only. Opinions expressed herein are solely those of HWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
Sources, in order of use:
- LYM Bonus Episode: The 2024 Election and Your Money
- Irs.gov: Topic no. 503, Deductible taxes
- Tax Foundation: County Data Shows Repealing SALT Cap Would Benefit High-Income Earners
- Kitces: Alternative Minimum Tax (AMT) Planning After TCJA Sunset: Preparing Clients To (Re)Encounter AMT After 2025
- Tax Policy Center: What are the sources of revenue for the federal government?
- Census.gov: The Impact of the 2021 Expanded Child Tax Credit on Child Poverty
- Center on Budget and Policy Priorities: Expanding the Child Tax Credit Should Be a Top Priority in 2025 Tax Debate
- Investopedia: What Is the Tax Cuts and Jobs Act (TCJA)?
- Bankers Life: What to Know About the Estate Tax Sunset in 2025
- Irs.gov: IRS reminds taxpayers their Social Security benefits may be taxable
- Tax Foundation: Exempting Social Security Benefits from Income Tax Is Unsound and Fiscally Irresponsible
- Tax Policy Center: Trump’s Social Security Benefit Tax Repeal Would Lower Taxes, Accelerate Program Insolvency
- CNBC: Trump vows an additional 10% tariff on China, 25% tariffs on Canada and Mexico
- The Day: Trump’s tariffs won’t work, just as McKinley’s didn’t
- Tax Policy Center: What Is A Tariff And Who Pays It?
- Foundation for Economic Education: Concentrated Benefits and Diffused Costs Explain the Persistence of Tariffs
- Tax Foundation: Revenue Estimates of Trump’s Universal Baseline Tariffs
- CEIC: United States Government Debt: % of GDP