Tax policy facing many 'what if?' questions after presidential election
“To the victor go the spoils,” a remark derived from something New York Sen. William L. Marcy said following the 1828 election of Andrew Jackson as U.S. president, applies to President-elect Donald Trump in his ability to set the nation’s tax agenda.
Trump can now push for the tax changes for which he advocated during the campaign. Whether he’s willing to go to the mat for all of them is another matter. The hard part of anticipating what’s down the road is the number of “What if?” questions along the way.
Among Trump’s tax policy initiatives is extending the 2017 Tax Cuts and Jobs Act, passed during his first term and set to expire in 2025; a tax deduction on auto loan interest; no taxes on tips; eliminating taxes on Social Security benefits; no taxes on overtime pay; and ending double taxation on Americans living in foreign countries.
With Republicans in charge in Congress and the White House, the president-elect will get some, but probably not all, of what he wants. Therefore, it’s too soon to make detailed financial plans based on Trump’s proposals alone.
TCJA extension is almost certain. When the TCJA passed, it was the largest tax overhaul in decades. The TCJA changed all seven tax brackets and made changes deep into the tax code. For example, prior to the TCJA, 39.6% was the top individual tax rate for incomes above $415,051. The TCJA lowered the top individual rate to 37% on incomes higher than $609,350. For married couples filing jointly, the 39.6% rate was assessed on incomes above $488,950; under the TCJA, it’s $731,200 and above.
If the TCJA isn’t renewed, tax brackets return to their pre-TCJA levels, meaning many Americans will pay higher taxes. There’s no Republican sentiment to raise taxes – and it’s not likely something most Democrats want laid at their political doorstep.
The TCJA reduced corporate taxes to 21%, down from a maximum of 35%. This part of the TCJA doesn’t expire. Vice President Kamala Harris’s proposal to raise the top corporate tax rate to 28% is now a non-concern for businesses, their employees and the people who purchase goods and services (businesses typically pass the tax-cost increase on to consumers, or cut costs, which impacts employees and infrastructure).
Two other TCJA provisions, among others, ending in 2025 if not renewed are the $10,000 state and local tax (SALT) deduction for taxpayers who itemize their deductions, and the pass-through 20% deduction for qualified business income.
Politics are complicating tax and financial planning for many people and businesses because, if one expected Harris to win and based financial planning on her proposals, they’re now useless. At the same time, Trump's tax plans, tariff decisions, etc., may end up being very different than conceived during the campaign.
Running headlong into every tax proposal are the federal debt and deficit. The U.S. government ran a $1.8 trillion deficit in the last fiscal year. The national debt is approaching $36 trillion. U.S. taxpayer-paid interest on the debt has topped $1 trillion annually. It’s often maintained that tax cuts result in higher economic growth; however, if spending increases at or near the rate of growth, nothing changes.
Flexible financial strategies make sense in this political environment, A flexible strategy considers “what ifs” in looking to the future: What if the TCJA provisions sunset? What if only some of them go away? What if tariffs increase, even if less than Trump proposed? What if SALT deductions survive, or don’t? Flexible strategies focus on what is certain or most likely to happen, and build the plan around those elements, reacting as necessary to changes. Work with your accountant or financial adviser to map a plan that can be adapted to realities as they unfold.
The spoils of victory are Trump’s. How that affects everyone else is, as yet, unknown.
This article first appeared in Knox News.