How Could the 2024 Election Impact Your Taxes?

How Could the 2024 Election Impact Your Taxes? What You Need to Know. 

Here’s a comparison of how the presidential candidates stand on tax cuts and increases.

In the 1988 election, George H.W. Bush famously declared, “Read my lips: No new taxes!” only to reverse that stance after taking office when budget deficits needed addressing. As the saying goes, history may not repeat itself but it often rhymes. 

Both presidential candidates are pledging tax cuts despite rising deficits. Whether these promises become law will largely depend on economic growth rates, which affect federal tax revenue, and the composition of Congress, which will influence the next president’s ability to implement their agenda. 

As we look ahead to the coming months, let’s examine the key tax issues the next president will encounter and what the candidates have stated so far. 

Will the 2017 tax cuts get extended?

A key issue for both Vice President Kamala Harris and former President Donald Trump is whether to extend the individual tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA) or allow many of its provisions to expire at the end of 2025. The TCJA made significant changes to the tax code, such as expanding tax brackets, lowering the top rate, increasing the standard deduction, capping mortgage interest, and limiting state and local tax (SALT) deductions. It also raised the federal gift and estate tax exemption. According to the Congressional Budget Office, simply extending the TCJA could increase the federal debt by up to $4.6 trillion by 2033.

Trump has expressed support for extending the 2017 income tax cuts, partially funding them through a 10% tariff on imports (with higher rates on Chinese goods). In contrast, during her 2020 campaign, Harris favored allowing the tax cuts to expire. However, she now supports President Biden's proposal to extend the cuts for individuals making under $400,000 a year, offsetting the costs by increasing taxes on high-income earners, capital gains, dividends, and corporations. Trump has also floated the idea of eliminating taxes on Social Security income, while Harris has suggested increasing taxes on higher-income recipients to strengthen the Social Security trust fund. Both have also mentioned ending taxes on tip income.

Here’s a closer look at how these policies could unfold.

Social Security Taxes: Harris has backed the Biden administration’s plan to impose Social Security taxes on earnings exceeding $400,000 to strengthen the Social Security trust fund. 

New Investment Income Tax: The Biden budget proposal for 2025 suggests raising the net investment income tax (NIIT) from 3.8% to 5% for individuals earning $400,000 or more. The NIIT currently applies to those with modified adjusted gross income between $200,000 and $250,000, depending on their filing status. The Medicare tax for earners above $400,000 would also rise from 3.8% to 5%.

Corporate Taxes: Harris has mentioned an increase in the corporate tax rate from 21% to 28%.

Explore This Comprehensive Guide on Navigating the 2024 Election

2024 Tax Planning

Trump Presidency

While Trump's tax platform is still evolving, if elected, he would likely seek to extend many of the provisions of the 2017 Tax Cuts and Jobs Act (TCJA).

Income Taxes: Trump would probably seek to extend the TCJA's income tax provisions, potentially temporarily, as Congress considers broader tax reforms. This could keep federal tax brackets at their current levels, with the top marginal rate remaining at 37%.

Qualified Dividends and Capital Gains: The TCJA reduced taxes on long-term capital gains by establishing separate brackets for assets held over a year and qualifying dividends, though the rates stayed at 0%, 15%, and 20%. It also maintained the 3.8% net investment income tax (NIIT) for higher earners. Some Republican tax experts have proposed lowering the top rate to 15% and eliminating the NIIT.

Harris Presidency

If elected, Harris may follow President Biden’s lead, possibly using his 2025 budget proposal as a guide. This plan suggests tax increases on the wealthy and corporations, letting certain provisions of the TCJA expire for higher-income individuals while offering tax cuts to lower- and middle-income earners. Additional tax hikes are also possible.

Income taxes: Biden’s budget proposes raising the top marginal rate on ordinary income from 37% to 39.6%, which will apply to taxable income above $400,000 for individuals and $450,000 for joint filers in 2024, adjusted for inflation after that. Harris may also consider a minimum 25% tax on total income, including unrealized capital gains, for those with a net worth over $100 million. Other marginal rates and income thresholds could also change.

Qualified Dividends and Capital Cains: Biden's budget suggests taxing qualified dividends and long-term capital gains at ordinary income rates, with a potential top rate of 37% or 39.6% if the highest marginal rate is increased.

Child Tax Credit: Harris has voiced support for expanding the Child Tax Credit (CTC), a tax benefit that helps offset the costs of raising children. The expansion could mirror the changes made under the American Rescue Plan Act during the pandemic when the current administration temporarily raised the CTC to $3,600 per child, making it fully refundable for families earning $2,500 or less.

Estate taxes: The TCJA raised the estate tax exemption to $13.61 million for individuals and $27.22 million for couples, but if the law isn't extended, these amounts could be reduced by half.

Additionally, the Biden administration’s 2025 budget proposal suggests removing the step-up in basis for capital gains exceeding $5.25 million for individuals or $10.5 million for married couples.

Retirement savings: Harris may support Democratic initiatives to limit or eliminate back-door and mega-back-door Roth IRA conversions, which allow higher earners to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA. These proposals were part of the 2021 Build Back Better Act but were not passed.

Social Security Benefits: Trump has indicated that he may consider removing all taxes on Social Security benefits. Currently, up to 85% of benefits are subject to taxation for single individuals with a combined income exceeding $34,000, and for couples with a combined income over $44,000. Below these income levels, either a lower percentage of benefits is taxed or may not be taxed. 

Child Tax Credit: The Child Tax Credit (CTC) was increased from $1,000 to $2,000 under the Tax Cuts and Jobs Act (TCJA). The eligibility income limits were also adjusted, broadening the phaseout range for higher-income earners while decreasing the fully refundable portion for those with lower incomes. These changes are set to expire at the end of 2025 unless Congress takes further action. Recently, during campaign events, vice presidential candidate J.D. Vance suggested that a new Trump administration might aim to double the credit once more. However, Senate Republicans recently rejected the proposal to expand it. 

Retirement Savings and Tax-Deferral: Republican tax policymakers have previously discussed the possibility of altering the tax-deferral treatment of retirement plans, commonly known as the "Rothification" of 401(k) contributions. This approach could generate revenue to help fund extensions of the Tax Cuts and Jobs Act (TCJA) by shifting more savings into non-tax-deferred retirement accounts, or Roth accounts.

Corporate Taxes: Trump is willing to support reducing the corporate tax rate from 21% to 15%. His administration previously lowered the rate from 35% to its present level. 

Focus on your plan 

A lot can change before the next president takes office. Stay engaged and prepare for various tax scenarios because everyone's financial situation differs. As Election Day approaches, consider consulting a financial or tax professional to discuss your specific needs. 

If you have any questions or would like more information on financial planning, you can visit our website or click here to schedule a call about your financial situation and needs.

Sources:

1. Congressional Budget Office, Extending Trump Tax Cuts Would Add $4.6 Trillion to the Deficit, CBO Finds, May 8, 2024
2. Committee for a Responsible Federal Government, US Budget Watch 2024, Donald Trump’s 60% Tariff on Chinese Imports, April 10, 2024.
3. Fidelity Viewpoints, The 2024 Election and Your Taxes, October 9, 2024