In this article, we would like to explore the potential tax changes and their implications in light of the outcomes of the 2024 U.S. presidential election:
Extension of the 2017 Tax Cuts and Jobs Act (TCJA)
Background: The TCJA, enacted in December 2017, made significant changes to the tax code, including lowering individual income tax rates, increasing the standard deduction, capping state and local tax (SALT) deductions, and raising the estate tax exemption.
Potential Changes: If the TCJA provisions are extended, many of these benefits will continue to exist, potentially impacting taxpayers across different income levels. Conversely, letting them expire could lead to higher tax bills for many individuals, as tax brackets would revert to pre-TCJA levels, and the standard deduction would decrease.
Estate and Gift Taxes
Current Structure: The TCJA raised the estate and gift tax exemptions to $13.61 million per individual and $27.22 million per couple (2024 amounts, indexed for inflation).
Proposals: Without an extension, these exemptions are set to decrease significantly. on January 1, 2026, the federal lifetime exemption amount will be reduced to approximately to one half of the current value. Based on the rate of inflation, the exemption as of January 2026 is expected to be approximately $7,000,000 per person. Proposed changes might also include eliminating the step-up in basis for capital gains above certain thresholds, affecting how inherited assets are taxed.
We expect this matter to be a significant debate topic for the candidates.
Income Tax Rates
Current Structure: The TCJA lowered the top individual income tax rate to 37% and adjusted the brackets for other income levels.
Proposals: There are discussions around potentially increasing the top marginal tax rate. Some candidates propose raising the rate on high-income earners (e.g., those making over $400,000 annually) and could introduce a minimum tax on total income, including unrealized gains, for ultra-wealthy individuals.
Capital Gains and Dividends
Current Structure: Long-term capital gains and qualified dividends are taxed at lower rates than ordinary income, with rates of 0%, 15%, or 20%, depending on income level.
Proposals: There’s potential for these rates to be aligned more closely with ordinary income tax rates. Some candidates suggest taxing capital gains and dividends at the same rate as ordinary income, which could significantly impact investors and individuals with substantial investment income.
Child Tax Credit (CTC)
Current Structure: The TCJA increased the CTC to $2,000 per child and made it partially refundable.
Proposals: Expanding the CTC could involve increasing the credit amount or expanding eligibility. During the pandemic, the CTC was temporarily increased to $3,600 per child, showing the potential for more substantial support for families with children.
Retirement Savings
Current Structure: Roth IRA conversions and the ability to make non-deductible contributions to traditional IRAs and then convert them to Roth IRAs are allowed.
Proposals: There is discussion about limiting or eliminating back-door Roth IRA conversions and mega-back-door contributions. Changes here could impact high earners’ ability to use these tax-advantaged savings strategies.
Social Security Taxes
Current Structure: Social Security benefits are partially taxable based on income thresholds. The current system taxes up to 85% of benefits for high-income individuals.
Proposals: Potential changes include increasing the income subject to Social Security taxes or eliminating the tax on Social Security benefits entirely, which could impact how benefits are taxed.
Corporate Taxes
Current Structure: The TCJA reduced the corporate tax rate from 35% to 21%.
Proposals: There’s a possibility of either increasing the corporate tax rate or providing further tax relief to corporations. Proposals might range from moderate increases to more substantial cuts, impacting business tax planning and corporate profitability.
Net Investment Income Tax (NIIT)
Current Structure: The NIIT imposes a 3.8% tax on investment income for individuals with income above certain thresholds.
Proposals: There is discussion about increasing this rate, which would affect individuals with significant investment income. Changes could alter the after-tax returns on investments.
Taxation of Tip Income
Current Structure: Tips are subject to income tax and must be reported by employees.
Proposals: There are discussions about potentially eliminating or adjusting the taxation of tip income, which could simplify reporting for service workers or provide tax relief.
Impact on Financial Planning
Given the potential for significant changes, it’s important to:
Monitor Proposals: Stay informed about which candidate's policies might prevail and how they could impact your financial situation.
Prepare for Various Scenarios: Consider how different tax proposals might affect your income, investments, and estate plans.
By staying engaged with ongoing tax policy discussions and preparing for a range of possible outcomes, you can better navigate the implications of the 2024 election on your finances.
At Trowbridge Professional Corporation, our team of tax experts specializes in optimizing tax strategies and help you to adjust your tax planning strategies in light of potential policy changes.
If you're interested in learning more about how we can assist you in optimizing your tax planning strategies, we invite you to schedule a call with us today. Our dedicated professionals are here to guide you through the process and answer any questions you may have.
Authors: Harsh Agarwal, Manager, Private Client Services
Kirill Chistyakov, Director, Private Client Services