Understanding Trump’s Proposed Tax Changes: Implications for Taxpayers and Business Owners

04 Dec 2024 Understanding Trump’s Proposed Tax Changes: Implications for Taxpayers and Business Owners

Tax changes can have a direct impact on your paycheck, business operations, and overall financial strategy. President-elect Trump has proposed extending and expanding provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, along with introducing new measures aimed at reducing tax burdens for individuals and businesses.

While this is not an exhaustive list of every tax or economic proposal mentioned during his candidacy – nor are these plans set in stone – this article focuses on the proposals that form the cornerstone of his economic plan and have been fairly consistent throughout his campaign. We examine these proposals from a nonpartisan perspective, focusing on their potential effects and how taxpayers might prepare.

Extending and expanding the Tax Cuts and Jobs Act

The TCJA introduced sweeping changes to the tax code when it was enacted in 2017. Many of its provisions were designed to be temporary, with several set to phase out or expire at the end of 2025 unless extended. Trump’s tax platform focuses on making these provisions permanent and further reducing tax burdens in key areas.

For individual taxpayers, extending the provisions of the TCJA would keep the lower tax rates and expanded tax brackets in place, maintaining the current tax structure. The TCJA reduced the top marginal tax rate from 39.6% to 37% and widened the tax brackets overall. This led to tax cuts across various income levels. By making these provisions permanent, the proposed tax plan aims to continue these benefits and preserve the status quo for individual taxpayers.

For businesses

One of the most significant changes under the TCJA was the reduction of the corporate tax rate from 35% to 21%. Trump has proposed lowering this rate even further, potentially to 15%, which has the potential to stimulate economic growth and enhance U.S. competitiveness on a global scale. Proponents say reducing the corporate tax rate further would leave businesses with more capital to invest in expansion, research and development, and hiring, which can lead to job creation and increased wages. For owners or shareholders of C corporations, this change could be substantial, as lower taxes typically translate into higher after-tax profits and greater returns on investment.

Critics argue that further reducing the corporate tax rate could increase the annual federal deficit and the cumulative national debt, which may also have broader economic effects. Nonpartisan organizations like the Committee for a Responsible Federal Budget (CRFB) have expressed concerns that additional tax cuts could exacerbate fiscal imbalances if not offset by spending cuts or other revenue measures.

Small businesses structured as pass-through entities, such as sole proprietorships, partnerships, and S corporations, also benefited from the TCJA through the introduction of the 20% qualified business income (QBI) deduction. This provision is scheduled to expire in 2025. Extending or enhancing the QBI deduction could provide continued relief for small business owners and entrepreneurs, incentivizing further investment and growth.

Additionally, President Trump has indicated he would like to reinstate 100% bonus depreciation, a tax provision that allows businesses to immediately deduct the full cost of eligible assets in the year they are placed in service rather than depreciating them over several years. Under the Tax Cuts and Jobs Act (TCJA), 100% bonus depreciation was available for assets acquired and placed in service after September 27, 2017, and before January 1, 2023. However, this benefit began to phase down by 20% annually in 2023 and is set to be fully phased out by 2027. Reinstating 100% bonus depreciation could be beneficial to businesses of all types. By allowing immediate expensing of asset costs, businesses can reduce their taxable income in the year of purchase, leading to significant tax savings and improved cash flow. This incentivizes businesses to invest more in capital assets, which can stimulate economic growth.

Proposals to eliminate specific taxes

Several of Trump’s proposals focus on eliminating taxes for specific groups, with the goal of increasing disposable income. These changes could have significant impacts, but they also raise questions about potential broader implications.

Social Security benefits tax

Currently, retirees with combined incomes above certain thresholds pay federal taxes on 50-85% of their Social Security benefits. Eliminating these taxes would increase retirees’ disposable income, providing more flexibility for living expenses or discretionary spending.

However, the revenue generated from taxing Social Security benefits contributes to the funding of Social Security and Medicare programs. Removing this revenue source could exacerbate funding shortfalls, potentially accelerating the timeline for when these programs face solvency issues.

While it’s unlikely that Social Security and Medicare would be discontinued entirely, funding gaps might necessitate changes to the programs. This could include reductions in benefits, increases in payroll taxes, adjustments to eligibility requirements, or reallocations from other federal budget areas. For individuals who have paid into the system but are not yet eligible for benefits, there’s a risk that future benefits could be reduced or eligibility criteria could change if funding shortfalls aren’t adequately addressed.

No taxes on tips and overtime

Excluding tips and overtime pay from taxable income could increase the take-home pay for hourly workers, particularly those in the service industry. Yet, this policy could be complex to implement and may have unintended consequences.

This will likely incentivize non-exempt workers to seek more overtime hours. Increased demand for overtime could put pressure on employers, who may be cautious about incurring the additional costs associated with overtime pay. Businesses often try to minimize overtime expenses unless they are facing significant understaffing. To manage these costs, employers might limit the availability of overtime or hire more part-time staff to avoid paying overtime wages altogether. This shift could reduce overall earnings opportunities for some employees and alter staffing dynamics within certain industries.

It’s difficult to predict exactly how these changes would ripple through the labor market. Significant tax policy adjustments often lead to shifts in employer and employee behaviors that are hard to foresee. Nevertheless, employers should keep an eye out for potential changes to taxable income and consider how these might affect their operations.

Car loan interest deduction

Allowing taxpayers to deduct interest paid on car loans would reduce the effective cost of financing a vehicle. This could encourage car purchases, providing a boost to the automotive industry and related businesses. Increased consumer demand might drive higher revenues across the sector, potentially leading to job creation and economic growth within the industry.

However, consumers should approach this incentive with caution and consideration. While the ability to deduct car loan interest makes buying a vehicle more financially attractive, increased demand could also lead to higher car prices. It’s also important to remember that just because you can deduct interest doesn’t necessarily mean it’s wise to take on larger loans or incur additional debt. Individuals should carefully assess their personal financial situations to ensure long-term financial consequences don’t outweigh the immediate tax benefits.

Repealing the SALT cap

The TCJA placed a $10,000 cap on the amount of state and local taxes (SALT) that taxpayers can deduct from their federal taxable income. Trump has proposed lifting this cap, which could benefit taxpayers who itemize their deductions in high-tax states like California, New York, and New Jersey. While this may not impact a large number of taxpayers, it could result in meaningful tax savings for individuals in certain regions.

Proposed tariff increases and their economic impact

While not directly changing tax laws, President Trump’s proposals to increase tariffs are a significant part of his economic platform and operate much like taxes on imported goods. These tariffs are designed to bolster U.S. manufacturing and reduce reliance on foreign goods but carry the potential for widespread economic effects.

He has proposed measures such as a 10% tariff on all imports and a 60-70% tariff on goods from China. Additionally, there have been announcements about plans to impose a 25% tariff on all imports from Mexico and Canada. While these measures aim to encourage domestic production, they could lead to higher costs for imported goods, which businesses often pass on to consumers. Many economists predict that these tariffs could result in increased prices for electronics, clothing, home goods, and other everyday necessities, potentially straining household budgets nationwide.

Retaliatory tariffs and export challenges

Another critical consideration is the strong potential for retaliatory tariffs from key trading partners, which could further disrupt global trade. For companies that rely on international sales, these retaliatory measures could limit revenue growth and create additional financial pressures.

Supply chain disruptions

Businesses dependent on imported materials may experience higher production costs or delays in securing supplies. Industries such as technology, automotive manufacturing, and retail, which rely heavily on international supply chains, are particularly vulnerable to price volatility and logistical challenges. These disruptions could reduce product availability, lead to further price increases, and complicate long-term business planning.

Proactive planning to mitigate risks

To manage these challenges, both consumers and businesses should take proactive steps to prepare. Consumers should anticipate potential price increases for imported goods and adjust spending habits accordingly. Where possible, consider accelerating purchases of products that may become more expensive once tariffs take effect, which is expected in early 2025. Also, explore domestic alternatives to reduce reliance on imported goods.

Businesses should work with financial professionals to model the potential financial impacts of tariffs and develop strategies to manage increased costs. Negotiate with third-party suppliers to clarify who will bear the cost of tariffs, ensuring contracts reflect these changes. Review your inventory levels and consider accelerating procurement of critical materials before tariffs are enacted. And reevaluate supply chains to identify vulnerabilities and consider domestic sourcing to reduce exposure to tariffs.

What these tax changes could mean for you

For individuals, the proposed extensions of TCJA provisions could mean continued lower tax rates, though the benefits vary based on income and deductions. For business owners, enhanced deductions and reduced corporate rates could increase cash flow and provide opportunities for growth. However, these policies, along with proposed tariffs, may also have broader economic implications, such as increased federal deficits, shifts in labor and consumer markets, and higher costs for imported goods.

Understanding how these potential changes might affect your finances is critical for planning ahead. If you’d like to review your financial plans, please contact our office. Our expert advisors can help you navigate these evolving policies, take advantage of available tax benefits, and prepare for any potential adjustments.

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