The Post-Election Impact on Future Tax Policy

Now that the 2024 General Election has concluded, some of the things that impact our financial lives that we could only guess about before may start to become clearer in the near future. One of those items is related to what we will have to pay in taxes. As a part of legislation passed in 2017 with the Tax Cuts and Jobs Act (TCJA), there were a number of changes to tax law, but many of those provisions were temporary and due to expire at the end of 2025. We have no crystal ball into the future, but with that legislation occurring under the first Trump Administration, there is a likelihood that some, if not all, of those temporary provisions will be allowed to continue instead of expiring. In fact, if the new administration follows through on what was stated in the Presidential campaign, there may be new tax cuts that are enacted during the coming years. However, for this issue of the newsletter, we will focus on the tax law changes that are currently set to expire and the effect of them continuing on instead of ending as the original law set forth.

Tax Rates and Income/Asset Limits
The changes to tax law implemented with the TCJA changed the marginal tax rates for the 7 different tax brackets. Prior to passage of the act, personal income tax rates ranged from 10% to 39.6%, and after the rates ranged from 10% to 37%. With those changes, 5 of the 7 tax brackets had a rate decrease with only the 10% and 35% brackets staying at the same rate. Each year, the income limits for each marginal tax rate are adjusted for inflation, but the other thing the act did was to significantly increase the income thresholds for the formerly 33% and 39.6% (and currently 32% and 37%) brackets while lowering the income threshold for the 35% bracket. Of course, a lower tax rate at the same taxable income level will always result in a lower tax bill, but with the shift of the income thresholds in the case of the now 32% and 37% brackets result in a greater reduction in tax for households at those higher income levels. While people in the 35% bracket may not have seen their marginal tax rate increase, some of them had more of their income taxed at that rate because of the decrease in the income threshold. Overall, the combination of changes to marginal tax rates and income thresholds by themselves resulted in slightly less taxes due for households in the bottom 4 tax brackets and more significant tax reductions for those in higher brackets, so the extension of these rates will generally result in more of the same. The TCJA also lowered the Corporate Tax rate from 35% to 21%, which significantly reduced the taxes on net profits of corporate businesses. This provision was due to expire at the end of 2025, but during the Presidential campaign, Donald Trump indicated he wanted to lower the Corporate Tax rate even further, which would not only keep corporate taxes lower than prior to the act, but that would result in corporations receiving further reductions in income taxes due. Another potential phaseout from the TCJA is the income thresholds for the Alternative Minimum Tax (AMT), a separate tax calculation for higher income households that eliminates certain deductions from income in determining the AMT. These higher income taxpayers would then pay the higher of their regularly calculated income tax or the AMT. Prior to the TCJA, the amount of income required to qualify was adjusted annually for inflation (between 2% and 6% from 2006 to 2017), but the TCJA boosted those numbers from the 2017 to 2018 tax year by almost 30%, which had the effect of eliminating most households from having the income necessary to qualify for the calculation. Since that boost, the income thresholds for the AMT have gone back to annual inflation adjustment. Should this TCJA provision be continued, a very limited number of taxpayers would continue to be subject to this tax, whereas, if it were to expire, many of those higher earning households would need to determine if they owed more taxes by the AMT calculation or their regular income tax calculation.

Tax Deductions and Exemptions
One of the changes brought about by the TCJA was a change to how offsets to income were treated. Prior to the act, taxpayers could either take the Standard Deduction or Itemized Deductions (whichever was greater), and they were able to claim personal exemptions for the primary taxpayers and dependents on their tax return. The TCJA significantly increased the Standard Deduction for all taxpayer types (Single, Joint, Head of Household), but it eliminated the personal exemption. For some households, the higher Standard Deduction balanced out the loss of the personal exemptions. However, if you itemized your deductions, you lost out on the additional income offset of personal exemptions. For those who itemize deductions, home ownership can often provide a large portion of the tax deductions. The TCJA imposed a limit on the amount of the Sales and Local Tax deduction (SALT) of $10,000 combined. The SALT deduction is generally comprised of the amount of state and local taxes withheld from income or sales taxes paid and property taxes (such as Real Estate taxes on a residence). The $10,000 limit largely affected homeowners whose property taxes pushed their SALT deduction over that limit. Because of the interconnection of the deduction amounts, deduction types, and exemptions, it is more case dependent how the continuation of these provisions of the TCJA would impact households. However, the expiration of those provisions in general would more likely have a positive tax impact on households that itemize deductions, and the continuation of the $10,000 SALT deduction limit further reinforces that argument. For households who take the Standard Deduction, the determination of impact is more a function of household size, and thus the number of personal exemptions available. Another exemption that is currently due to expire at the end of 2025 is the Estate Tax exemption, which removes assets from being subject to the estate tax. Similar to the AMT described earlier, the Estate Tax exemption has been increased for inflation annually. The TCJA doubled the exemption limits from $5.6 Million for Single filers and $11.2 Million for Joint filers in 2017 to $11.2 Million for Single filers and $22.4 Million for Joint filers in 2018. The effect, of course, was to keep many more individuals from being subject to paying any estate tax. If this provision were to expire, the amount of assets subject to estate tax would fall back to around $7.15 Million for Single filers and $14.3 Million for Joint filers. For the majority of households, even the old exemptions would not cause estate taxes to be owed, so the continuation of the current exemption levels, adjusted for inflation, would largely benefit those with significant household assets. The last deduction impacted by the TCJA we will discuss is the Deduction for Small Business Income. The act allowed a 20% deduction of what is called pass-through income for sole proprietorships, partnerships, and S-Corporations. This income passes through from business taxes to personal taxes, so the deduction serves to lessen the hit of that pass-though income. If this provision were to expire, for businesses of these structures that take advantage of the deduction, they would owe a larger amount of income tax on business profits.

Tax Credits
There was not much in the TCJA in the way of tax credits that would be subject to the 2025 sunset provision, but the Child Tax Credit is one of those. The TCJA doubled the amount of the Child Tax Credit from $1,000 to $2,000 per child. Subsequently, post-pandemic, in 2021, the credit was increased further to $3,000 for children ages 6 to17 and $3,600 for children under age 6, but that increase was terminated at the end of 2021, returning the amount to the $2,000 in the TCJA. Of the $2,000 credit, in 2018, $1,400 of the credit was refundable, meaning that even if a household did not owe any tax, they could still receive a $1,400 tax credit, an increase from $1,000 before the act. The refundability of the credit receives annual inflation adjustment, so for 2024, the refundable portion of the credit is $1,700. The TCJA also increased the income thresholds at which the credit phased out, which allowed households with higher income to be able to claim the credit. If the increased Child Tax Credit were to expire at the end of 2025 per the current schedule, the credit would return to the $1,000 level, which would essentially cut in half the available credit to families with children.

While the Trump Campaign indicated prior to the election the intent to extend the changes that were set to expire in the TCJA, you will need to stay tuned to see what is actually decided once the administration is in place.

Stewardship Emphasis

Income is one of the keys to your financial life, but it is not just important what you make, but what you keep.

The Empowerment Channel    |   Volume CCXXXI   |    Dedicated to Promoting Financial Education through Stewardship