Election Update: What's Next for Taxes?

Tax Reform on the Horizon: What You Need to Know

Dear Friends and Clients,

As we look ahead to 2025, there’s growing talk about the future of tax reform—and more specifically, the potential extension of provisions from the Tax Cuts & Jobs Act (TCJA) of 2017. With Republicans holding the reins of both the legislative and executive branches, many believe that tax reform will play a major role in the federal budget process next year.

So, what does this mean for you, your financial plans, and the economy at large? Let’s dive into some key areas that could see change, and what it might mean for your financial world.

Will Individual Income Tax Rates Stay the Same?

If you’ve enjoyed the lower tax rates since the TCJA was enacted, you’re not alone. In my view, the individual income tax rates are likely to stay as they are for the foreseeable future. Along with these rates, the higher standard deduction is likely here to stay as well. 

What About the State and Local Tax (SALT) Deduction?

The SALT deduction has been a hot topic since the TCJA capped it at $10,000. If you live in a high-cost-of-living area, this cap has undoubtedly felt like a financial burden. Many believe this cap will be revisited in 2025. If this is something that affects you, it’s worth keeping an eye on—changes here could be a real win for those in high-tax states.

Estate Taxes: What’s Changing?

For those with significant estates, you may have noticed the $12.92 million individual estate tax exemption that’s currently in place. This exemption was set to expire after 2025, which caused some high-net-worth families to rush to use it before it potentially drops. Here’s some good news: With a Republican-controlled Congress, it’s likely that the current estate tax exemption limit will be extended. This could take a lot of pressure off of families who were scrambling to reduce their estates in time. If estate taxes have been part of your planning conversations, this could give you more breathing room to plan with confidence.

Corporate Taxes and the Qualified Business Income (QBI) Deduction

A major tax reform goal of the Trump campaign is to lower corporate tax rates, which currently sit at 21%. They have reiterated plans to reduce this to 15%, which could have wide-reaching effects on both large corporations and small businesses. If this tax reduction takes place, we may also see changes to the Qualified Business Income (QBI) deduction, which allows pass-through entities to deduct up to 20% of their income. There’s even the possibility that the QBI deduction could be expanded or have its income limits adjusted. For small business owners or anyone in pass-through entities, this could be a great opportunity to maximize tax savings.

The Bigger Picture: What About the Budget?

Of course, any change to the tax code comes with a cost, and the Tax Foundation estimates that making the individual, business, and estate provisions permanent could add approximately $4.25 trillion to the deficit over the next 10 years. How Congress decides to offset this cost will be part of the ongoing debate. However, it’s clear that these changes could have a significant impact on your bottom line.

Child Tax Credits:

Increasing the child tax credit is an area that has broad bipartisan support, as it was something that both the Trump campaign as well as the Harris campaign promised to increase. Raising a family is not cheap (I have two girls and a boy on the way). The current Child Tax Credit is $2,000. The campaigns had mentioned figures as high as $5,000 or $6,000. We could also see a return to the $3,600 level that the Biden administration temporarily put in place.

This was one of the most popular tax policies of the Biden administration and both parties saw the positive impact on families as well as reduced child poverty and hunger.

One long-term benefit of this is the hope that the U.S. is able to increase its birth rate. One of the long-term problems that will only get worse financially for the U.S. is entitlement spending with an increasingly aging population and smaller generations in the workforce to pay for it. When Social Security was created, the average life expectancy was 63 and the Social Security retirement age was 65. So the average person didn't make it to social security and the average claim was only a few years. Now the full retirement age is 67 and the average life expectancy is 77.5 years, with the average claimant receiving benefits for 13-16 years. That is a generational math problem that needs to be accounted for.

How the Heck are we going to pay for this?

You may now be asking yourself, "All of these are tax decreases. How the heck are we going to pay for this when the government is running at a deficit as is?" That is an extremely reasonable question to ask. As of the current proposals the Trump administration has put on the table, would increase the deficit. The tax cuts would be partially offset by repealing green energy tax credits and from proposed tariffs. 

In my view, the bull case that is not currently factored into the deficit projections is what happens if the tariffs are used as a negotiating tool to bring down tariffs on U.S. exports to other countries. If this comes to fruition, we could see a rise in GDP and tax revenue to further offset the proposed tax cuts.

That being said, if the United States were a family making $100,000 a year, they would be carrying approximately $110k in personal debt. Call me cynical, but we have a spending problem. Republicans tend to cut taxes without spending reductions, and Democrats tend to increase spending without raising enough in taxes. This is pretty natural as elections are by popular vote and unfortunately, running on realistic promises that are tax-neutral or better is not an election-winning strategy.

I am once again thankful to live in Texas, where having a balanced budget is in the state constitution. Maybe our federal government will learn a lesson from us someday.

Stay Proactive, Stay Informed

While the tax landscape is certainly shifting, I want to emphasize how important it is to stay proactive in your financial planning. Tax laws are always evolving, and it’s crucial to work closely with your trusted tax, legal, and accounting advisors to ensure you’re well-prepared for whatever changes come down the pipeline. By staying informed and taking action now, you can make sure you’re optimizing your strategies to work in your favor.

I’ll be closely monitoring developments on Capitol Hill, and I’ll continue to keep you posted on any major updates. In the meantime, don’t hesitate to reach out if you have any questions or concerns about how these potential changes might affect your financial plan. The more proactive you are, the better positioned you’ll be.

Stay tuned, and let’s keep moving forward together!

Warm regards,

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