With tax policy in the spotlight following the presidential election, many are wondering how proposed changes could affect their finances. Tax changes may not be the first thing on your mind, but they play a huge role in shaping the economy and our everyday lives. As it stands, the 2017 Tax Cuts and Jobs Act (TCJA), which brought sweeping tax reforms, is set to expire at the end of 2025, potentially altering tax rules for both individuals and businesses.
During his campaign, Trump pledged to make several tax provisions of the TCJA permanent. In addition, he proposed new tax cuts, including removing the state and local tax (SALT) deduction cap, eliminating taxes on Social Security benefits, tips, and overtime, and further reducing corporate tax rates. But these changes depend on Congress’s support, and while Republicans now control the Senate, the House is still uncertain. Here’s a breakdown of Trump’s tax plans and how they could impact you.
1. Extending Existing Tax Cuts
The TCJA brought notable reductions to income tax rates, particularly for higher-income earners. For instance, the top marginal tax rate was lowered from 39.6% to 37%. This tax cut applies to single filers with incomes over $609,350. The TCJA also doubled the standard deduction, making it easier for most Americans to avoid itemizing deductions. Additionally, the child tax credit was raised from $1,000 to $2,000, with a refundable portion of up to $1,400, providing extra support to families.
Businesses also benefited from the TCJA, which lowered the corporate tax rate from 35% to 21% and introduced a 20% deduction for pass-through business entities. To offset some of the costs, however, the TCJA removed certain deductions, such as personal and dependency exemptions, and imposed a $10,000 cap on the SALT deduction, which limits how much state and local tax payments can reduce taxable income.
Trump has expressed interest in making these TCJA changes permanent and eliminating the SALT deduction cap altogether. If he succeeds, high-income earners, in particular, may continue to enjoy lower tax rates and deductions for years to come. Removing the SALT cap could especially benefit those in high-tax states who have been significantly impacted by this limit.
2. Eliminating Taxes on Social Security Benefits, Tips, and Overtime
Another potential change involves removing federal taxes on certain types of income, which could provide additional relief to working and retired Americans. Trump has proposed eliminating taxes on Social Security benefits, which could be a game-changer for retirees. Currently, Social Security benefits are taxable if recipients earn additional income beyond certain thresholds. For single filers, benefits are taxable if combined income exceeds $25,000, while for married couples filing jointly, the threshold is $32,000. Depending on income, up to 85% of benefits could be subject to tax.
Removing taxes on Social Security benefits could provide extra income for retirees who may feel financially stretched. However, the biggest beneficiaries would likely be middle- to upper-middle-income retirees who have other sources of income but still rely on Social Security to meet their needs.
Trump also aims to eliminate taxes on tip income and overtime pay, which would benefit workers in industries where tipping and overtime are common. This could give a boost to service workers and others who depend on variable income, helping them keep more of their earnings. The proposal follows similar measures, like Alabama’s recent exemption of overtime pay from state taxes, and could provide extra financial relief for workers in various fields.
3. Lower Corporate Taxes and Higher Tariffs on Foreign Goods
Trump’s tax agenda also emphasizes reducing corporate taxes further, proposing to lower the corporate tax rate from 21% to as low as 15% for companies that produce their goods within the U.S. While no detailed plan has been provided, studies suggest that cutting the corporate tax rate to 15% for all corporations could reduce tax revenue by hundreds of billions of dollars over the next decade.
In addition to tax cuts, Trump has proposed a 10% tariff on all imported goods and a 60% tariff on imports from China. The goal is to protect American businesses by encouraging consumers to buy domestically produced goods. However, these tariffs could impact consumer prices, particularly on everyday items that are frequently imported, leading to higher costs for goods like electronics, clothing, and home goods.
Higher tariffs may be felt most by low- to moderate-income households, as they would likely face increased prices on imported items. While the intention is to boost American manufacturing, there’s concern that higher prices could offset the benefits of proposed tax cuts for individuals and families.
How These Proposals Could Affect You
For many Americans, these proposed tax changes could mean more disposable income, particularly for retirees, service workers, and those in states with high income taxes. Here’s a summary of who could be most impacted:
- Retirees: Those receiving Social Security may see extra income if benefits are no longer taxed, potentially providing more financial security.
- High-Income Earners: Removing the SALT cap and maintaining lower tax rates could result in significant tax savings, especially for those in high-tax states.
- Service and Overtime Workers: Workers who receive tips or frequently work overtime may enjoy higher take-home pay, as these earnings would no longer be subject to federal tax.
- Consumers of Imported Goods: Higher tariffs on foreign goods may lead to price increases, impacting consumers who rely on affordable imports for daily needs.
Planning Ahead
With these potential changes on the horizon, it’s wise to keep an eye on developments in tax policy. If you stand to benefit from these adjustments, planning ahead can help maximize your savings. Here are some steps to consider:
- Review Your Retirement Plan: If you’re approaching retirement and may benefit from tax-free Social Security, consider how this change could affect your overall financial strategy. Additional income could provide more flexibility in budgeting or allow for more comfortable spending.
- Evaluate Your Deductions: For those who live in high-tax states, the removal of the SALT cap could be a significant relief. Be prepared to take advantage of this change by assessing your state and local tax payments and considering how to optimize your deductions.
- Monitor Changes in Consumer Prices: If tariffs go into effect, it may be a good time to track any changes in the cost of imported goods. Adjusting your budget to account for higher prices can help prevent financial surprises down the road.
- Stay Informed: Tax policy is often subject to change, especially with shifting political landscapes. Keeping informed on tax legislation allows you to make adjustments and take advantage of new opportunities.
Conclusion
While tax policy can sometimes seem complex and distant, these proposed changes could have direct effects on many Americans’ financial situations. From retirees and working families to businesses, the potential tax cuts and new tariffs would bring both relief and challenges. As with any policy shift, it’s essential to stay informed and consider how these changes might impact your personal finances in the coming years.
