*The information being provided is for informational purposes only and does not constitute tax advice or any political opinion of Stopp & VanHoy CPA’s and Business Advisors. The purpose of this article is to raise awareness of the tax laws that may be enacted based on the tax policy changes proposed by the presidential candidates, and to help our clients consider the potential impact to their tax situation.

 

The 2024 presidential election is fast approaching, and the candidates have significantly different and heavily debated views on taxation that will have far-reaching effects for all Americans. As we near the sunset of the Tax Cuts and Jobs Act (TCJA) at the end of 2025, understanding the impact of those proposed changes – if enacted – is crucial in planning for your business and personal finances.

 

Tax and Economics

Federal taxes, being the main source of revenue for the government, are part of a much larger, complex economic system. Since 1970, in all but four years the government has run a deficit (government spending is exceeding revenue), and we continue to see an increase in the total federal debt. These can lead to inflation and increasing interest rates, contributing to rising costs for both businesses and individuals.

However, some economists argue that a federal deficit is not the issue, but rather, what the deficit was caused by – whether the deficit is temporary to spark growth in the economy, or it merely decreases federal revenue without generating new economic outputs. Other economists believe that running a deficit during times where the overall economy is strong results in slowed economic growth.

Whatever economic analysis you favor, there is no question that government spending and revenue is directly impacted by tax policy. While the candidates have some overlapping tax views, many sources believe that both candidates proposed changes would ultimately result in a federal deficit and further increase the national debt.

As we compare the proposed tax changes for each presidential candidate, consider the following:

·        How would the change directly affect your business or personal tax situation?

·         Would the change create an economic snowball effect, having an indirect impact on your tax situation?

·        Would this create additional complexities to reporting requirements, recordkeeping, and other administrative tasks?

·        How would this affect the federal deficit and federal debt (thus, interest rates and inflation)?

·        Would the change stimulate the economy, resulting in economical growth? Or does the change come at too high of a cost and lack substantial economic return?

Currently, we are experiencing some breathing room from inflation rates, a healthy rise in the stock market, and interest rates on the decline- signs of an economy that has rebounded from a recession. However, we also still feel an impact in many sectors – the housing market, insurance rates, grocery costs, healthcare premiums, and energy prices- to name a few.

The presidential candidates offer promise and solutions to offset what feels like a repetitive cycle of ever rising costs, but how those solutions are to be funded remains a bit muddy.  As we compare the proposed changes head to head, keep in mind that while the candidates may have their own agenda on tax policy, they do not possess the authority to enact any changes without the approval of congress.

 

Business:

Under current law, the corporate tax rate is 21%, AMT rate is 15%.

Harris:

·        Increase the corporate tax rate to 28%, AMT rate to 21%.

·        Make permanent the excess business loss limitation for pass-though entities.

·        Create “America Forward” tax credits aimed at key industries such as AI, clean energy, the steel industry, farming, manufacturing, and transportation.

Trump:

·        Lower the corporate tax rate to 15% for US producers, and 20% for all others.

·        Require tariffs, including a range of 10-20% base tariff on all imports, a 60% tariff on imports from China and tariffs on automobile imports.

·        Require a tariff of 10% on all US exports to foreign countries, with a higher tariff on exports to China.

 

Individual Taxes

Under current law, the highest marginal tax rate is 37% for incomes over $609,350 ($731,200 MFJ). Gains from a like kind exchange are deferred under IRC section 1031.

Harris:

·        No increase in tax rates for incomes under $400,000 ($450,000 MFJ)

·        Increase the highest rate to 39.6%

·        Limit gain deferral under section 1031 (like-kind exchanges) to $500,000

·         Limit retirement contributions for high income individuals with large account balances

Trump:

·        Replace individual income taxes with tariffs, including a range of 10-20% base tariff on all imports, a 60% tariff on imports from China, a tariff of 10% on all US exports to foreign countries, with a higher tariff on exports to China.

·        Create an itemized deduction for auto loan interest.

 

Capital Gains and Dividends

Under current law, high income earners ($583,751 MFJ, $518,901 all others) are taxed at the long-term rate of 20%. Additionally, a 3.8% net investment income tax (NIIT) applies for incomes exceeding $250,000 MFJ ($200,000 all others).

Harris:

·        Increase the long-term capital gains and qualified dividends rate to 28%, and to 33% for those with income over $1 million.

·        Increase the net investment tax rate to 5% for incomes exceeding $400,000, and tax carried interest as ordinary income.

Trump:  No changes discussed.

 

Deductions

Under current law, state and local tax (SALT) limited to $10,000 deduction.

Harris:

·        Increase small business startup deduction from $5,000 to $50,000.

·        Disallow deduction of compensation over $1 million

Trump:

·        Eliminate or increase SALT deduction limit.

 

Credits

Under current law, the child tax credit (CTC) maximum is $2,000 per child

Harris:

·        Expand CTC to be fully refundable at $6,000 for 1 year and under, $3,600 for ages 2-5, and $3,000 for ages above.

·        Expand the EIC credit to those who do not claim children.

Trump:

·        JD Vance has discussed increasing the CTC to $5,000 (this has not been confirmed by Trump).

 

Estate Tax:

The current exemption limit for 2024 is $13.61 million, and appreciated property transfers receive a step up in basis at death.

Harris:

·        Tax unrealized capital gains exceeding $5 million ($10 million MFJ) at death.

Trump:

·        Permanently extend the estate tax reductions under TCJA

 

Exemptions

Under current law, up to 85% of social security benefits may be taxable. Income from tips and overtime pay are subject to tax.

Harris:

·        Exempt tip income from taxation.

Trump:

·        Exempt tip income, social security benefits, and overtime pay from taxation. Overtime income would also be exempt from employee payroll taxes, however, the employer payroll taxes and overtime rates would still apply.

 

Note: It is unclear if either candidate has proposed whether payroll taxes for the employee or employer would still apply to exempt tip income.

 

Just days away from the election, we won’t have to wait long to see where our financial future may be heading. As we are faced with a changing political environment, staying engaged with your tax advisor is the best way to plan for a variety of tax scenarios. Contact Stopp & VanHoy, CPA’s and Business Advisors to help you navigate the increasingly complex environment surrounding tax policy. We are committed to being proactive in order to mitigate the risk of unfavorable tax implications, while taking advantage of potential credits and deductions that may be available to you, or your business.