Personal 2025 Tax Strategies for Either Election Outcome
Our Chief Investment Officer Brent Ciliano and Director of Market and Economic Research Phillip Neuhart recently shared their perspective on the financial markets amid the 2024 election.
As part of this discussion, they explored each candidate's economic policy proposals—including how your taxes may be affected. Here's a review of the proposed tax policies and some insight into what you can do to position your portfolio for success.
Each candidate's tax plan policy
Current tax policy discussions start with what's sunsetting as a result of the Tax Cuts & Jobs Act of 2017, or TCJA, expiring. As part of this law, the top individual income tax bracket rate was cut to 37%. If the cut isn't extended in 2025, the rate will return to 39.6%. This will happen automatically after the election if there's a divided government.
What is promised by the two candidates in a situation where there's full party control?
Kamala Harris has endorsed President Biden's fiscal agenda. This would see a return to a top marginal tax rate of at least 39.6%, with a potential surcharge on even higher incomes.
Donald Trump favors an extension of the 2017 tax cuts, and this includes the top individual tax bracket. But the top marginal rate cut might be removed as a result of budget negotiations.
Tax strategies based on candidates' policies
The most effective way to build a proactive tax strategy is to review each candidate's policy proposals individually. Then, identify actions you can take into 2025, and align your portfolio for future growth.
Vice President Kamala Harris
Economic policy proposal |
Tax strategies |
|---|---|
No tax increases for income less than $400,000 |
The law remains as is. No need for taxpayers below $400,000 to change their budget. |
Increase long-term capital gains tax rate from 20% to 28% for individuals with income of less than $1 million |
It impacts high-net-worth individuals or middle-income earners with a large-gains-generating one-time sale. This group should consider mitigating strategies, including an installment sale or Section 1031 exchange if possible. |
Increase top income tax rate to 39.6% for incomes more than $400,000 and increase net investment income tax, or NIIT, and Medicare tax from 3.8% to 5% |
TCJA sunsetting would bring more opportunities to lower increased taxes through deductions, including increased mortgage interest deduction, no state and local tax, or SALT, cap and a 2% miscellaneous deduction. Working with an advisor to capture offsetting losses may be useful. Losses include separate entity or tax loss harvesting. |
Expand the child tax credit, or CTC, from $2,000 to $3,600 with monthly payments, give a $6,000 one-time credit in the child's first year and expand earned-income credit |
CTC can help families pay for childcare and help reduce child poverty levels. Small business owners can use these benefits to find and retain lower-income employees when competing with big-box stores. |
$10,000 credit for first-time homebuyers, plus $25,000 down payment assistance for all first-time homebuyers |
This will allow younger adults, currently barred by interest rates and prices, to enter the homeownership market. Parents can help adult children with home purchases. Young single adults can enter co-ownership agreements, partnering to buy homes they couldn't afford individually. |
Increase in the SALT deduction limit |
Allowing more SALT deductions could offset increases in taxes for higher income individuals. This could also mitigate the impact of living in high-tax states like New York, California and Oregon. |
Eliminate taxes on tip income for taxpayers who earn less than $75,000 |
This is a policy shared with Trump. It will help those in jobs with high reliance on tips, such as waitstaff, and will increase general pressure on customers to tip. Some employers may try to reduce base salary and push tip income with the idea that employees will either break even or gain from the tax break. Some will try to recategorize other income as tips to fall within the tax-free definition. |
Increase the excise tax on stock repurchases from 1% to 4% |
New issues of stock to the public or employees—as well as employee retirement plans and buybacks valued at less than $1 million—avoid the tax. The company can pay dividends instead of repurchasing shares. Even at 4%, buybacks may still be more tax-advantaged. |
Tighten estate tax rules |
Work with a planner and estate tax attorney to implement one or more advanced wealth transfer strategies. The objective is to help lower your estate tax liability. This will mitigate the impact of a higher estate exemption and other transfer tax changes. |
Raise Section 195 small business tax deduction from $5,000 to $50,000 for the first year for new businesses |
New entrepreneurs can take this as an opportunity to start a venture. This could also be used to apply to new services split off from a current operating company. Discuss with an advisor how best to capture this benefit. |
Former President Trump
Economic policy proposal |
Tax strategies |
|---|---|
Extend personal income tax cuts |
Extending TCJA-lowered top rate of 37% and lower tax brackets would maintain reduced tax impacts on most households where they're currently in place. Taxpayers would need no additional action on taxes or budgets. |
Lower corporate tax rate to 15% to 20% |
Results may include decreased cost of capital; increases in productivity, output, wages and employment; and a larger economy. |
Impose 10% across-the-board tariff on all imports and up to 60% tariff on imports from China |
Importers of affected goods pay the tariff to the US Treasury. Corporations will likely pass the expense on to consumers. Lower-income consumers spend a higher ratio of income on goods and are likely to bear more of the increased cost by proportion. Presidents have wider latitude to implement tariffs than taxes, which require an agreeable Congress. This change would be easier to implement. |
Eliminate taxes on Social Security income |
Social Security is already near insolvency. This would further reduce funding, which comes from taxes. There would be advantages in the short term for some who are seniors heavily reliant on Social Security benefits. It may result in lowered benefits in the long term. |
Extend 100% bonus depreciation |
This gives companies an immediate tax deduction in qualifying short-lived assets. Many companies have used this to reduce their effective tax rate far below 21% to single digits. Permanent accelerated depreciation means companies may increase business investment or capital accumulation and create more jobs. They may also pay less to the government. |
Repeal green-energy tax incentives from 2022 Inflation Reduction Act |
Companies and individuals should take advantage of green-energy tax incentives now if repeal is a possibility. Many of these are popular and have benefitted high-net-worth individuals and large corporations. |
Reverse SALT |
The TCJA imposed a $10,000 cap on state and local tax deductions. Trump now seeks a reversal of this TCJA provision. If implemented, taxpayers—especially in high-tax states—could see their liabilities reduced, similar to what would be expected under Harris' proposal. |
Eliminate taxes on tip income and exempt overtime pay from taxation |
Effects are the same as those described in the Harris proposal. Exemption of overtime pay from taxation would end all taxes on overtime, which could cause a shift to salaried employees and eliminate overtime pay. This primarily benefits low-income employees and would result in reduced revenue to the government. |
Impose new tax on large private university endowments |
TCJA already imposed a 1.4% tax on large university endowments for institutions with 500 or more students and endowment assets greater than $500,000 per student. The new tax is aimed at elite schools with large endowments. Thirty-eight institutions would be impacted. These schools may reduce access or funding to lower-income students. |
What happens next?
To put these strategies in context, tax cuts desired by any incoming politicians will be harder to pass compared to the past two administrations due to the current state of the market and other issues, such as higher interest rates.
The bottom line
Whichever candidate wins in November, the situation will likely remain complex. The most straightforward scenario would be single-party control of the White House and Congress. Even then, budget pressures and other financial constraints—including possible interest rate changes—will remain in play. There's also the impact of any budget reconciliation legislation to consider. Any of these factors could lead to significant alteration, or shelving, of headline election pledges.
If House and Senate control end up being divided, different negotiating positions will become involved and final outcomes will be even more difficult to predict. In this context, it's even more important for individual taxpayers to become familiar with the key policies and proposals—and to start planning for all possible impacts on financial situations and budgets.
For more information, or to begin discussions about putting proactive tax strategies in place, speak to a First Citizens wealth consultant today. You can also review our Capital Management Group's election year update starting at the 30:43 mark.
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