What Tax Changes Might Mean for Individuals and Businesses Under Trump's New Administration

ARTICLE | December 17, 2024

Introduction

The possibility of significant tax policy changes often accompanies shifts in political leadership. With discussions around potential policies under a new Trump administration gaining attention, individuals and businesses are considering what these changes might mean for their financial strategies. Staying informed about prospective tax reforms is essential, as proactive planning can lead to substantial financial benefits and help navigate the complexities of the tax landscape.

Background: The Tax Cuts and Jobs Act (TCJA) Overview

Enacted in 2017, the Tax Cuts and Jobs Act (TCJA) introduced sweeping changes to the U.S. tax code, impacting both individuals and businesses. Key provisions included reducing income tax rates, nearly doubling the standard deduction, limiting certain itemized deductions, and lowering the corporate tax rate from 35% to 21%. While these changes resulted in tax savings for many, several provisions are set to expire after 2025, creating uncertainty about the future tax environment.

Potential Tax Changes Under a New Trump Administration

1. Extending and Expanding TCJA Provisions

One potential policy under discussion is the extension of the TCJA's individual tax cuts beyond their 2025 expiration date. Making these tax cuts permanent would maintain the current lower tax rates and expanded tax brackets, providing continued benefits to middle- and high-income taxpayers. Additionally, there is the possibility of further reducing tax rates for certain brackets, which could increase disposable income and stimulate economic activity.

An extension could also affect standard deductions and personal exemptions. The TCJA nearly doubled the standard deduction but eliminated personal exemptions. Maintaining or adjusting these provisions would influence taxpayers' taxable income and overall tax liabilities.

2. Eliminating the SALT Cap

Under the TCJA, deductions for state and local taxes (SALT) paid were capped at $10,000. This change significantly affected taxpayers in high-tax states such as New York, New Jersey, and California. A proposal to eliminate the SALT cap would allow taxpayers to deduct the full amount of their state and local taxes, potentially reducing federal tax burdens for many.

If the SALT cap is removed, individuals in high-tax jurisdictions may see substantial tax savings. This change would necessitate a review of withholding and estimated tax payments to ensure accuracy and avoid surprises at tax time.

3. Eliminating Taxes on Tips, Overtime Pay, and Social Security Benefits

Another potential change includes proposals to exempt certain forms of income from taxation, specifically tips, overtime wages, and Social Security benefits.

Tips Income: Currently, tips are taxed as regular income. Exempting tips from taxable income would increase take-home pay for workers in service industries. However, this could introduce complexities in payroll reporting and might require businesses to adjust their accounting practices.

Overtime Wages: Exempting overtime pay from income tax could incentivize employees to work additional hours, boosting their earnings. Employers, however, may need to manage increased overtime requests and consider the financial implications for their operations.

Social Security Benefits: Presently, Social Security benefits are taxable for individuals whose income exceeds certain thresholds. Eliminating the tax on these benefits would provide financial relief to retirees, enhancing their disposable income. Yet, it raises concerns about funding for Social Security and Medicare programs, potentially leading to broader fiscal implications.

4. Further Reducing Corporate Tax Rates

The possibility of lowering the corporate tax rate from its current 21% to 15% is also under consideration. Advocates argue that a reduced corporate tax rate would leave businesses with more capital to invest in growth, innovation, and job creation. It could enhance the competitiveness of U.S. companies on a global scale.

However, critics express concerns about the impact on federal deficits and the national debt. Decreased tax revenue from corporations could exacerbate fiscal challenges unless offset by spending cuts or other revenue-generating measures.

5. Restoration of Business Deductions

Businesses may also benefit from proposals to restore or enhance certain deductions, including:

Reinstating 100% Bonus Depreciation: This provision allows businesses to immediately deduct the full cost of eligible assets in the year they are placed in service, rather than depreciating them over time. Reinstating or extending 100% bonus depreciation could improve cash flow and encourage investment in new equipment and technology.

Restoring Interest Deductions Based on EBITDA: Returning to an interest deduction formula based on earnings before interest, taxes, depreciation, and amortization (EBITDA) would enable businesses with significant debt to deduct more interest expense, potentially reducing taxable income.

Immediate Expensing of R&D Costs: Allowing businesses to immediately deduct research and development expenses would incentivize innovation and reduce the tax burden for companies investing in new products and services.

6. Introduction of New Import Tariffs

The introduction of a 20% universal tariff on all U.S. imports is another potential policy under consideration. The goal of such tariffs is to boost domestic production and reduce reliance on foreign goods. However, this approach could have significant implications for businesses and consumers.

Companies that rely on imported materials or products may face increased costs, which could be passed on to consumers in the form of higher prices. Supply chain disruptions are also a concern, as tariffs could affect the availability and pricing of essential goods.

Moreover, there is the risk of retaliatory tariffs from trading partners, potentially impacting U.S. exports and global trade relations.

Implications for Individuals

For individual taxpayers, these potential changes could offer various opportunities for tax savings:

Charitable Contributions: Maintaining or enhancing deductions for charitable giving could encourage more philanthropy while reducing taxable income.

Home-Related Deductions: Continued or expanded deductions for mortgage interest and property taxes could benefit homeowners, especially if the SALT cap is eliminated.

Student Loan Assistance: Proposals to exclude employer-provided student loan assistance from taxable income would offer relief to borrowers, easing the financial burden of education debt.

Adjusting financial plans in light of these potential changes is crucial. Individuals should review their deductions, contributions, and overall tax strategies to maximize benefits and ensure compliance.

Implications for Businesses

Businesses stand to gain from reduced tax rates and restored deductions, potentially improving profitability and enabling growth initiatives. Key considerations include:

Cash Flow Improvement: Lower taxes and enhanced deductions could free up capital for investment, expansion, and workforce development.

Investment Decisions: Opportunities for immediate expensing of assets and R&D costs may influence the timing and scale of capital investments.

Financing Strategies: Adjustments to interest deduction limitations could affect how businesses approach debt financing.

Supply Chain Management: Anticipated tariffs may necessitate a reevaluation of supply chains, with a focus on sourcing domestically or diversifying suppliers to mitigate risks.

“Proactive tax planning is essential in times of potential legislative change. By staying informed and adapting strategies accordingly, businesses can position themselves to capitalize on new opportunities and navigate challenges effectively,” says Jamie Miller, CPA and Partner at MBN & Company.

How to Prepare for Potential Tax Changes

Given the uncertainties, both individuals and businesses can take steps to prepare:

For Individuals:

Review your current tax situation, focusing on deductions and credits that may be affected. Consider adjusting your withholding or estimated tax payments, and consult with a tax professional to develop personalized strategies that align with potential changes.

For Businesses:

Assess the potential impact of proposed tax policies on your operations. Planning for capital expenditures, financing, and supply chain adjustments now can position your business to adapt swiftly. Engaging with tax advisors can help optimize your tax position and identify opportunities for savings.

How MBN & Company Can Help

At MBN & Company, our dedicated team of tax professionals is equipped to assist clients navigating the complexities of potential tax law changes. We offer comprehensive services, including:

• Tax Consulting and Strategy Development: Crafting personalized tax strategies that align with your financial goals and the evolving tax landscape.
• Business Succession and Valuation: Assisting with planning for the future, including succession planning and business valuation services.
• Multi-State and International Tax Planning: Providing guidance on tax obligations across different jurisdictions, essential for businesses operating in multiple states or countries.
• Representation Before Taxing Authorities: Offering support and representation in dealings with federal, state, and local tax authorities.

Our commitment is to help you understand how potential tax changes may impact your situation and to develop strategies that maximize benefits while ensuring compliance. We encourage you to reach out to our team to discuss how we can support your tax planning needs.

Conclusion

While the specifics of potential tax changes under a new Trump administration remain uncertain, staying informed and proactive is key for individuals and businesses alike. By understanding possible policy shifts and preparing accordingly, you can position yourself to take advantage of opportunities and mitigate challenges. At MBN & Company, we are here to provide expert guidance and support to help you navigate these developments confidently.

About the Expert

Jamie Miller, CPA

Email: jmiller@marketingbynumbers.io

Jamie Miller is a licensed Certified Public Accountant (CPA) and Partner at MBN & Company. With 15 years of public accounting experience, he specializes in providing tax services to construction, real estate, and not-for-profit clients. Jamie is passionate about advising clients on tax planning and business growth, guiding them through all stages of the business lifecycle.