Trump’s Tax Agenda: How Will Your Taxes Change?

By Doug Young – 26 November 2024

Introduction

With Republicans holding the presidency, the house, and the Senate, President Donald Trump is in a strong position to advance his tax agenda.

By exploring the proposed changes and their potential effects on taxpayers we will provide an overview of Trump’s tax plan and how it may impact individuals, business owners, and investors.

Individual Tax Changes

Extension of Tax Cuts

Under Trump’s tax plan, the individual tax cuts introduced in 2017 will become permanent. This means that there will be no increases in federal tax rates for individuals across the board.

The maximum individual tax rate, which is currently 37%, will remain the same. This stability in tax rates provides assurance to taxpayers and encourages economic growth.

Standard Deduction Increase

Another significant change is the extension of the increased standard deduction. Originally introduced in 2017, this doubled the standard deduction for individuals.

Trump aims to make this tax cut permanent as well, benefiting a majority of Americans. By increasing the standard deduction, individuals can reduce their taxable income, potentially leading to lower tax liabilities.

Itemized Deductions

One of the concerns with the 2017 tax cuts was the limitation placed on itemized deductions.

Specifically, the cap on state and local taxes (SALT) deductions was set at $10,000, limiting taxpayers’ ability to write off their full state and local tax payments. However, Trump has promised to remove this cap, making the itemized deduction more attractive for those with eligible expenses that exceed the standard deduction.

Additionally, Trump proposes adding more eligible expenses to the itemized deduction, such as auto loan interest. This expansion aims to further incentivize taxpayers to choose itemized deductions if their expenses surpass the standard deduction.

Business Owners and Investors

Qualified Business Income (QBI) Deduction

Small business owners stand to benefit from the extension of the QBI deduction.

This deduction grants qualifying business owners an automatic 20% deduction against their income. Trump’s plan intends to extend this deduction, allowing millions of small business owners to continue paying fewer taxes.

By utilizing the QBI deduction, business owners can potentially reduce their tax brackets and save considerable amounts of money.

Bonus Depreciation Deduction

Investors, particularly in real estate and business equipment, can take advantage of the bonus depreciation deduction.

This deduction allows investors to write off large portions of their investment property expenses, such as real estate, equipment, machinery, vehicles, and even private jets.

While the bonus depreciation rates have been phasing out since 2023, Trump is expected to increase them back up to 100%. This change could result in substantial tax savings for qualifying individuals, depending on their investment situation.

Corporation Tax Rates

Business owners in higher individual tax brackets may benefit from switching to a C corporation (or C corp) under Trump’s plan.

By electing to be taxed as a C corporation, these business owners can potentially reduce their tax brackets by 10% or more, especially if they plan to reinvest in their businesses. However, making such a decision involves careful consideration and consultation with a CPA to assess the overall tax implications.

Other Tax Provisions

Overtime Pay Exemption

Under Trump’s tax plan, overtime pay would be exempt from taxes. This exemption aims to benefit hourly employees who work more than 40 hours per week.

Professionals across various industries, such as nurses, construction workers, engineers, warehouse workers, police officers, and firefighters, would no longer pay taxes on their overtime earnings, providing them with additional income.

No Tax on Tips

Hospitality workers, including bartenders and servers, would also benefit from Trump’s tax plan, as their tips would be exempt from taxes.

This provision could potentially extend to professions like ride-sharing drivers, such as those working for Uber or Lyft, who receive tip income.

By eliminating taxes on tips, these workers can retain more of their earnings.

Social Security Benefits

Trump intends to make Social Security benefits exempt from taxes.

Currently, Social Security benefits are partially taxable based on income thresholds. Trump’s plan aims to remove these thresholds altogether, ensuring that retirees receive their Social Security income without being subject to taxation.

This change would provide additional financial relief to retirees.

Timeline for Tax Changes

The timing of when these tax changes will take effect depends on Congress and its ability to introduce and pass relevant bills.

Based on historical precedent, tax changes introduced by Trump in 2017 took effect a year later in 2018. If a similar timeline is followed, these new tax changes may go into effect as early as 2026.

The ultimate timing will be determined by Congress. With the Republican control of the presidency, the house, and the Senate, swift action on these tax proposals is possible.

Conclusion

Trump’s tax plan introduces significant changes that could impact individuals, business owners, and investors.

From the extension of tax cuts and increased standard deductions to the proposed alterations in itemized deductions and the benefits for small business owners and investors, understanding these changes is crucial.

The potential exemptions on overtime pay, tips, and Social Security benefits offer further relief to specific groups of taxpayers.

It is wise for individuals and business owners to consult with a CPA to fully comprehend the implications of these tax changes and make informed financial decisions.