What to Expect from the Upcoming U.S. Presidential Election

By Ian Boccaccio, Violet Goodheart, Scott Stogsdill, and Samuel Tae

How Will Your Taxes Be Impacted?

Now that both party platforms have been established, the potential impact on taxes after the election can be evaluated.

What to Expect from the Republicans

When compared to the current tax law, the Republican proposals could have a wide-reaching impact on the business environment.

Proposals

Former President Trump has been clear about his plan to decrease the corporate tax rate from the current 21% to 20% or lower. He also proposes to make the 20% pass-through deduction for Qualified Business Income permanent, rather than allow it to expire in 2025. For individual income tax, the current 37% maximum rate is scheduled to revert to 39% in 2025. The Trump plan would make this, and other changes made by the Tax Cuts and Jobs Act (TCJA), permanent. This would include the estate and gift tax changes, raising the estate tax exemption to $11.58 million. Trump proposes reverting to expensing Internal Revenue Code (IRC) Section 174 research and experimental costs and treatment of bonus depreciation according to rules in effect prior to the TCJA.

In addition, Trump opposes the Democrats’ plan to impose a minimum tax of 25% on total income, including unrealized gains, for taxpayers with wealth greater than $100 million. Unlike the Democrats, Trump has not proposed any changes to payroll or self-employment tax on individuals earning more than $400k in wages but plans to eliminate personal income tax on tip income and Social Security income. Vice Presidential candidate J.D. Vance has proposed increasing the Child Tax Credit to $5,000 per child.

Tariff Impact

Trump also plans to impose large tariffs on all imports, potentially as high as 60% when applied to China.¹ If implemented, this significant increase could trigger retaliatory tax increases on U.S. exports. The stated purpose of the tariffs is to create what Trump described as a “ring around the U.S. economy,” in hopes of boosting domestic production. Higher tariffs could instead be detrimental to the U.S. economy by raising prices, reducing production or appreciating currency, which would make it more difficult for exporters to sell abroad.

Potential Tax Concerns

As much of Trump’s platform would decrease taxes, something must be on the chopping block to pay for these cuts. Several likely areas could be at risk.

Repealing the municipal-bond tax exemption has been raised as one possible outcome to subsidize tax cuts. This exemption was established in 1913, as a vehicle for cities, towns, school districts, hospitals, and other borrowers to raise money to finance infrastructure. Investors in municipal bonds generally do not pay taxes on the interest they earn, allowing borrowing at lower rates.

It is no secret that Trump is not concerned with climate change. Another potential area for tax reform under a Trump administration could be the energy tax credits. The current clean energy tax credits available have increased in popularity, as climate change concerns increase. As Trump has asserted to be against the Green New Deal, production of solar and wind energy products could be hampered or eliminated as collateral damage to pay for proposed tax cuts. While Trump has been vocal about his disdain for the Green New Deal, the data is clear that the majority of investment derived from the Inflation Reduction Act has benefited Republican-leaning counties and states.

What to Expect from the Democrats

The Democratic platform closely follows President Biden’s budget plan for 2025, focusing on tax increases for the wealthy and corporations, while giving tax breaks to the lower- and middle-income taxpayers.

Proposals

Vice President Kamala Harris has proposed allowing certain provisions of the TCJA to expire for individuals, while increasing the top marginal tax rate from 37 to 39.6% for taxable income over $400,000 (single) and $450,000 (joint) in 2024. A minimum tax of 25% may also apply to total income, including unrealized capital gains, for taxpayers with net worth in excess of $100 million. Harris has also proposed taxing qualified dividends and long-term capital gains at ordinary income tax rates, with a top rate of 37% (or at 39.6% if the tax rate is increased).

Harris would restore the Child Tax Credit expansion under the 2021 American Rescue Plan Act, which increased the credit from $2,000 under current law to $3,000 for older children and $3,600 for younger children only for 2021. In addition, Harris would provide $6,000 for newborns in their first year of life, resulting in a credit of $6,000 for children under one year old, $3,600 for children two through five, and $3,000 for children six and older.

On the estate tax front, the Biden budget for 2025 proposes eliminating the step-up in basis for capital gains greater than $5.25 million for single tax filers or $10.5 million for married tax filers.

The Harris platform also includes new housing tax incentives and penalties. For housing construction, she proposes an expansion of the existing low-income housing tax credit as well as a new tax credit for the construction of starter homes. In an attempt to reach four million first-time homebuyers, an average of $25,000 in down payment assistance would be provided to eligible first-time homebuyers, with additional support for first-generation homebuyers.

To offset the proposed tax credits and incentives, Harris proposes to increase the net investment income tax from 3.8 to 5% for taxpayers with earned income of $400,000 or more. This surcharge for investment income currently applies to individuals with modified adjusted gross income between $200,000 and $250,000, depending on filing status. Along with the proposal to increase the highest individual tax rate to 39.6%, this proposal would bring the top marginal rate on long-term capital gains and qualified dividends to 44.6%.

 The proposals would also include increasing the additional Medicare tax rate for those earning more than $400,000 from 3.8 to 5%. Social Security tax changes include subjecting earnings in excess of $400,000 to Social Security taxes.

At this time, Harris has not proposed any increase in tariffs.

Potential Tax Concerns

As with the Trump proposals, all tax cuts result in a loss of revenue. Harris’s proposals will be costly, but she has included increases to corporate tax rates and individual rates on wealthy taxpayers, in an attempt to offset the beneficial tax cuts. There have been no references made to cutting benefits or eliminating current tax incentives such as green energy and clean vehicle credits to pay for the tax cuts proposed. It is anticipated that a Harris administration would continue to pursue the current tax incentives in place to encourage increased participation in environmentally friendly projects.

Speculation

There is no question that the most important tax consideration in the upcoming election is the expiration or extension of the TCJA provisions. According to the Tax Policy Center, nearly half the benefits of extending the TCJA would go to those making $450,000 or more. Their analysis found that households making $450,000 or more in 2027 would receive more than 45% of the benefits of extending the expiring individual and estate tax provisions of the TCJA. Making the provisions permanent would cut taxes for those making $1 million or more by 3.2% in 2027. Those making $5 million or more would receive an average tax cut of nearly 3% of their after-tax income, while middle-income households would see a tax cut of about 1.3% of their after-tax incomes.

In addition to the impact on federal individual and corporate taxes, the expiration of the TCJA in 2025 will also impact the tax rates on foreign source income through the expected tax rate changes of foreign derived intangible income (FDII) and global intangible low-taxed income (GILTI). These changes will also be felt at the state tax level as well, as states are still struggling with the correct treatment of these 2017 changes. Changes affecting bonus depreciation, expensing research and development (R&D) costs, and taxation of foreign source income will also influence tax policies at the state level.

Tax policy analysts expect that Harris will continue policies established in the Biden administration both at home and abroad.

Planning Before Year-End

What can you do in anticipation of future tax changes afoot?

As tax rates are as low as they have ever been, it makes sense for multinational corporations to accelerate foreign sales into the current tax year. Accelerating income and deferring deductions is standard advice in anticipation of rising rates. Given the projected rate changes proposed by either party, there is a good chance of higher rates in the future. This would also be a good time to repatriate excess cash held overseas, while deferring any significant capital expenditures of a controlled foreign corporation. It would also be beneficial to monetize any IRC Section 965 foreign tax credits before they expire.

It is important to note that although both candidates have stated their proposals, no action can be taken unilaterally with Congressional action. In a divided Congress, the chances of success of either parties’ “wish list” is questionable.

Upcoming Webinar

Join Ryan for a live webinar on Thursday, November 7, 2024, where our experts will break down the election results, including key outcomes at the state level, and share actionable insights for your business. Don’t miss out—stay tuned for more details.

¹ Committee for a Responsible Federal Government, US Budget Watch 2024, Donald Trump’s 60% Tariff on Chinese Imports (April 10, 2024).

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.