On the morning Donald J. Trump was officially declared the winner of the 2024 U.S. presidential election, he promptly met with his transition team to begin strategizing and circulating candidates to fill his cabinet for the new administration.
President-elect Trump’s tax policy proposals which were highlighted during the campaign, include these key provisions:
- Extending (and/or making permanent) many of the temporary provisions of President-elect Trump’s 2017 Tax Cuts and Jobs Acts (TCJA), currently set to expire at the end of 2025.
- Cutting the corporate income tax rate from 21% to 20% and reducing it as low as 15% for corporations that make their products in the U.S.
- Imposing a universal 20% tariff on all imported goods to the U.S. and increasing that rate to 60% for imported goods from China.
- Repealing selected clean energy provisions enacted as part of the Inflation Reduction Act (IRA) of 2022, specifically the Electrical Vehicle Credit.
Tax Provisions Under the TCJA: Individual, Estate and Business
1. Permanent Extension of Individual Tax Cuts:
- Rates and Brackets: The lower individual tax rates and adjusted tax brackets introduced under the TCJA would be made permanent beyond their 2025 expiration. This would continue to reduce the overall tax burden for many taxpayers, with the largest percentage change in after-tax income particularly benefiting middle- and upper-income households.
- Standard Deduction and Personal Exemption: The TCJA nearly doubled the standard deduction while eliminating personal exemptions. Making these changes permanent would simplify filing for many taxpayers and maintain the higher deduction levels.
- Child Tax Credit and Other Dependent Credits: The Child Tax Credit under the TCJA would increase to $5,000 and introduce a credit for other dependents, which would continue to provide tax relief for families if made permanent.
- Itemized Deductions: The TCJA removed several itemized deductions and eliminated the Pease limitation, which reduced the value of itemized deductions for high-income taxpayers. Included in this was the much-publicized $10,000 limitation on State and Local Tax (SALT) payments. Some of the impact of these taxpayer-unfriendly positions would be offset by the increased standard deduction.
- Alternative Minimum Tax (AMT): The TCJA significantly reduced the number of taxpayers subject to the AMT by raising exemption levels. Making this change permanent would continue to limit the AMT’s reach.
2. Estate Tax Provisions
The TCJA doubled the estate tax exemption, allowing individuals to pass on larger estates tax-free. If these provisions are made permanent, it would mean that more individuals could transfer wealth to heirs without incurring estate taxes, effectively reducing the tax burden on large estates.
3. Business Tax Provisions
- 100% Bonus Depreciation: The ability to immediately deduct the full cost of eligible capital investments (100% bonus depreciation) would be restored, encouraging businesses to invest in new equipment and infrastructure by reducing their taxable income.
- R&D Expensing: The TCJA required research and development (R&D) costs to be capitalized and amortized over five years (15 years for foreign activity). However, eliminating this treatment to allow businesses to deduct R&D expenses immediately would reduce compliance burdens and promote innovation.
- Interest Deduction Limitation: The TCJA initially allowed businesses to calculate interest deductions using EBITDA (earnings before interest, taxes, depreciation, and amortization), which was later restricted. Reverting to the EBITDA calculation would expand the amount of interest expense that businesses could deduct, benefiting highly leveraged companies.
- Qualified Business Income (QBI) Deduction: The QBI deduction was part of the TCJA effort to reduce taxes for businesses and their owners, similar to the substantially reduced corporate tax rate. The QBI deduction, or Section 199A deduction, allows eligible business owners to deduct up to 20% of their qualified business income. The deduction is available to owners of pass-through entities such as sole proprietorships, partnerships, S corporations, and some trusts and estates.
Overall, these proposed changes would aim to continue stimulating economic growth by reducing tax burdens on individuals and businesses, encouraging investment and, in some cases, simplifying the tax code.
Tax Cuts for Corporations, Particularly Manufacturers
- Reduction of Corporate Tax Rate: President-elect Trump has proposed further reducing the federal corporate tax rate from the current 21% to 20%. This reduction aims to make U.S. businesses more competitive internationally and encourage economic growth.
- Lower Rate for Domestic Manufacturers: For companies that manufacture products within the U.S., President-elect Trump has suggested lowering the tax rate even further to 15%. This policy is intended to incentivize domestic production and potentially bring manufacturing jobs back to the U.S.
- Reintroduction of Domestic Production Activities Deduction (DPAD): President-elect Trump has proposed reinstating a form of the DPAD at 28.5%, which effectively lowers the tax rate for domestic producers from 21% to 15%, which may stimulate M&A and deal activity. This deduction previously provided tax relief for domestic manufacturing activities but was eliminated under the 2017 tax law.
These proposed changes build on the significant corporate tax cuts enacted in 2017, which lowered the corporate rate from 35% to 21%. While intended to enhance domestic production and investment, these cuts mainly benefit shareholders. Although they have the potential to stimulate economic growth, they could also increase the federal deficit if not balanced by other revenue increases or spending cuts.
Universal Tariff Policy on Foreign Imports
Trump's proposed tax policy on tariffs, 60% on Chinese imports and 20% on imports from other countries, aims to protect U.S. manufacturing by increasing demand for domestically produced goods. Still, it may result in significant price hikes for foreign goods.
Clean Energy Tax Credits
The upcoming changes to the political landscape have raised some important questions about the continuing evolution of the U.S. energy policy. While it is unlikely the most recent source of key climate incentives, the Inflation Reduction Act (IRA), will be completely repealed.
As the country enters territory with sustainable energy growth policies, it is important to remember a few key points. Federal tax credits for wind and solar were not introduced under the IRA. These clean energy incentives have been in place for decades. The majority of the IRA’s budget was allocated to red states, with 80% of funding directed to these and other battleground states in the recent election. Additionally, IRA funding has significantly contributed to domestic job creation and reshoring of U.S. manufacturing over the past two years.
While the path for clean energy may have shifted, there are many reasons to believe that key aspects of the IRA, including its transferability mechanism, will continue.
Other Tax Provisions To Watch
The proposed tax policies include eliminating taxes on specific income items such as tips, overtime and Social Security benefits. Additionally, they suggest creating an itemized deduction for auto loan interest and imposing taxes on large private university endowments.
Evaluating the Impact of Trump's Proposed Tax Policies
Some economists suggest that some aspects of Trump’s proposed tax policies, like the extensions in the TCJA, are well-structured and would promote long-run economic output. On the other hand, they caution that other elements, such as his suggested tariffs, could offset the economic gains from the proposed tax cuts and pose risks of foreign retaliation, potentially leading to trade wars.
The impact of these tax proposals, along with other economic factors that impact the economy, businesses and families, workers, and individual income taxes, will hinge on the specific combination of policies implemented and the structure of each policy.
Disclaimer:
The content focuses on President-elect Trump's tax proposal plans and is intended to provide general information about the potential tax legislation that may be implemented by the future government. The information provided in this content piece is not intended to serve as legal or tax advice and should not be relied upon as such. The prospective potential legislation mentioned in this content piece is subject to change, and there is no guarantee that any proposed legislation will be enacted into law. Any action taken based on the information provided in this content piece is at their own risk, and Cherry Bekaert shall not be held liable for any such action taken.
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