How Trump’s tax cuts and tariffs will affect your wallet

A postelection look at how tax laws are likely to change, and especially the outlook for the 2017 tax cuts.

There is a tax break for just about everyone on the list of cuts that President-elect Donald Trump promised during his campaign, ranging from averting income-tax rate increases scheduled for 2026 to eliminating taxes on tips and Social Security income.

But even with the Republican majority in both the Senate and the House, it will be nearly impossible to make good on all promises. The revenue loss for the federal government, estimated at $9 trillion if all proposed changes are adopted, would be too great, and implementing some ideas may not be feasible, experts say.

“Campaign proposals have one purpose: to get the candidate elected. You don’t have to worry about the practicality of the proposals,” says Dustin Stamper, who leads the tax legislative affairs practice at accounting and consulting company Grant Thornton. “Now, Republicans are going to face some hard choices.”

Tax Outlook

Broadly speaking, the richer you are, the more tax benefits you will probably enjoy under a second Trump presidency. Kamala Harris’ defeat eliminates the chance for a wealth tax and clears the way for tax-friendly policies for top earners.

The outlook for middle- and lower-income taxpayers is less certain or rosy with Trump’s win. He floated various narrow tax breaks for targeted groups of lower-income Americans, but the combined net impact of all of his ideas could mean small improvements or even declines in after-tax income, according to the Urban-Brookings Tax Policy Center, and the Tax Foundation, which are think tanks in Washington, D.C.

Tariff Chances

Trump has been beating the drum about issuing a 60% tariff on imported Chinese goods and a 10% or 20% tariff on imports from anywhere else, which experts estimate would raise a net $2.8 trillion or $4.5 trillion for federal coffers over 10 years and be the biggest offsets to tax cuts.

But a direct result of tariffs is higher prices for U.S. consumers, says Howard Gleckman, a tax policy center senior fellow. “It would effectively be a significant tax increase,” averaging $1,800 annually per household with a 10% tariff or $3,000 with a 20% tariff.

That burden would offset benefits of Trump’s tax cuts, particularly for lower- and middle-income taxpayers, Gleckman says.

Here’s a deeper look at Trump’s tax ideas and what to expect:

Expiring Tax Cuts

The cornerstone of Trump’s tax plan is to extend a host of tax cuts that were passed during his first term under the 2017 Tax Cuts and Jobs Act, but are scheduled to expire in 2026. It makes sense to assume that most of these will be extended. With a Republican majority in Congress, most tax experts agree that lawmakers will aim to extend the expiring provisions by the end of 2025 in one clean sweep.

“But there is an asterisk. It’s a very expensive extension, and there are still some budget hawks in the Republican Party,” says Mark Baran, managing director at CBIZ’s National Tax Office.

Among temporary tax cuts and benefits that would fall away without action by Congress are lower individual income-tax rates (the top rate was reduced to its current 37% from 39.6%); expanded income and capital gains tax brackets, so it takes more income to be taxed at the next-higher rate; a doubled standard deduction (currently $29,200 for married couples and $14,600 for singles); and a doubling of the Child Tax Credit to $2,000.

Another sunsetting provision is the current $13.61 million per-person gift and estate tax exclusion. Failing to extend it would drop the exclusion to the pre-2018 level of $5.49 million plus inflation adjustments that would bring the total to about $7 million. A 20% deduction for many owners of pass-through entities such as partnerships and S corporations would also sunset.

Alternative minimum tax rules were adjusted in the 2017 tax act with a bigger exemption that phases out at such high levels that less than 0.1% of households are now affected by the AMT. If expired, just over 4% of households would pay higher taxes using the AMT system, the tax policy center estimates.

Trump tax cuts for capital gains and qualified dividends, if expired, would leave rates as is (at 0%, 15% and 20%) but thresholds between the brackets would drop, meaning higher rates would kick in at lower gains levels.

To limit the cost of the extensions—estimated at $4.5 trillion over 10 years—lawmakers may extend the tax cuts temporarily rather than making them permanent.

“We could see an extension for a handful of years,” says Garrett Watson, senior policy analyst at the Tax Foundation. “The trade-off we’d have is to deal with the expirations again a few years later.”

For taxpayers, a wholesale extension not only means avoiding a tax increase in 2026; it also “provides continuity and simplicity,” says Claudia Gonzalez, a principal at Kaufman Rossin, an accounting firm. “All the planning we’ve been doing based on current rules can be extended.”

The $10,000 SALT Deduction Cap

Late in his campaign, Trump floated ending a $10,000 cap on state and local tax, or SALT, deductions that was part of the 2017 tax cuts. This would be an exception to the extensions and a big benefit, particularly to higher earners and property owners.

Many states have enabled strategies for pass-through business owners to work around the cap and benefit from full SALT deductions, but individual taxpayers still have a $10,000 cap.

The biggest winner from a cap repeal would be the top 1% of earners, who make more than $1 million annually, according to a tax policy center analysis. Their after-tax income would rise by 1.6%, or about $35,000, while the top 0.1%, who earn $4.7 million or more, would get a 1.5% boost with an average tax cut of $141,000.

But the SALT cap has been an important revenue raiser; eliminating it completely would add another $1 trillion in cost to the $4.5-trillion-plus Trump tax cut extensions.

If Republicans look for ways to limit the cost of their cuts, there is a chance they may actually raise the cap rather than eliminate it, Gleckman says.

Targeted Tax Cuts

Trump posed a number of new tax ideas during his campaign: eliminating taxes on tips, Social Security income, overtime pay, and income earned by first responders. Other ideas are to authorize an itemized deduction for auto loan interest and a tax credit for family caregivers.

“I don’t see traction on these,” says Mark Parthemer, chief wealth strategist at Glenmede, a wealth management firm. “They would be very expensive and difficult to implement.”

For example, allowing tax-free overtime pay would open a new realm of potential tax avoidance, as workers probably would try to recharacterize the bulk of their income as overtime. And removing taxes from Social Security benefits is likely to be impossible: Republicans will probably adopt tax changes through the budget reconciliation process, which prohibits tampering with Social Security income.

If any of these ideas sees the light of day, it’s likely to be eliminating taxes on tips—up to an income threshold—because Harris also floated it and it may have broad support, says Pam Lucina, president of the Northern Trust Institute. It “would be hard to dial back because it was so prominent during the campaign,” she says.

Not taxing tips would be a token effort to help low-income workers, however. In 2023, just 2.5% of workers were in jobs with tips, according to Yale University’s Budget Lab.

Beyond these tax ideas, some Republicans advocate aggressive cuts targeted to wealthy taxpayers, such as reducing capital gains taxes and eliminating the estate tax altogether. But these would mean yet more in lost revenues.

Future Tax Hikes?

The price tag on Trump’s ideas will be an issue because of the growing deficit, says Erin Scannell, CEO of Ameriprise’s Heritage Wealth Advisors.

Even Trump’s more aggressive tariff ideas wouldn’t offset his total $9 trillion in tax cuts, so Republicans likely will look for revenue raisers.

Some ideas are more likely than others. For example, Trump has suggested repealing credits of up to $3,200 per household for energy-saving improvements and up to $7,500 credits for purchasers of electric vehicles. Those credits were expanded in the 2022 Inflation Reduction Act.

There may be willingness to allow increases in the corporate income tax and the estate tax, experts say.

Since 2017, “There has been a significant amount of turnover in the Republican caucus,” Grant Thornton’s Stamper says. “Many don’t feel the same ownership” as the legislators who wrote the tax cut act.

It’s feasible that Republicans decide to raise the corporate tax slightly, given that each percentage-point increase produces about $100 billion in revenue, says Joshua Odintz, a tax attorney at Holland & Knight.

Although the estate-tax exemption is unlikely to fall back, it could happen as lawmakers make hard choices, Stamper says. “We’ve told our clients it’s not inconceivable, and they should leverage the current high exemption while they can.”

Read the full article at Barrons.