By Matthew Gaude & Shawn McGuire
With less than two months until the presidential election, the policy platforms for President Donald Trump and Vice President Kamala Harris are gradually forming. Through speeches and debates, each candidate is laying out what they stand for and how they would change existing policies. For investors, perhaps the most scrutinized area is taxes, and there are concerns over how changes to tax rates could impact both Wall Street and Main Street. How can investors maintain perspective as we approach November 5?
It’s important to maintain perspective this election season.
Both candidates’ platforms are still subject to change despite the short timeline until election day. While it’s impossible to cover all the details here, many of the key differences on taxes between the candidates and their parties come down to the future of the Tax Cuts and Jobs Act (TCJA).
Before discussing the details, it’s important to maintain perspective around tax policy since these issues can be politically heated. Taxes are intertwined with politics and reflect our polarized political climate. Regardless of which side of the aisle we might be on and what our personal preferences may be, it’s important to stay objective so we can clearly focus on our financial goals.
While taxes have a direct impact on households and companies, they do not always have a straightforward effect on the overall economy and stock market. This is because taxes are only one of the factors that influence growth and returns, there are many deductions, credits, and strategies that can reduce the statutory tax rate, and spending and investment patterns often adjust to work around taxes. In other words, lower taxes do not automatically result in an economic boom, and higher tax rates do not necessarily result in a crash.
Additionally, election rhetoric and actual policies can be quite different. Candidates often make promises based on their political leanings that may not fully materialize once in office. Even once a candidate is elected, Congressional partnership and approval is still required to pass new tax laws. Historically, the president’s party tends to lose seats in Congress in their second term, and their approval rating tends to decline. This process can alter or water down initial proposals.
For example, during the 2016 presidential campaign, President Trump promised a complete overhaul of the tax system. While the Tax Cuts and Jobs Act was a significant change to the tax code, it also retained many existing elements. Similarly, President Biden criticized the TCJA during the 2020 election cycle and discussed raising taxes on high-income earners and corporations. While the Inflation Reduction Act of 2022 did impose a 15% minimum corporate tax rate, this is far from the sweeping changes discussed during the election.
The future of the Tax Cuts and Jobs Act and national debt is uncertain.
The truth is that tax rates have been quite low by historical standards for decades. Even if there are no changes in the next presidential term, with the federal debt continuing to expand, many economists worry that taxes will have to rise to close the gap in the future.
The TCJA took effect in 2018 and included reducing individual income tax rates with the highest rate declining from 39.6% to 37%, nearly doubling the standard deduction, dropping the corporate tax rate from 35% to 21%, and implementing a territorial tax system for corporations. The TCJA also lowered estate taxes, eliminated personal exemptions, and adjusted several other deductions and credits.
As discussed above, the Inflation Reduction Act of 2022 introduced a 15% minimum tax on large corporations with annual profits over $1 billion. It also implemented a 1% excise tax on stock buybacks for publicly traded companies.
Unless action is taken by the president and Congress, many provisions of the TCJA will expire for the 2026 tax season, creating a so-called “tax cliff.” This makes taxes especially contentious this election season. Here are some of the items the candidates are discussing:
- Trump proposes cutting corporate taxes further from 21% to 15% for some companies, including manufacturers who make their products domestically. Harris is in favor of increasing the corporate tax rate to 28%, in line with President Biden’s position.
- Trump has discussed extending the TCJA’s individual tax rates, but specifics are still unclear. Harris supports allowing the top marginal rate to revert to 39.6%.
- Harris proposes raising the capital gains rate from 20% to 28%. Along with an increase in the “net investment income tax” introduced with the Affordable Care Act, the top capital gains rate would rise to 33%, the highest since 1978.
- Both candidates propose new enhanced child tax credits and not taxing tips. Trump has discussed eliminating taxes on Social Security for seniors.
- Harris proposes expanding the start-up expense deduction from $5,000 to $50,000 and $25,000 in support of first-time homebuyers making down payments.
- Harris proposes a new tax on unrealized capital gains for those worth $100 million or more. Such a tax would be historic. The recent Moore v. United States case in the Supreme Court loosely touched on this by allowing a provision in the TCJA that imposed a one-time tax on unrepatriated foreign earnings.
The economy has grown under both parties.
Unfortunately, the annual budget deficit remains high and the national debt is likely to grow regardless of who occupies the White House. While studies on the matter differ and should be taken with a grain of salt, many suggest that either candidate would add trillions to the debt in the coming years.
However, it’s also the case that the economy has grown over history under both political parties. As discussed earlier, it’s important to remember that who occupies the White House is not the most important factor for the economy and markets, regardless of how counterintuitive that may seem. Policy changes tend to be gradual due to checks and balances in our political system. Perhaps more importantly, neither candidate is proposing a return to pre-Reagan-era tax levels when the top marginal rates reached as high as 94%.
So, while taxes do play an important role in financial plans, they do not necessarily impact investment portfolios and economic growth the way some might imagine. Investors should continue to work with a trusted advisor and focus on their long-term goals this election season. By maintaining a balanced perspective and avoiding politically driven decisions, investors can better position themselves for success across the evolving political landscape.
Uncertainty
Ultimately, the consequences of the 2025 Tax Sunset are unsettled. There’s a possibility that Congress will extend or alter these tax laws before the end of 2025, but if that doesn’t happen, changes can take place. To see the potential changes that could take place if the TCJA is not extended for individuals, click here. This will show the tax brackets that will revert to the previous tax rates for both single and married filing jointly as well as updates on itemized deductions, deduction items update, and potential tax implications.
If the 2025 Tax Sunset occurs without intervention from the government, the effects on individuals and businesses will vary contingent upon their unique situations. Some taxpayers would experience an increased tax liability, while others could potentially gain from changes like the SALT deduction cap removal. Or, conversely, some businesses could face a higher tax bill if temporary deductions expire.
The bottom line? As the election season heats up, it’s important for investors to maintain perspective amid heightened political rhetoric and divergent economic proposals from the candidates. While Trump and Harris may propose changes to the tax code, it’s important to maintain objectivity when crafting financial plans.
Take Action Today
Again, we believe the wisest move to get ahead and prepare for potential changes stemming from the 2025 Tax Sunset is seeking guidance from a professional financial advisor. At Live Oak Wealth Management, our team dives deep into your income tax records, expenses, and how investment choices could affect both your current and future tax obligations. Should you wish, we’re more than happy to collaborate closely with your tax advisor so your financial plan is fully equipped for the anticipated changes.
Whether you’re an individual taxpayer or a business owner, if you’re ready to partner with us to align your finances with the upcoming 2025 Tax Sunset, call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online. We’re here to help!
About Matthew
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
About Shawn
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER® professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.