A presidential election can be taxing for individuals and investors. And this year's vote is no different. There's no shortage of policy uncertainty for taxes and proposed tax cuts.
Both presidential candidates are promising tax cuts. But the tax policy proposals of Democrat Kamala Harris and Republican Donald Trump differ markedly. Harris is promising no tax hikes for households earning less than $400,000. But she is proposing higher levies on the wealthy and corporate America. Trump wants to extend the tax cuts for all taxpayers he passed in 2017. The former president also proposes new tax cuts for individuals and companies. He's also talking perks, such as reducing the cap on the deduction on local and state taxes.
"Both candidates have made big promises to taxpayers," said Dylan Bell, chief investment officer at CalBay Investments.
Taxes And Presidential Election Questions
There's also a big unknown facing taxpayers. That is: Will Congress will extend key provisions of the 2017 Tax Cuts and Jobs Act (TCJA). These "Trump tax cuts" expire at the end of 2025. If the tax code reverts, more earned income will fall into higher tax brackets. Meanwhile, the standard deduction will shrink and the alternative minimum tax will return. And the federal estate exemption could be slashed in half.
Under Harris' plan, there's also a chance that there will be changes to capital gains rates and the top income tax rate. Both candidates favor the elimination of taxes on tip income. Trump wants to end taxation of Social Security benefits to boost retiree income. And Harris wants to expand Child Tax Credits to help working families.
Tight Congressional races also add stress to the confusion in the neck-and-neck race for the presidency. That makes it tough to handicap whether there will be a power shift or legislative gridlock. And which tax proposals will become law or die as proposals.
No doubt, individuals and investors wonder how any policy changes might impact them. And they'll question if they'll be paying more or less taxes.
"Taxes are one of the biggest questions that we're getting as the election nears," said Robert Waskiewicz, senior financial advisor at Wescott Financial Advisory Group.
So Many Unknowns With Taxes
With all the policy unknowns, it's important for Americans not to make rash moves with their money based on what might happen, warns Waskiewicz.
"You want to be prepared, you want to be aware, you want to be knowledgeable," said Waskiewicz. "But you don't want to be premature in doing things and then finding out you did it for no reason or potentially hurt yourself."
If there are any changes in the tax code, "you will have time" to make adjustments to help mitigate any adverse tax impacts, said Steven Novack, a senior financial advisor at Altfest Personal Wealth Management.
Impacts Of Sunsetting Of 2017 Tax Cuts And Jobs Act
The tax change that will impact the most people is if Congress doesn't extend the Trump tax cuts. These cuts are set to sunset at the end of next year, says Bell. "The major thing to keep an eye on if they do sunset the TCJA is the return of the higher income brackets across the board for all taxpayers," said Bell.
Back in 2017, the TCJA reduced individuals' tax burden by expanding tax brackets. This allowed more earned income to be taxed at a lower bracket. It also lowered the top tax rate. It also increased the standard deduction. That benefits taxpayers who don't itemize deductions on their 1040 return. The TCJA, though, put a cap on mortgage interest and state and local tax (dubbed SALT) deductions. This hurt homeowners in high-tax states. Trump's tax cuts also increased the federal gift and estate tax exemption. That exemption enables high-net-worth families to pass on more of their estate to the heirs tax-free.
Indeed, estate planners are closely watching to see what happens to the estate exemption. Currently, single taxpayers can claim a lifetime gift exemption of $13.61 million. That amount doubles for couples. If Congress doesn't act and the amounts return to 2017 levels in 2026, the single taxpayer limit would drop back to around $7 million. "If that were to go back to old levels, that could cause some concern for wealthier families, especially ones with highly appreciated real estate," said Bell. The Republicans, Bell adds, would be more inclined to extend the exemption and leave it at current levels.
Keep An Eye On Taxes
And if it turns out that taxes on income will be higher if the TCJA expires, one strategy to offset those higher future taxes is to "accelerate income now when your tax brackets are lower," said Waskiewicz. There are many ways to boost income. That includes increasing the distribution amounts on your retirement accounts. You could take bigger withdrawals than your minimum distribution requires, says Waskiewicz. Older Americans might consider taking Social Security earlier.
Converting traditional IRA dollars into a Roth IRA (which features tax-free withdrawals) also makes more sense when you are in a lower tax bracket today than you think you will be in tomorrow, adds Waskiewicz. The reason: You'll pay lower taxes on the amount you convert, as it is taxed as ordinary income.
Still, if the Trump tax cuts are extended and there are fewer changes in tax policy, there will be fewer tax consequences for most people, adds Waskiewicz.
How Presidential Election Might Impact Taxes On Capital Gains
Under Harris' proposal, high earners who take home $1 million or more will see the rate they pay on long-term capital gains (assets held at least one year) rise from 20% to 28%. That means, an investor who posted profits of $100,000 on AI-chip darling Nvidia would pay $28,000 in capital gains instead of $20,000 if he or she opted to sell. If that proposal were to become law in 2026, a high-net-worth investor could shield more of the profit from taxes. How? Sell over a two-year period. Sell some this year and some in 2025 while capital gains are at the lower 20% rate, says Bell.
Adds Novack: "Push income forward by maybe selling some things and taking the capital gains hit now."
If your portfolio faces higher capital gains, you can also minimize your tax hit by investing in more tax-efficient investments. Exchange traded funds (ETFs) are a great option, says Waskiewicz. Another tax-saving move is to gift long-term appreciated assets to charity instead of cash. That way you avoid paying capital gains tax on the profit, receive a tax deduction on the full fair market value of the gift and also reduce your estate taxes.
Harvest Gains
Another way to minimize the capital gains hit is to offset those gains with losses via tax-loss harvesting. Any losses that can't be offset by gains can offset up to $3,000 in earned income.
"You're trying to develop a strategy to mitigate some of these (potential) impacts," said Waskiewicz.
The downside of any hint of a hike in capital gains taxes is it could create a torrent of selling that knocks stock prices down and has a negative effect on your portfolio's value, Novack said.
"If people are holding stuff with huge gains, you might see them dumping shares, causing those stocks to take a hit," he added.
How Eliminating Taxes On Tips And Social Security Will Benefit Taxpayers
Gratuities earned by restaurant and other hospitality workers could be eliminated. Both Trump and Harris have proposed that idea. And if so, that will instantly put more cash in workers' pockets. "If tip income suddenly becomes nontaxable, that's a positive," said Waskiewicz. "If tips are your primary source of income, that's a net cash flow positive."
The extra cash could boost spending, as well as free up cash for saving and investing.
And basic tax planning says if Harris wins and doesn't raise taxes for those earning under $400,000, you can take steps to ensure that your income doesn't cross that threshold and push you into a higher tax bracket, says Waskiewicz.
