What Now? An Update for New Leadership

What Now? An Update For the New Leadership

November brought about a change to the expectations for investors. What was supposed to be a very close election ended up with the GOP picking up the Presidency, House and Senate. The election didn’t end up being particularly close, with Trump sweeping every swing state and even gaining ground in states that are solid blue. This matters in that he appears to have a mandate, and the Republicans in the Senate have a few extra seats, though the House is still tight. Investors are reasonably asking, what does this mean for my investments and what does this mean for taxes? We’ll take a look at these in the opposite order.

Tax law changes aren’t rare, but the last several years have seen a large number of them. There was the Affordable Care Act (ACA), the Tax Cut and Jobs Act (TJCA), the CARES Act, and then SECURE Act, and SECURE Act 2.0. Each of these presented major changes to tax law. The next impending change is the expiration of most of the provisions of the TJCA. This has been a major impetus for tax planning over the last several years. The Act cut taxes for most individuals, but it also raised taxes in a few areas, most famously, by limiting the annual deduction for State and Local Taxes (SALT). The biggest provisions driving proactive tax planning are the reduction of tax rates (and broadening of bracket such that rates go up more slowly) and the doubling of the Lifetime Exemption, which is how much a person can gift or leave in an estate before being subject to gift and estate taxes.

This article will address what would change with the sunset of the TJCA and what I now expect with the results of the election considered. It will end with a look at the investment market in light of the new regime.

TJCA changes

Marginal tax rates go from 10-37% under TJCA to 10-39.6%, after. Most people would have a 1-3% increase in their marginal rate, but because bracket thresholds were lowered under TJCA, many people currently in the 24% bracket (upper middle class) will be paying 33%.
Standard deduction would go from $14,600/29,200 to $8,300/16,600.
Personal exemption of $5300 would come back.
Child tax credit was doubled to $2000 under TJCA and the phaseout threshold raised from $110K to $400K.
Credits for other dependents are $500 under TJCA, nothing post.
SALT deduction limited to $10K under TJCA, no limit post (doesn’t affect most people because of higher standard deduction).
Mortgage interest deduction limited to $750K of mortgage debt, this would increase to $1M
TJCA limits itemized certain “other itemized deductions” such as casualty loss and gambling losses doesn’t allow deduction for tax prep or investment management fees
TJCA limits moving expenses to members of the armed forces. It was previously available to everyone.
AMT exemption is higher under TJCA making it apply to even fewer people
ABLE account limits are higher under TJCA
Health insurance premium tax credit is higher under TJCA, so people getting ACA plans may have a lower tax credit to offset
Section 199A QBI deduction allows deduction of 20% of business income in pass-through entities. This would go away.
No more bonus depreciation after TJCA
The TJCA removed the limit on losses from noncorporate businesses up to $610K. Under the old law, losses could only offset business income.
Employer credit for paid family and medical leave will go away
Estate and gift tax reduced from $13.61M to about $7.15M post TJCA

As is obvious by the long list above, the TJCA was a major and sweeping piece of legislation. I thought it was unlikely that most of the provisions would be extended, as the sunset is automatic, and an extension takes, quite literally, an act of Congress, plus the President’s signature. In our polarized political environment, it is hard to get anything passed, and an extension looked unlikely, even if the GOP retook the White House. Now that Trump is returning to power and that the Republicans have a comfortable majority in the Senate and control of the House, and that Trump is taking his decisive victory in what was supposed to be a very close rase as a mandate, I expect extending at least most of the TJCA will be a high priority, and will likely succeed. This act is probably the crowning accomplishment of the first Trump presidency. It is true that Republicans in the House tend to engage in a lot of intramural fighting, but with the ringleader (Gaetz) out of the picture and Trump focused on accomplishing his goals, I expect the party will fall in line.

While I now expect much of the TJCA to be renewed, renewal is far from certain, and some provisions will likely be altered or even allowed to expire. Trump and the Republicans have championed lower tax rates, so I do expect the current rates to remain in place, and it is even possible they could try to cut them further. The higher lifetime exemption is likely to be saved as well. This will give relief to people with net worth in the $7M range and above, though people above $14M, or couples above $28M still need to consider planning for estate taxes. I think everyone should be aware of the size of their estate and potential taxation, as the lifetime exemption seems to be something that comes up for debate a lot and tends to move around. Vice President Harris wanted to drop the exemption to $1M. Considering that the estate tax very quickly ramps up to 40% and that this is in a sense a double or even triple taxed (money is tax as earned, if spent on property it is taxed ongoing at a state level and then everything is taxed again upon death) this is an onerous tax that could have come to touch many more people and very well still may some day. For now, the limit will likely remain high enough that most people are unaffected.

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