Ideas and Price Tags: A Closer Look at President-Elect Trump's Tax Reform Promises

Preparing for the Trump Administration's Tax Policy Plans

Dear Walker & Armstrong Clients,

As we prepare for potential tax policy changes, it’s essential to evaluate the key proposals put forth by President-elect Donald Trump during his campaign. His tax plan includes significant reforms for individuals and businesses, aiming to stimulate economic growth while offering tax relief. However, these changes also carry substantial fiscal costs. Below is an overview of the main proposals, their projected impacts, total revenue implications, and prospects for enactment.

Key Proposals and Their Costs

1. Extension of the Tax Cuts and Jobs Act (TCJA)

The TCJA, passed in 2017, introduced lower tax rates for individuals and corporations, increased the standard deduction and the child tax credit, and made other significant changes. These provisions are set to expire at the end of 2025. President-elect Trump has proposed to make the expiring TCJA provisions permanent. If made permanent, 2026 taxes would be calculated under the same law as 2024 and 2025 taxes. If TCJA expires, 61% of taxpayers will see their taxes go up. Expect lengthy and tumultuous discussions throughout 2025 on the extension of TCJA.

• Cost: Estimates range from $4.6 trillion (Joint Committee on Taxation) to $5 trillion (Penn Wharton Budget Model) over the 10-year budget period. Because of its cost, expect intra-party arguments from the Republican deficit-hawks over the extension of TCJA.
• Prospect: Some provisions in TCJA are likely to be extended, but not all. Deficit and politics will get in the way.

2. Remove Cap on State and Local Tax Deduction (SALT)

TCJA included a $10,000 limitation on the SALT deduction. President-elect Trump proposed a repeal of the $10,000 cap.

• Cost: The cost of fully repealing the SALT cap is estimated to be between $620 billion to $700 billion over 10 years.
• Prospect. It is unlikely that the cap will be repealed. It is more likely, because of the cost of a repeal, that the cap will be modified to appease Republican representatives in high tax states.

3. Exemption of Tips and Overtime Pay from Federal Taxes

Eliminating taxes on tips would benefit hospitality workers and personal service workers (hairdressers, Uber drivers, massage therapists) who frequently receive tips as a significant income component. Eliminating taxes on overtime pay would benefit workers in construction, warehousing, nursing, and seasonal and retail businesses who frequently log overtime hours.

• Cost. Exact costs depend on thresholds and implementation, but estimates suggest a total revenue loss exceeding $500 billion over a decade.
• Prospects. Five bills are presently in the House to exempt tips from federal tax, most likely because both presidential candidates proposed this change. Legislation exempting overtime pay is questionable because of the cost, and a potential for manipulation. 

4. Exemption of Social Security Income from Federal Taxes

Eliminating taxes on Social Security benefits would primarily benefit middle- and higher-income households, as low-income recipients often do not pay taxes on these benefits under current rules.

• Cost: Approximately $550 billion over 10 years.
• Prospect: It is unlikely that we will see tax free Social Security benefits as the revenue from taxing social security income is earmarked for the Social Security and Medicare reserves – which are expected to be depleted by 2033 and 2031 respectively. In addition, reconciliation rules allow a simple majority for most tax law changes. Social Security and Medicare changes take a 60% majority vote. 

5. Business Tax Incentives

Bonus Depreciation:  Permanently extend 100% bonus depreciation for qualified business assets. TCJA presently provides that bonus depreciation for qualified business assets is 40% for 2025, 20% for 2026 and -0-% for 2027.

Research & Development (R&D) Expensing:  Reintroduce immediate expensing for R&D costs. TCJA presently requires R and D costs to be amortized over 5 years.

Interest Deductibility:  Adjust TCJA limits on deducting business interest expenses.

• Costs: For all 3 proposed changes, the costs are estimated to be $930 billion over 10 years ($710 billion for R and D, $120 billion for bonus depreciation, and $100 billion for business interest deduction change.)
• Prospects. Prospects are good for all three of these changes as there is a bi-partisan bill, passed in January 2024, awaiting a vote in the Senate. If enacted, the changes are likely to be effective in 2025. Any TCJA changes would be effective in 2026.

6. Corporate Rate Reductions

TCJA reduced the corporate tax rate from 35% to 21%. President-elect Trump has suggested reducing the rate further to 15% for domestic manufacturing income. The proposal mimics the repealed IRC section 199 domestic production activity deduction (DPAD).

• Cost: Reducing the rate on domestic manufacturing income from 21% to 15% would cost approximately $400 billion over the 10 year budget period.
• Prospects. Likely as it is aimed at helping U.S. manufacturing, a goal of both parties. Uncertain effective date.

7. Other Deductions and Credits 

Caregiver Deductions:  Tax relief for those providing in-home care for elderly or disabled family members.

Education Credits: New tax credits and deductions for education-related expenses.

Automobile interest deduction:  If the campaign promise to make auto loan interest deductible is enacted, only a subset of taxpayers would get any benefit, particularly those who itemize deductions and have significant loan interest. Presently Americans hold about $1.6 trillion in auto loan debt and pay about $100 billion in auto loan interest.

• Cost: The cost of the 3 changes is approximately $375 billion over 10 years (caregiver deduction $200 billion, education credits $50 billion, and auto interest deduction $125 billion.) 
• Prospects: Unknown. Details and information on implementation are lacking.

8. Tariffs as an Offset

A 10% universal on all imports is proposed to generate revenue and encourage domestic production. The President-elect has proposed a 60% tariff on imports from China.

• Potential Cost to Households: A 10% tariff could increase annual household expenses by approximately $1,500. This estimated cost includes higher prices for imported goods such as food, electronics, and industrial supplies, as well as increased costs for domestic products reliant on imported components. A 60% tariff on imports from China could result in even steeper impacts. For U.S. households, this could translate to an annual increase of approximately $1,950 in expenses. Such measures could also prompt retaliatory tariffs from China and other trading partners, compounding costs for U.S. consumers and businesses.
• Projected Annual Revenue: Approximately $4 trillion over 10 years if trade volumes remain stable.
• Prospects. President-elect Trump frequently cited protecting U.S. manufacturing, addressing trade imbalances, and countering unfair trade practices as reasons for tariffs. Since the President has the authority to impose or increase tariffs without Congressional approval, it is likely that additional tariffs will be imposed. The amount and timing is uncertain.

Total Fiscal Impact

Combining these initiatives, the projected revenue loss over a decade could exceed $8.4 trillion, offset partially by up to $4 trillion in tariff revenue if fully implemented. However, the remaining shortfall would significantly add to the federal deficit, necessitating careful planning to mitigate long-term fiscal risks.

Implications for You

It is important to note that none of these proposals affect your 2024 taxes. For 2025 and later years, these campaign promises if enacted will have far-reaching implications for individuals and businesses. However, politicians and lobbyists will get in the way of speedy tax law changes. We will keep you up to date as 2025 progresses and more details are available on the many changes outlined here.

Please contact our office if you have questions on this summary and to discuss your yearend planning needs.

Warm regards,

The Walker and Armstrong Team