Heading into the 2024 election, Republican and Democratic tax policy proposals reflect their differing economic ideologies.
Both sides have significant implications for personal wealth planning, particularly regarding how to manage tax liabilities, structure investments and plan to transfer wealth to future generations. Understanding each party’s current tax proposals is key to adjusting your clients’ financial strategies accordingly.
Keep in mind that current policy proposals are just that: proposed plans. Changes often occur before final legislation is passed.
Here’s a general breakdown of the top-level tax proposals from each side of the aisle and the implications for your client’s tax situation:
Republican Proposals
- Lower income tax rates for individuals and businesses: Republicans generally are advocating for lower income taxes. Current proposals broadly focus on extending or making permanent the 2017 Tax Cuts and Jobs Act (TCJA) provisions to retain current income tax rates for individual and corporate income taxes.
- Extending the current estate tax exemption: As part of extending the TCJA, the GOP has been in favor of retaining the all-time high estate tax exemption, currently $13.61 million for individuals and double that for married couples. If not extended, the estate tax exemption is set to be cut approximately in half at the end of 2025.
- Eliminating specified taxes: Republicans have proposed doing away with taxes on tips and Social Security payments.
Impact on wealth planning:
- If the TCJA remains permanent, most high-income earners won’t see much of a change because tax rates and deductions would remain the same.
- If tax rates remain the same, your clients can still take steps to lower their income tax bills, regardless of whether their income will be higher or lower in 2025.
Democratic Proposals
- Raising taxes on high-income individuals and corporations: Democrats propose increasing taxes on high-income earners (individuals earning above $400,000 annually) and raising the corporate tax rate, potentially rolling back parts of the TCJA. If so, the top ordinary income tax rate would revert to 39.6%, and the 20% qualified business income pass-through deduction would expire.
- Decrease in estate tax exemption amount and limitations of estate planning tools: If the TCJA provisions are allowed to expire, the estate, gift and generation-skipping transfer tax exemptions would be halved to approximately $7 million. The Democrats have also discussed possibly lowering the exemption amount to $3.5 million and limiting certain estate planning tools, such as grantor-retained annuity trusts.
- Expanding tax credits for middle- and lower-income individuals: Proposals have included expanding tax credits, including:
- Expanding the child tax credit to $3,600 from $2,000 per dependent and providing $6,000 credit for newborns
- Expanding the Earned Income Tax Credit for workers without children
- Extending enhanced premium tax credits under the Affordable Care Act
- Exempting tip wages from federal income taxes; payroll taxes for Social Security and Medicare would remain
- Wealth taxes or capital gains tax reform: Democrats are exploring measures like taxing unrealized capital gains or raising taxes on capital gains for top earners.
Impact on wealth planning:
- Higher earners could face increased taxes, particularly on income and capital gains.
- The potential of a reduced estate tax exemption in 2026 means you may want to meet with your clients to review their estate-planning strategies now while the exemption remains high.
- Middle- and lower-income families could see more tax relief through expanded credits and social programs.
- Potential tax increases for high-income earners may affect investment strategies and estate planning.
Remember, the results of the 2024 congressional elections will significantly impact the implementation of any future tax proposals. The composition of Congress will shape the scale and direction of any tax reform.
Congressional Elections
Here are ways the results of congressional elections could potentially influence policy:
Divided congress:
- Legislative gridlock: If one party controls the House and the other controls the Senate, passing major tax reforms will be difficult. Compromise on tax issues would be necessary, possibly leading to more moderate or piecemeal changes. Legislative gridlock would likely mean the sunset of the TCJA provisions.
- Tax proposals stalled: Both parties may block each other’s more extreme tax proposals, resulting in limited changes or new tax legislation.
Republican majority:
- Lower income taxes: If Republicans control both chambers, they could extend or expand provisions of the TCJA, focusing on lower taxes for businesses and individuals and maintaining the higher estate tax exemption amount.
Democratic majority:
- Tax increases on high earners: Democrats would likely allow some of the TCJA provisions to expire, pursuing higher income taxes on corporations and high-income earners while expanding tax credits for middle- and lower-income households.
Start Planning
The results of the presidential and congressional elections will impact future tax policy, though it’s impossible to predict outcomes. Nonetheless, reviewing your clients’ wealth plans with them is a good idea to identify potential strategies to prepare and make changes as needed.
