Wealth Planning Commentary – November 11, 2024

Post-Election Tax Planning

Republicans will control the Senate and the Oval Office next year and are only a few seats shy of gaining control of the House. As a result, the personal income tax landscape is likely to shift. During his campaign, President Trump promised to reduce income taxes in various ways, from extending the Tax Cuts and Jobs Act (TCJA) of 2017 to replacing the U.S. income tax system entirely with foreign tariffs. It's unclear which of these proposals the administration will pursue, but they expect to seek meaningful changes rather than simply extending current tax rates. Any tax changes will, of course, require Congressional approval. Here are a few of the most impactful proposals that Trump discussed on the campaign trail:

TCJA Extension The most probable outcome is the extension of the TCJA’s provisions, which would maintain today’s marginal income tax rates and estate tax structure. While the estate tax exemption is set to remain high – approximately $13.99 million per individual next year – estate planning remains essential, particularly for high-net-worth families. It is important to ensure that your estate plan aligns with your intentions, addressing the potential impact of any transfer—large or small—on heirs. Even with the high exemption, families should consider the impact of state-level estate taxes, as these can still pose a significant liability. Families with substantial wealth should continue to plan wealth transfers and gifts to heirs, though the urgency may not be as pressing as it was prior to the election.

No Tax on Tips, Overtime Pay, and Social Security Eliminating income tax on tips, overtime pay, and Social Security would reduce federal tax revenue considerably. This could necessitate limitations on these exemptions, especially if the revenue from proposed tariff changes falls short of expectations.

SALT Cap While many Republicans favor maintaining the SALT cap, those from high-tax states advocate for its removal or increase. Given that any tax changes need to be revenue-neutral, there could be a modest increase in the SALT deduction cap, though the cap itself is unlikely to be fully repealed.

Tax Planning Outlook Estimates from the Committee for a Responsible Federal Budget suggest that President Trump’s proposals could increase the federal deficit by as much as $7-15 trillion. To make up for the shortfall, Trump has suggested increasing tariffs. The Republican-controlled Senate will likely facilitate the administration’s tax agenda, and if the House shifts to Republican control, there will be a clearer path for major reforms. However, without a Senate supermajority, some legislation may face delays or require negotiation with Democrats. If progress stalls, Republicans may use the budget reconciliation process to pass tax changes with a simple majority. This process allows changes to last up to 10 years but requires revenue offsets, which could complicate the implementation of significant tax cuts. Regardless of the immediate tax policy changes, it is likely that the U.S. will need to rebalance its budget in the future. The most straightforward way to do so would be through increases in income and estate taxes. While such increases may not occur within the next four years, they remain a long-term possibility. Our recommendations remain largely consistent with those provided earlier this year, though the extended timeline following the election may allow more flexibility in implementing these strategies. Roth conversions are one strategy to mitigate potential future tax increases. Those with significant wealth should still consider transferring assets to the next generation, though they may take a more gradual approach. Recognize that heirs may face higher tax rates in the future, and thoughtful wealth transfer planning today could ensure that legacy wealth is passed on efficiently and with a positive impact on their standard of living. Please reach out to your Wealth Manager with questions about tax planning.

Disclosures

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