Heading into the 2024 election, Republican and Democratic tax policy proposals reflect their differing economic ideologies.
Both sides have important implications for personal wealth planning, particularly in relation to how to manage tax liabilities, structure investments and plan for the transfer of 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. Amendments often occur before final legislation is passed.
Here's an overview of the high-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 are generally advocating for lower income taxes. The current proposals focus broadly on extending or making permanent provisions of the Tax Cuts and Jobs Act (TCJA) 2017 to maintain current income tax rates for individual and corporate income taxes.
- Extending the current estate tax exemption: As part of expansion of TCJA, The GOP has favored keeping 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 will be halved at the end of 2025.
- Elimination of specified taxes: Republicans have proposed eliminating tip taxes and Social Security payments.
Impact on estate planning:
- If the TCJA remains permanent, most high-income earners won't see much change because tax rates and deductions will remain the same.
- If the tax rates remain the same, your customers can still take steps for it lower your income tax bills, regardless of whether their incomes will be higher or lower in 2025.
Democratic proposals
- Tax increases for high-income individuals and corporations: Democrats propose raising taxes on high-income earners (individuals making over $400,000 a year) 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 qualified business income pass-through deduction of 20% would expire.
- Reducing the estate tax exemption amount and limitations on estate planning tools: If the TCJA provisions are allowed to expire, the estate, gift, and generation tax exemptions will be cut in half to approximately $7 million. Democrats have also discussed lowering the exemption amount to $3.5 million and limiting certain estate planning vehicles, such as grantor-held annuity funds.
- Extension of tax credits for middle and low income individuals: Proposals have included expanding tax credits, including:
- Expanding the child tax credit to $3,600 from $2,000 for dependents and providing a $6,000 credit for newborns
- Expanding the earned income tax credit for workers without children
- Expansion of enhanced premium tax credits under the Affordable Care Act
- Exclusion of tip wages from federal income taxes; Payroll taxes for Social Security and Medicare will remain
- Wealth or capital gains tax reform: Democrats are exploring measures such as taxing unrealized capital gains or raising capital gains taxes on top earners.
Impact on estate planning:
- Higher earners may face increased taxes, particularly on income and capital gains.
- The potential for a reduced estate tax exemption in 2026 means you may want to meet with your clients to review their estate planning strategies now while exclusion remains high.
- Middle- and low-income families can get more tax relief through expanded credits and social programs.
- Potential tax increases for high earners could affect investment strategies and estate planning.
Remember, the results of the 2024 congressional elections will significantly affect the implementation of any future tax proposals. The makeup of Congress will shape the scale and direction of any tax reform.
Congressional elections
Here are ways the results of the congressional elections could potentially affect politics:
Divided Congress:
- Legislative deadlock: If one party controls the House of Representatives 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 partial changes. Legislative deadlock is likely to mean the termination of TCJA provisions.
- Tax proposals have stalled: Both parties could 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 increase for high income earners: Democrats are likely to allow some of the TCJA's provisions to expire, pursuing higher income taxes for corporations and high-income earners while expanding tax credits for middle- and low-income families.
Start planning
The results of the presidential and congressional elections will affect future tax policy, although it is impossible to predict the results. However, reviewing your clients' wealth plans with them is a good idea to identify possible strategies to prepare and make changes as needed.