In the early hours of November 6, the U.S. presidential race was declared in favour of Donald Trump. This outcome led many Americans to anticipate the continuation of low taxes, a hallmark of Trump’s economic agenda, as financial advisers suggest.
For much of the past year, Americans had been preparing for the possible expiration of the 2017 Tax Cuts and Jobs Act (TCJA), a sweeping reform of the tax system that introduced significant reductions for individuals and businesses alike. While several benefits for individuals are scheduled to expire at the close of 2025, Trump’s return to the presidency, along with a majority in Congress, has sparked expectations of an extension to these policies.
What Americans Stand to Gain
Potential Growth in Investments and Economy:
Trump’s tax policies have already bolstered stock market gains, with major indices like the Dow Jones Industrial Average and the S&P 500 surging to record levels following his electoral victory. Analysts attribute part of this performance to expectations that corporate tax rates will remain low or potentially fall even further, encouraging companies to resume investment plans delayed by political uncertainty.
According to James Knightley, chief international economist at ING, this renewed confidence could enhance corporate profitability and economic performance. Scott Anderson, chief U.S. economist at BMO Economics, raised his forecast for 2025 U.S. economic growth from 1.9% to 2.2%, citing improved consumer and business confidence.
Lower Personal Income Tax Rates:
One of the TCJA’s most significant features was its reduction of income tax rates for nearly all Americans. For example:
- The top tax rate dropped from 39.6% to 37%.
- Middle brackets like 33%, 28%, and 25% fell to 32%, 24%, and 22%, respectively.
- The 15% bracket dipped to 12%.
Should these tax cuts be extended or made permanent, taxpayers could continue to benefit from higher take-home incomes. Financial adviser Daniel Milan notes that this stability offers Americans a sense of security regarding their finances.
Implications for Retirement Planning:
Low tax rates provide flexibility for those considering Roth IRA conversions. Jim Czerniak, Chief Investment Officer at Ambassador Wealth Management, explains that taxpayers don’t need to rush their decisions. A Roth conversion allows individuals to pay taxes on traditional retirement accounts now, enabling tax-free withdrawals in the future. With the current rates expected to remain in place, strategic conversions can be carried out without urgency.
Estate Planning Advantages:
High-net-worth individuals stand to benefit from the TCJA’s doubled federal lifetime gift and estate tax exemption, now indexed for inflation. In 2024, this exemption stands at $13.61 million per individual, but it is set to halve in 2025 if the law is not extended. Advisers have reported that many clients feel relieved that these policies might stay intact, providing clarity for estate planning.
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The Potential Downside
While extended tax cuts might seem beneficial on the surface, they could exacerbate the growing federal budget deficit, a concern shared by many economists and advisers.
The Committee for a Responsible Federal Budget, a nonpartisan organisation, estimates that fully extending the Trump tax cuts could add between $4 trillion and $5 trillion to the national deficit over the next decade.
An expanding deficit has the potential to drive inflation and elevate long-term interest rates. As a result, everyday expenses such as groceries, rent, and utilities could rise significantly. Moreover, borrowing costs for businesses and individuals may increase, hindering economic activity.
Impact on Monetary Policy:
Scott Anderson suggests that an overheating economy may force the Federal Reserve to reconsider its accommodative monetary stance. The Fed could halt its easing cycle or even tighten policies earlier than anticipated to control inflation. However, these effects may not become apparent until 2026 or beyond.
In Conclusion
Trump’s return to the White House signals a continuation of his hallmark tax and economic policies, providing potential short-term gains for individuals and businesses. Lower taxes, strong stock market performance, and boosted confidence are among the immediate benefits.
However, the longer-term implications, particularly the growing federal deficit and its economic ripple effects, remain a critical concern. For now, the immediate future looks optimistic for taxpayers and investors, though the potential challenges of these policies may emerge in the years to come.
