Whenever a presidential election shifts the direction of policy in Washington, D.C., it’s worth paying attention.
Donald Trump’s return to the presidency, combined with Republican majorities in both the Senate and the House of Representatives, sets the stage for potentially significant changes in taxes, investments, and personal finances. Here’s an overview of what may lie ahead.
Tax Changes Likely Under Trump
Trump’s influence on tax policy during his first term led to the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. This landmark legislation brought widespread changes, including lower tax rates, a near doubling of the standard deduction, a cap on state and local tax (SALT) deductions at $10,000 annually, and the elimination of the personal exemption. These reforms simplified tax filing for many Americans by reducing the need for itemised deductions.
The TCJA was set to expire at the end of 2025, which would see tax brackets revert to pre-2017 levels, with rates as high as 39.6%. However, Trump’s administration, buoyed by Republican support, is expected to push for an extension or even permanent adoption of these measures.
In addition, Trump has proposed several new tax changes, such as making tip income, overtime pay, and Social Security retirement income non-taxable. He has also floated the idea of making auto loan interest deductible and potentially scrapping federal tax credits for electric vehicles. While these proposals could benefit individuals, their feasibility remains uncertain due to potential challenges in Congress and concerns over revenue loss.
The Inflation Challenge
Trump has made controlling inflation a top priority. However, his proposal to increase tariffs on foreign imports could have the opposite effect. Tariffs typically raise costs for businesses, which may then pass these costs onto consumers, driving prices higher.
Higher tariffs could also provoke retaliatory measures from trading partners, potentially slowing economic growth and reducing tax revenues. Economists such as David Kelly, chief global strategist at J.P. Morgan Asset Management, warn that these policies could undermine efforts to curb inflation.
Under Trump’s previous administration, inflation averaged around 1.9% annually, lower than the rate seen during Joe Biden’s presidency but higher than the 1.4% average under Barack Obama. While Trump may aim to return inflation to these lower levels, achieving this amid rising costs and geopolitical complexities will be a challenge.
A Bullish Outlook for the Stock Market
Trump’s election victory has already sparked optimism in financial markets. On November 6, the Standard & Poor’s 500 index experienced its largest single-day gain following a presidential election since the 1920s, rising 2.5%.
This rally reflects investor confidence in policies favouring reduced taxes, deregulation, and increased corporate activity, such as mergers and acquisitions. Historically, stock markets that rally after elections tend to perform well over the subsequent 12 months, with an average gain of 9.5% in similar scenarios, according to data from LPL Financial.
However, analysts caution against overconfidence. Dave Sekera, Morningstar’s chief U.S. market strategist, believes the market is currently overvalued, except for small-cap and value stocks. He advises investors to review their portfolios, rebalancing between equities and underperforming assets such as bonds.
More Read
What It Means for Your Finances
The potential extension of the TCJA could have several implications for individuals and families:
- Lower Income Tax Rates: Taxpayers would continue benefiting from reduced rates. For example, the top tax rate of 37% would remain, instead of returning to the pre-TCJA level of 39.6%.
- Estate and Gift Taxes: The current federal exemption of $13.61 million per individual would likely remain in place, protecting more wealth from taxation.
- Investment Opportunities: With the stock market buoyant, many Americans could see their retirement accounts and investment portfolios grow.
However, there are potential downsides. Extending the TCJA could exacerbate the federal budget deficit, projected to increase by $4 trillion to $5 trillion over the next decade if the tax cuts are fully extended. Rising deficits may lead to higher inflation and interest rates, making borrowing costlier for businesses and individuals.
Navigating the Changes
For investors and taxpayers, Trump’s victory offers opportunities and risks. Now is a good time to evaluate your financial situation, considering adjustments to investments and planning for potential policy changes.
Financial advisors recommend:
- Portfolio Rebalancing: Shift assets to maintain a diversified mix, focusing on areas that may perform well in a Trump-led economy.
- Estate Planning: High-net-worth individuals should review estate and gift tax strategies to capitalise on favourable exemptions.
- Tax Planning: With lower rates likely to persist, consider strategies such as Roth IRA conversions or deferred income tactics to optimise tax liabilities.
While Trump’s policies could deliver financial benefits for many, the long-term effects, especially on the broader economy, remain uncertain. As ever, the key to navigating these changes is staying informed and proactive.
