Impact of US Election Results on the Income Tax Landscape
By Patrick T.R. Charvat, CPA
With Donald Trump’s re-election and Republican majorities in the House and Senate, changes to the federal income tax landscape as part of this unified government are more likely than usual.
As we look at the potential changes that may be in store based on the platform and statements made by Trump and others in the Republican leadership, please note that other outcomes are possible once the new administration takes office.
Extension of the Tax Cuts and Jobs Act (TCJA)
The biggest potential change is not a change at all, but maintenance of the status quo – extending the Tax Cuts and Jobs Act (TCJA) past its 2025 sunset.
The TCJA markedly changed multiple facets of the income tax code relating to individuals, pass-through businesses, C-Corporations, and gifting/estate planning. Generally speaking, the TCJA reduced overall income tax burdens for the groups listed above.
One of Trump’s signature achievements during his first term, many aspects of the TCJA were unpopular among Democrats. Kamala Harris was expected to allow most of the act’s provisions to expire.
On the other hand, Trump’s re-election means that there will most likely be a concerted effort to extend the TCJA, which he promised during his campaign.
Removal of State and Local Tax Deduction Limitation (SALT)
Despite the expectation of extending the TCJA regime, there may be political will to let the $10,000 State and Local Tax (SALT) Deduction limitation expire.
Before the TCJA, there was no limit on the amount of state and local taxes itemized on federal individual tax returns. Trump has suggested he would be in favor of allowing this part of the act to expire and the idea has Democratic support, since many impacted taxpayers live in blue states such as New York, New Jersey, and California.
Removal of tax on tips
On the campaign trail, Trump repeatedly stated his desire to remove tax on tips, which are currently taxed the same way as standard employee wages.
While Trump has not outlined further specifics, a pair of bills were introduced in Congress earlier this year that provided visions for what this may look like. The first bill, introduced in the Senate, would have provided an exemption from income for cash tips (cash here would include not just cash itself, but also debit/credit card payments and checks). Non-cash tip income, such as tickets or coupons, would remain taxable. This bill would have kept tips subject to payroll FICA taxes, with just the income tax removed.
A separate House bill would have exempted both cash and non-cash tip income from income and payroll FICA taxes.
Should tips become tax-free, one question is how the administration would react, if at all, to employers changing their business models to be more tip-centric to avoid workers paying income tax.
Removal of tax on Social Security benefits
Trump has spoken in favor of removing income tax on Social Security benefits. Depending on one’s income and filing status, anywhere from zero to 85 percent of benefits are currently taxable.
Despite its relative popularity, such a change may not come to pass since any changes to Social Security needs 60 votes in the Senate, requiring bipartisan agreement.
Removal of tax on overtime wages
Trump has also floated the idea of removing tax on overtime earnings. There has been less detail provided on this statement compared to the no tax on tips or Social Security statements and no legislation supporting the change has yet been introduced.
If the idea becomes law, it could represent a seismic shift in the way employers conduct business.
Depending on how it is enacted, employers may consider changing salaried employees to hourly employees if the exemption applies to FICA taxes and if salaried employees do not receive the same tax benefit.
While employers would need to keep a careful eye on overtime costs, some companies may find the increased labor provided by willing workers beneficial.
Many analysts, however, believe the no tax on overtime idea is the least likely of Trump’s proposals to pass. Aside from the upheaval it could cause in employer/ employee relations, new reporting mechanisms would be required to detail the breakdown of employees’ standard vs. overtime hours. While reporting requirements already exist for employee tips as well as Social Security benefits, there are currently no tax reporting requirements for overtime hours.
Bottom line
November’s election yielded a legislative and executive branch motivated and empowered to enact modifications to the federal tax landscape. Although the likelihood of change varies from issue to issue, the accountants at Boyer & Ritter will continue to monitor all the latest legislative developments to keep you informed.
Patrick T.R. Charvat is a CPA and Tax Manager who has experience working with individuals and multistate and local business entities. Contact Patrick at 717-761-7210 or pcharvat@cpabr.com.