As discussions around Donald Trump’s political agenda continue to evolve, one topic that has garnered significant attention is the potential for tax reform.
During his previous term as president, Trump implemented the Tax Cuts and Jobs Act (TCJA), which lowered tax rates for businesses and individuals.
If he were to return to office, there are possibilities for further tax changes, particularly concerning tax brackets. But how might these changes affect your finances?
Let’s take a closer look.
What Are Tax Brackets?
Tax brackets are the ranges of income that are taxed at different rates. In the U.S. federal tax system, income is divided into segments, each of which is taxed at a different rate. These rates are progressive, meaning the more you earn, the higher percentage of your income will be taxed as you move into higher brackets.
Currently, there are seven tax brackets, ranging from 10% to 37%, with the highest rate applying to income above certain thresholds. However, if Trump were to enact changes to the tax code, some of these brackets could shift, altering the amount of taxes you owe.
Key Proposals for Tax Changes Under Trump’s Leadership
While specifics about potential changes to tax brackets under Trump’s future presidency remain speculative, here are a few key areas where tax reforms could come into play:
1. Lowering Individual Income Tax Rates
Trump’s past tax policies focused on reducing individual income tax rates. Under the TCJA, the top rate dropped from 39.6% to 37% for individuals earning above a certain threshold. If Trump were to further lower individual tax rates, it could result in significant savings for higher-income earners.
For instance, if Trump were to cut the top rate even further—say, to 30%—those with higher incomes would see a reduction in their tax burden, putting more money in their pockets. This would especially benefit individuals in the higher tax brackets (e.g., income above $523,600 for single filers in 2024).
2. Flattening Tax Brackets
Another possibility under Trump’s tax reforms could be the flattening of tax brackets. This means simplifying the structure, possibly reducing the number of brackets to make the system more straightforward. This would likely involve combining multiple tax rates, which could lead to a single flat tax rate for higher income earners.
For example, instead of seven tax brackets, the U.S. could have fewer, larger ones. If this change were implemented, those in the higher tax brackets might benefit from the simplification, potentially lowering their overall effective tax rate.
3. Increasing the Standard Deduction
Trump’s administration has been favorable toward increasing the standard deduction—the amount of income that is not subject to federal tax. Increasing the standard deduction reduces taxable income, which could be particularly helpful for lower- and middle-income taxpayers.
If Trump were to raise the standard deduction again, many taxpayers could see an overall reduction in their tax liabilities, as a greater portion of their income would not be subject to taxation. For example, in 2024, the standard deduction for single filers is $13,850. Under Trump’s tax policies, it could be raised even further, meaning fewer people would need to itemize deductions to reduce their taxable income.
4. Corporate Tax Rate Reductions
One of the major aspects of Trump’s earlier tax reform was the reduction of the corporate tax rate from 35% to 21%. This decision had a cascading effect on the economy, encouraging businesses to invest, hire more employees, and increase wages.
While this change primarily benefits businesses, it also has indirect benefits for individuals, such as wage increases, job growth, and higher corporate profits. If Trump were to pursue further tax cuts for corporations, it could result in even greater economic growth, which in turn could lead to higher wages and more job opportunities for American workers.
5. Eliminating or Reducing Estate Taxes
Trump has also suggested eliminating the estate tax, also known as the “death tax,” which taxes the transfer of wealth upon death. The estate tax currently only applies to estates valued above $12.92 million (for individuals in 2024). If this tax were eliminated, heirs to large estates could avoid paying significant taxes on their inheritance, increasing the amount they receive.
For individuals with substantial estates, this could be a game-changer, making it easier for families to pass on wealth without the burden of high taxes. However, for the vast majority of Americans, this wouldn’t have an immediate impact, as most people do not fall into the estate tax bracket.
How These Changes Could Affect Your Wallet
Higher-Income Earners
If Trump were to reduce tax rates, particularly in the upper brackets, high-income earners could see substantial savings. Those in the top tax bracket, earning hundreds of thousands of dollars or more, would benefit the most from any reduction in tax rates, putting more money in their pockets each year.
Middle-Class Families
A tax rate reduction or an increase in the standard deduction would likely have a positive impact on middle-class families. With fewer taxes taken out of their paycheck or by receiving larger refunds, middle-class earners might see more disposable income, which they could use to pay down debt, invest, or spend on everyday needs.
Lower-Income Earners
While the direct benefits for low-income earners might not be as pronounced, some of the indirect effects—like economic growth, job creation, and the potential for wage increases—could improve their financial standing. Furthermore, increasing the standard deduction would lower their taxable income, which could reduce their overall tax burden.
Final
While the specific tax changes under a potential second term for Donald Trump remain uncertain, the focus would likely be on reducing the overall tax burden for individuals and businesses.
This could result in more money for high-income earners, tax simplification, and potential economic growth through corporate tax cuts.
However, any major tax reform would also have consequences, including debates over how to fund government programs and whether such tax cuts would lead to increasing deficits. As always, it’s important to stay informed about potential changes and how they could impact your specific financial situation.