To say the 2024 presidential election has been eventful would be an understatement. And while history tells us that markets will likely take the eventual outcome in stride, one area where the outcome of the election is almost certain to have a significant impact is tax policy. Democrats and Republicans are offering starkly different visions for the future of US tax policy, and wealthy individuals may need to reassess their estate plans, and their wealth-transfer strategies, depending on which party prevails.
Two campaigns, two distinct visions for tax policy
While former President Trump has not laid out an extensive plan for taxes in a potential future Trump administration, it's likely that he would continue the efforts to reduce taxes on individuals and corporations that he began in his first term. Similarly, while there is some ambiguity as to what a Harris administration might focus on, one can assume that many of the priorities laid out during the Biden administration might carry over—namely, higher taxes on wealthy Americans and corporations. Though the details may be fuzzy, the contrast between the two perspectives on taxes could not be starker.
Ultimately, whether or not any of these policies or proposals are enacted will depend not only on which party wins the White House, but also on which party controls the Senate and the House of Representatives. Proposals may be easier to implement when one party has full control of the government, though that is not necessarily the case. In a divided government scenario, we may see opportunities for creative, bipartisan dealmaking—or end up with intractable gridlock, which, in the case of the TCJA, may be especially consequential.
How might these proposals affect you? Well, it depends.
Do you earn more than $400,000 annually?
If so, your taxes could go up by the end of 2025.
Democratic proposals would see taxpayers who earn more than $400,000 annually (or married couples earning more than $450,000) subject to a top marginal tax rate of 39.6%, which means that any dollar above that threshold would be taxed at that rate.
Currently, the top marginal tax rate is 37%. This rate was set in 2017 by the Tax Cuts and Jobs Act, but only through the end of 2025—at that point, barring action from Congress, the rate will automatically jump back up to 39.6%. A future Democratic administration would likely let that provision of the act lapse, bringing the rate back up to its pre-TCJA level, while a Republican administration would likely seek to make the 37% rate permanent.
It's possible that a Democratic administration might lift the current cap on deductions for state and local taxes—the SALT deduction. Since 2017, that deduction has been capped at $10,000. For high earners in states with large tax burdens, the removal of the SALT deduction cap could help offset the additional tax owed as a result of the increase in the top marginal tax rate. Additionally, a Democratic administration could potentially seek to remove the payroll tax exemption for earnings over $400,000, making any dollar earned over that amount subject to the Social Security tax. The most recent version of this proposal would maintain the exemption for earnings between $168,600 and $400,000 (these amounts would be adjusted for inflation annually).Taxpayers could also see the net investment income tax rate rise to 5% from 3.8% for those with a modified adjusted gross income (MAGI) greater than $400,000.1 The additional Medicare tax rate for those earning more than $400,000 could also increase to 2.1% from 0.9%.2
Roth IRA conversions, a popular tax-savings strategy, could be prohibited for taxpayers at this income level as well, and "backdoor" Roth contributions, where after-tax traditional IRA contributions can be rolled into a Roth IRA despite income limits, could be eliminated entirely.3
Do you earn more than $1 million annually?
Under Democratic proposals, taxpayers who earn more than $1 million in income annually would see their long-term capital gains and qualified dividends taxed as ordinary income rather than the more forgiving 20% rate currently in effect. This income would also be subject to the aforementioned 3.8% net investment income tax (NIIT). In contrast, Republicans have proposed that the tax rate for capital gains and ordinary dividends be indexed to inflation, which could exclude a portion of the gains from taxation, resulting in a lower overall tax burden.
Do you plan on passing on appreciated assets?
Currently, individuals who inherit appreciated assets from someone who has passed away are able to benefit from a "step-up" in cost basis. That is, the cost basis of the assets is stepped-up to the current, fair market value, effectively wiping out the need to pay capital gains on any growth that occurred prior to the inheritance. Democrats have proposed changing this so that the transfer of appreciated assets is treated as a taxable event for the original owner. While the inheritor will still receive the assets with a step-up in basis, the original owner's estate would have to pay capital gains tax on any gains in excess of $5 million.
Do you expect to pass on an estate worth more than $7 million?
If you expect to leave behind an estate worth more than $7 million, you may want to start planning ahead for what might be coming.
As with the top marginal tax rate, the 2017 Tax Cuts and Jobs Act lifted the lifetime estate and gift tax exemption significantly—but only through the end of 2025. In 2024, the exemption amount is $13.61 million per person, but unless the increase is made permanent by Congress, it will revert back to its original, pre-TCJA level, which (once adjusted for inflation) could end up somewhere between $7 and $7.5 million. If the provision expires and an individual passes away with an estate that has a value greater than the exemption amount, the value that exceeds the exemption amount will be taxed at 40%.
Again, as with the top marginal tax rates, Democrats are expected to allow this provision to lapse, while Republicans have promised to make it permanent.
Do you have more than $100 million in assets?
Democrats are seeking to apply a broad tax to ultra-high-net-worth individuals and families who possess more than $100 million in assets. This proposed tax would establish a minimum tax of 25% on total annual income, including unrealized capital gains.
How should you prepare?
"While we don't expect these changes to come into effect in the next year, it's still worth considering what strategies might make sense in a higher tax environment," says Greg Doyle, a vice president on Fidelity's Advanced Planning Team. Doyle points to 4 strategies that could potentially help reduce your tax burden and facilitate wealth transfer to the next generation, especially if income taxes are increased:
- Roth IRA conversions: If you are likely to be affected by the increase in the highest marginal income tax rate, converting a traditional IRA to a Roth IRA now, when the rate is still relatively low, may make sense. A Roth IRA can help provide tax-free growth potential and tax-free withdrawals in retirement or for your inheritors, especially if they live in high-tax states like New York or California. 4
- Bunching charitable deductions: If you itemize your deductions and plan on making a large charitable gift to a donor-advised fund, it may make sense to defer that gift if you expect to be in a higher tax bracket in future years.
- In-kind transfers: If you have a grantor trust, you may want to consider moving high-cost-basis assets into your trust and taking low-cost-basis assets of equal value out. Bringing those low-basis assets back into your estate may allow your spouse or children to "step-up" the basis of the assets to the fair market value when they inherit them, offering a substantial savings on capital gains taxes.
- Tax-smart strategies: Investors of every income level can implement strategies designed to help manage, defer, or reduce taxes, such as tax-smart asset location and tax-loss harvesting .
It's worth noting, however, that changes to some of these strategies—particularly Roth conversions and in-kind transfers—could come about in the event Congress takes up some of the proposed changes in the coming term. Additionally, individuals with IRAs that have a balance greater than $10 million could end up subject to special distribution rules requiring them to withdraw a portion of the excess amount. While it's unlikely these proposals will come into effect anytime soon, it's important to be conscious of the potential for changes in the future.