Now that the election is finally, mercifully behind us, let’s quickly review what might happen with regards to your taxes and investments.
If you read our pre-election guide, you saw that what we deemed as one of the two most likely outcomes has come to pass: Republicans now control the White House, House, and Senate. (Note: I held off for a few days hoping things would become official, but as I write this DecisionDesk has called 216 out of the 218 seats needed for the GOP, with Republicans holding leads in a bunch of outstanding races; if Democrats somehow come back to miraculously hold a 218-217 edge I’ll eat my hat while issuing a mea culpa.)
Pushing Back the Sunset
The 2017 tax law has a number of provisions set to expire at the end of next year, specifically things like the top tax rates, the standard deduction, QBI deduction and bigger child tax credits. The early call here is that those big items all get extended beyond 2025, which means its mostly status quo for your tax bill going forward. This would have been much more complicated with a divided government situation.
The reason those parts of the law were set to expire is under reconciliation rules (which was used to workaround a Senate filibuster) the budgetary impact had to be dealt within inside a 10-year window. Republicans now control the Senate, but don’t have enough seats to break a filibuster, so the other early call here is that the tax extensions get passed via reconciliation again. Which means instead of being “permanent” they’ll just move the sunset back to something like 2032.
Two Possible Complications
The above sounds pretty straightforward, but there are two potential sticking points: SALT and Medicare Trust Fund
Under current law, only $10,000 of state and local taxes (SALT) can be taken as itemized deductions each year. (My clients in New York and New Jersey love hearing me explain this each April). If the Republican House majority is as slim as it appears at the moment, members from high tax states will have the leverage they need to demand SALT be repealed. Repealing SALT will make things much more expensive, and could cause friction with other members, as SALT primarily benefits higher income taxpayers (since lower-income taxpayers don’t itemize in the first place, let alone have high mortage and property taxes).
The other issue is with the Medicare Trust Fund (I can hear your eyes glazing over, but bear with me). We’ve been hearing for decades about how our entitlement programs are eventually going to run out of money, but no one has actually wanted to tackle the problem because its just easier to ignore it. Unfortunately, the piper must finally be paid. Social Security’s trust fund is schedule to be exhausted in 2033 (so that one’s still getting ignored), but Medicare’s Hospital Fund (better known as Part A) is going to run out in 2028.
Since dealing with that shortfall will involve payroll taxes its possible it gets grouped into the future bill dealing with income taxes and dealt with together. But my early prediction now is that while 2028 will still be Trump’s term, its not this Congress’ problem so they’ll kick the can one last time and tell the 2027 version to deal with it.
Investments & Markets
If you ignored the post-election status and commentary on Wednesday and Thursday you may have noticed that the stock market really liked having some political certainty going forward. The Fed also quietly cut rates (the central bank version of a Friday Night News Dump). The economy actually looks quite strong heading into 2025 barring some type of surprise – which would likely show up in the next month or so if it turned out that the Fed waited too long to cut rates. We’ll have more on the broader economy coming next month as part of a year-end recap/lookahead.
Now What?
Nothing too exciting is going to happen until late January, unless you’re a masochist like me and will follow along with who is going to be tapped on the Ways and Means Committee and who the possible contenders for Treasury Secretary are. Once a new tax bill starts to get drafted we’ll try to break it down as plainly as possible.