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Writer's pictureBridget Sullivan Mermel CFP(R) CPA

Tax Changes Post Election: What To Expect And How To Prepare



Tax changes post election - what can you expect and how can you prepare for these changes? Join us this week as Bridget and John discuss the potential impact of the recent election on personal finances, particularly taxes.


Tax Changes: What to expect under the new political landscape. The Trump-era tax cuts, which were set to expire in 2025, could lead to tax adjustments or possibly nothing at all. Republicans might push for certain tax cuts, but the tax laws could remain unchanged if no new legislation passes. The likelihood of "patchwork" tax changes, where they pick and choose their favorite components, is higher than nothing happening at all.


Social Security Taxes: One potential change is the proposal to stop taxing Social Security benefits. Currently, Social Security is taxed only for those with additional income, and about 40% of Social Security recipients don’t pay taxes on it. Eliminating this tax could benefit low-income retirees, although it would likely only help the lower-income 40% of Social Security recipients.


Estate Tax: The possibility of reducing the estate tax exemption (currently $12 million per person) is a possibility, but we think it is unlikely to change. There’s not much political appetite for lowering the estate tax exemption, so it’s expected to remain at the current level.


Capital Gains Taxes: We may see some changes to capital gains taxes. Currently, capital gains are taxed at varying rates depending on income. There are talks of simplifying the system, potentially reducing the rates to 15% for most people, and eliminating some surtaxes.


Keep in mind that while you should be aware of possible changes, there is no need to take action until laws are passed and changes are scheduled.


Resources:


- Alliance of Comprehensive Planners: https://www.acplanners.org

- John's firm website: https://www.trinfin.com




TRANSCRIPT:


Bridget: Hey, John, we just had an election, and now we have results. It will impact your taxes and other areas of personal finance. How? We've got our predictions here on Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.


John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we talk about what to do about the election with your personal finances, I want to remind everybody to hit that subscribe button. That helps other people find this information on YouTube. And with that, I'm so glad that you reminded me there was an election. I kind of forgot about that. Maybe I was trying to forget about it. I know that we're pretty glad not to have the political ads one after another here in Wisconsin anymore.


Bridget: Right.


John: So now we've got a little bit of clarity on what's going on. We don't know the results of the House quite yet as we look at this, but Republicans in control of the White House and the Senate and there're some impacts. We're starting to hear from people talking about, all right, what do we do now?


Bridget: Right.


John: We talked in a previous episode about what we think about the economy and the stock market, but there's a lot of other things. We can't control the economy or the stock market. We can control a lot of things. What are you telling folks about what they should be doing now or what they should be thinking about?


Bridget: Well, I want to start with taxes. And let's talk about the things that the Republicans have said they like, and that we know from the last go round that they like. With the tax conversations, it's important to understand that the current tax regime that was passed under the last Trump administration expires in 2025. So in 2025, we're all set with what we had before, but they're going to be wrangling about what's happening in 2025 and 2026 and beyond.


Sometimes it takes multiple years, so they might start in 2025 or start in 2026, but they're going to be positioning etc. And they kind of have to pass something. And that was the same whoever got elected; they're going to pass something. So that means they're going to make some changes. And since Republicans are going to have a lot of influence, we can talk about what they like and what they might do. Okay, so the first thing.


John: Well, I want jump in there. You said that they're going to do something. I'm not so sure that I agree with that. They could choose to do nothing, right?

 

Bridget: They could. And then it would go back to the 2015, 2016 rules.


John: Right. I'm not sure I think that's what's going to be likely or not, but one thing they could say is, listen, we kind of think we need to raise revenues, we need to raise taxes in some fashion. But rather than tax passing a tax law that says I raise taxes, now I got to go defend that next time I run for election. I can say, you know what, those folks in 2017 did this stuff. We haven't done anything. So I think that's one of the choices. Maybe they do nothing. I'm not sure how likely I think that is, but it's on the table.


Bridget: And another thing is patchwork. What are our favorites? Let's cherry pick a few things and do those.


John: Yeah, right.


Bridget: That’s a possibility, and that's actually a lot more likely than doing nothing.


John: Yeah.


Bridget: There’s some of those favorite things that everybody can agree on. So, let's say they're going to do something. The first thing I want to talk about is not taxing Social Security. I think that's an intriguing idea. What I think a lot of voters don't understand, though, is that Social Security is only taxed if you're making some other income. I just looked this up. For 40% of the people receiving Social Security, that's all they are living on. And you would need to get another, $20,000, maybe $30,000 in addition to Social Security to start getting taxed. So if I were to guess, I would say that 60% of the people that get Social Security do not pay any tax on it.


John: Yeah. Let me just grab that, because that's really interesting. I don't want to skip over that. That's powerful. 40% of people receive Social Security as their sole source of retirement income.


Bridget: Right.


John: Maybe a little bit of interest these days, and they got a little bit of money in a checking account sort of thing, but they're living on Social Security. And based on the tax laws, that's tax free by definition.


Bridget: Yeah, exactly.


John: And then you need to have another $20,000 or $30,000 before even half of it becomes taxable. It's not all taxable even before half becomes taxable. And I don't disagree with your estimation. Some bigger number. 50%, 60%, a lot of people generally, call it half, aren't paying taxes on Social Security anyway.


Bridget: I would say it's at least half.


John: That's really powerful. And I hadn't thought about that. I kind of knew the tax side, but I hadn’t thought about it until you just said that. Okay, yeah, that sounds wonderful. No tax on Social Security. Half the people are probably not paying anyway. That's really significant.

 

Bridget: The other thing is that the people who are paying tax on Social Security are making a little bit of money.


John: Right.


Bridget: So right now, we have a progressive tax system. So the people who are making more pay more. People who have more pay more. And the people who have less pay less, but maybe a higher percentage of their total income in certain situations. Okay, so I'm not going to get into that. Okay, so that's who this would be benefiting. It sounds good for everybody, but it would benefit probably 40% of the people who are actually making some other money.


John: Right.


Bridget: So that puts it into that pot of people. You could still be in some kind of low-income bracket, but you've got some other money coming in. You're not in a poverty situation. You're pretty far above poverty actually. So, that puts it in perspective. That tax cut is competing with a lot of other things. Let's just put it that way. And so, let's talk about the other things that it's competing with. Let's assume that we are going to have to pay some tax. Even back in Revolutionary times, you had to pay some tax. So if you have to pay some tax and they'd love to get rid of income tax, I know, and probably replace it with a sales tax or a consumption tax. But the possibility of that is quite remote, and it would just be hard to raise enough money.


So let's talk about all the competing interests. First, there's estate tax. So one thing that people have been worried about is the estate tax. We go to conferences and they're all like, oh, the estate tax is going to change. The $12 million plus exemption per person is going to end in 2025. Oh, do something. You gotta be kidding me. That's hard to change. And both the Democrats and Republicans have no appetite now. And there's a changing demographic, too, of who's got the money and who they vote for. So if I had to place a bet, I think it's a really safe bet that the estate tax will not go down. It'll stay at the $12 million. What are your thoughts?


John: As you were describing that, one of the things that popped into my head, and it's something that I learned from you or that you reinforced for me, is this idea of, here's all these proposals, here are the talking points from the elections, even from the administration, as they take office. And it's important to be aware of the possibilities. Here are the things that are being talked about, and let's have a plan for when this comes to be. But let's not do anything until we know something is done, because of what you just described; a lot of these things are hard to get through.


And I think back four and a half years ago, during our last presidential election, Biden's position was changing the estate tax, eliminating maybe the step up in basis when somebody dies. And there was a lot of conversation. The Democrats take over, and man, we've got to be scared about this. And I heard it from clients, I heard it from attorneys. And in part because of your expertise, I thought, well, let's be prepared, but let's not jump off the ship into the lifeboat quite yet. When's the last time you heard about the estate tax. It was a big deal and then it went away. So be aware of it. And that, I think, is maybe going to be my overarching opinion about how to think about this stuff. They're talking about changing Social Security tax.


They're talking about these things. Usually when it happens, it's not retroactive, not always; they can do whatever they want to. But usually they say, hey, starting next January, here's what's going to happen. So we usually have lead time. Again, not always. Be careful of that. But, once they decide what's going to happen and it becomes a law, then we can take some action on it. And we don't want to start from ground zero, but we also don't want to put the cart in front of the horse. I think that's probably my overarching theme on this conversation.


Bridget: Yeah. And the other thing I think we should talk about is capital gains. So right now, capital gains are taxed at zero if you're in the lowest tax brackets, and then they're taxed at 15% if you're in middle tax brackets, then they're taxed at 20% if you're in a higher tax bracket. And in that spot between the middle and high, there's a surtax that got put in during Obamacare to help pay for health insurance. So that can add another 3% or 4%, to the people that are making, I think over $250,000 if you're married, filing jointly. I just saw this yesterday. Okay. So they'd like it just to be 15%, call it a day, and on lower income people, maybe zero. That is one thing they will pass. And then that day it'll be effective because they don't really want to be incentivizing the markets.


John: Yeah, right.


Bridget: Okay. It's going to be that. And they'll keep it quiet too, so you won't be able to trade based on changing tax brackets with capital gains. With the rest of it, I totally agree with you about how they handle it. Okay, it's this date. We got time. Don't worry about it. But with capital gains, they typically say, okay, it's going into law now. This is the day. If you sell after this day, it is at this tax bracket.


Anything you sell before that day is that tax bracket. And the problem is that it's always like some odd day and you have to try to keep track of it if you're a tax preparer. Yeah, you sold that on the first of this same month. And then, so that was taxed at 20%, but now if you sell it on the 20th of that month, that happened to be at 15%. So it gets kind of crazy and confusing. But that's another thing that I remember from last time is a lot of last-minute drama.


John: Yeah.


Bridget: And it's frustrating as somebody who's talking about taxes, because then we need to try to get the word out at the very last minute about what you might be able to do at the end of the year. Or some of the stuff even happens the next year.

John: Right.


Bridget: And so, you really can't do anything. So, I'm expecting tax drama at the end of 2025 and probably at the end of 2026.


John: I think that's probably the safest bet. Expect some tax drama as we get to the end of next year. And again, I'm going to heed your advice over the years and pay attention. But don't get too excited till there's something to get excited about.


Bridget: Yeah. And don't make moves based on proposals, because it’s hard to get this stuff done.


John: All right, super. Hey, let's wrap things up here. Again, I'm John Scherer. I run a fee-only financial planning practice in Middleton, Wisconsin.

 

Bridget: I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois. John and I are both taking clients, but if you're interested in finding an advisor who thinks like we do in your neighborhood, check out acplanners.org.


John: Don't forget, hit that subscribe button.

 


At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.


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