Donald Trump’s election win signals changes in tax policies that could shape the financial future for middle-class Americans.
While President-elect Trump promised to lower taxes for most Americans by extending or making permanent the 2017 Tax Cuts and Jobs Act (TCJA), the broader impact of his tax proposals remains to be seen once he officially takes office next monyh.
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Will middle-class families see lasting benefits, or will Trump’s stance on trade and other factors offset the gains? Here is how his tax plan could affect the middle class.
Maintain the Current Tax Rate
Throughout this year’s campaign, President-elect Trump vowed to continue or to make permanent the TCJA. The law, which is set to expire next year, changed the federal tax code in several ways that affect the middle class.
“President-elect Trump’s tax plan is designed to provide much-needed relief by addressing the soaring costs of inflation,” said Andrew Loposser, president of APL Consulting, a Virginia-based Republican consulting firm. “The plan will achieve this in two ways: encouraging businesses to hire more workers and ensuring no tax increases for families whose budgets have already been stretched for years.”
For example, the law lowered the 15% tax rate to 12%, nearly doubled the standard deductions, simplified the filing process for many taxpayers, and potentially reduced taxable income for middle-class households.
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More Tax Burdens
Paul Carlson, a CPA and managing partner at Law Firm Velocity, said while maintaining or making the 2017 tax cuts permanent will help middle-class families with everyday expenses, President-elect Trump’s tax proposals also have negative effects.
“The downside is that making these cuts permanent could lead to budget shortfalls in social programs, which many middle-class families rely on, like education and healthcare,” Carlson said.
In addition, Carlson said if Trump lowers the Child Tax Credit from its current level of $2,000, families will feel the pinch, especially those with multiple children.
“Right now, you really want to boost your emergency savings,” Carlson said. “If taxes go up or credits get cut, you’ll need that cushion.”
Accelerate Income Growth
Another key factor among the 2017 tax law changes enacted during Trump’s first term was the provision that brought the U.S. corporate income tax rates in line with those levied in Europe and Asia.
“This tax reduction improved U.S. economic competitiveness, accelerating income growth for middle-class families,” said Wayne Winegarden, an economist at the Pacific Research Institute. “If the tax reductions expire, the consequence will be slower income growth and fewer job opportunities for middle class families across the country.”
Increase the Price of Everyday Items
One of Trump’s most controversial proposals during this year’s presidential campaign was imposing a 10%-20% universal baseline tariff on imports. The nonpartisan Tax Foundation estimated that a 10% universal tariff would increase taxes on American households by an average of $1,253.
Winegarden said tariffs are part of Trump’s tax plan because tariffs are a type of consumption tax.
“Tariffs are a particularly destructive form of taxation,” Winegarden said. “Like all taxes, they raise costs. Some of these costs will be borne directly by families who will have diminished purchasing power.”
Winegarden said tariffs will also increase business costs, because many inputs are imported. According to the U.S. Trade Commission, the electronics sector depends significantly on imported components, such as integrated circuits and semiconductors, which are essential for making smartphones and computers.
“These higher production costs will harm business profits in the U.S. and will further raise costs on families,” Winegarden said. “The higher cost structures will also change how businesses produce goods and services, which will further compound the adverse economic impacts.”
In addition, Winegarden said tariffs inevitably encourage other countries to retaliate. “These retaliations further reduce economic opportunities for Americans, compounding the adverse impacts.”
Exempting Taxes on Tips and Social Security Income
Trump proposed exempting tips, Social Security and overtime pay from the income tax. These changes could affect the estimated 6 million Americans who rely on tips as part of their income and 56% of beneficiary families.
“If that goes through [Congress], it will cut taxes for the middle class,” said Gary Massey, managing director at Massey and Company CPA.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Trump Won the Election: How His Tax Plan Could Affect the Middle Class
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