As the 2024 elections approach, taxpayers and businesses alike eagerly observe the potential shifts in income tax policy that could follow the electoral outcomes. The stakes are high, as the direction of tax policy will significantly impact financial planning, business strategies, and household budgets. The fundamental divide between Republican and Democratic approaches to taxation is stark, with each party offering distinctly different visions for the future. This article explores the potential changes in income taxes depending on which party wins, highlighting the key proposals and their implications for individuals and businesses.
Republicans generally favor lower taxes and have historically advocated for policies that reduce the tax burden on individuals and businesses. If the Republicans win the 2024 elections, we can expect them to push for the extension of the Tax Cuts and Jobs Act (TCJA) provisions, many of which are set to expire on December 31, 2025. Key aspects include:
The qualified business deduction, introduced by the TCJA, allows eligible businesses to deduct up to 20% of their qualified business income. This deduction is crucial for pass-through entities such as sole proprietorships, partnerships, and S-corporations. Republicans are likely to support extending or enhancing this deduction to incentivize small business growth further.
The TCJA also lowered the corporate tax rate from 35% to 21%. Republicans would likely resist any efforts to increase this rate, arguing that a lower corporate tax rate boosts economic growth and competitiveness.
The TCJA reduced the top individual tax rate from 39.6% to 37%. Republicans would likely aim to make these lower rates permanent, benefiting higher-income earners and potentially stimulating investment and spending.
On the other hand, if Democrats win the 2026 elections, we can anticipate policies focused on increasing taxes for higher earners and corporations while providing relief to middle and lower-income families. Kamala Harris’s tax proposals are similar to President Biden’s, but we are eager to see more details as the election unfolds. Here is what we know so far:
They are protecting the middle class from increases in income tax. Harris has stated that individuals earning under $400,000 will not see a tax increase. For this to be true, something must be addressed with the Qualified Business Income (QBI) deduction, from which many middle-class business owners are currently benefiting.
Harris has proposed increasing the child tax credit to $3,600, a $1,600 increase from where it today. She also wants to give a tax credit of $6,000 for families with a new baby. In other words, a first year child tax credit of $6,000, then $3,600 in subsequent years.
Kamala Harris has proposed a 4% tax on taxpayers who make over $100,000 to help pay for “Medicare for All.” Additional details have not yet been released for this, although it should be noted that it contradicts her promise that nobody earning $400,000 or less will see increased tax liabilities.
Another significant proposal is raising the corporate tax rate from 21% to 28%. This increase is intended to ensure that corporations pay a “fair share” of taxes and contribute to infrastructure and social programs.
While Harris (or Biden) has not proposed eliminating the QBI deduction, there might be reforms to ensure that it genuinely benefits small businesses rather than high-income individuals exploiting the deduction. Taxpayers in the fields of health, law, accounting, consulting, financial services, and a few others deemed to be “Specified Service Trade or Business” (SSTB) are already subject to phaseouts for this deduction for taxable income ranges:
Single filers 182,100 – 232,100
Married filing joint 364,200-464,200
The QBI deduction is unavailable for taxpayers in those industries beyond the upper limits of those income ranges. For other eligible taxpayers beyond those income ranges, taxpayers may still qualify, but several tests may limit the deduction.
In a simplified scenario where a taxpayer is not an SSTB, is married filing joint, has taxable income of $450,000, and has a QBI of 250,000. The QBI deduction is 250,000 x .20 = 50,000. If this taxpayer loses this deduction, it will increase tax liability by 16,000 annually.
Business concept. Business people discussing the charts and graphs showing the results of their successful teamwork.
Joe Biden proposed taxing long-term capital gains at ordinary income tax rates for individuals earning over $1 million, doubling the current top rate. Kamala Harris has not listed this as a formal proposal in print, but has recently commented that she supports this. Combined with the net investment income tax of 3.8%, the top federal rate would be 43.4%. The net investment income tax is also subject to expansion for high-income taxpayers. The NIIT rate would increase from 3.8% to 5% for taxpayers with incomes over $400,000. This tax applies to investment income sources such as interest, dividends, capital gains, rental and royalty income, and a notable inclusion of non-passive business income. In other words, before the NIIT was applied only to passive investment income, under his proposal, the NIIT would apply to active business income for individuals earning over $400,000.
Regarding the estate tax, there are several proposals aimed at increasing estate tax revenues. The current estate tax exemption of approximately $13.6 million (in 2024) would reduce to $3.5 million per individual, a range we haven’t seen since 2009. The top estate tax rate would increase from 40% to 45%.
A controversial aspect of Biden’s (and now we presume Harris’s) tax plan is the taxation of unrealized gains at death. It would be effective for gains above $5 million for individuals and $10 million for married and joint filers. This proposal is a significant departure from the current method of assets passing to a beneficiary receiving a stepped-up basis to the fair market value at death. We are eager to see if Harris incorporates this into her plan.
Last, there is a proposal for a billionaire minimum tax of 25% on the total income, including unrealized capital gains, for individuals with more than $100 million in assets. Although this tax affects only a small portion of ultra-high net-worth taxpayers, it is a new tax we’ve not seen before. Take, for instance, the recent climb in the value of Tesla stock. In June 2024, Elon Musk’s net worth increased by approximately $12 billion just from the sharp rise in Tesla’s stock price. Under this Harris tax proposal, Elon must pay $3 billion tax on unrealized gains. He would presumably need to sell $3 billion of stock to pay for this tax, which would generate even more capital gain upon the sale. This tax raises concerns about how it will affect increases in real estate values in addition to the value of businesses. High net-worth taxpayers typically have their wealth attached to illiquid assets, which will make it difficult to pay taxes on unrealized gains.
The election will determine a drastic change in income taxes for us taxpayers. Harris has promised that middle-class taxpayers earning less than $400,000 will see no increase in tax. Corporations, high-income earners, and those subject to the estate tax would see the greatest tax increases. There is time to assess where you may stand with these changes. The Tax Cuts and Jobs Act is currently set to expire on 12/31/25. If Republicans win, they will likely extend the TCJA or make aspects of it permanent.
If Democrats win, they will likely enact their proposals to be effective 1/1/2026. Stay tuned and consult with your tax advisor and estate planning attorney to ensure you understand how this affects you and your family.
Donovan Thiessen, CPA is the founder and owner of The Accountant, LLC. Our mission is to help business owners make better decisions by providing timely and accurate financial and tax analysis. You may reach Donovan at [email protected], www.theaccountant.cpa, and 702.389.2727.
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