What a Second Trump Term Could Mean for Social Security, Taxes, and Interest Rates
If there's one thing we know that the financial markets like, it's certainty.
And since the 2024 presidential election was settled overnight -- rather than the weeks it took to count votes in 2020 -- the markets have reacted to the certainty of our new political reality with very strong returns.
But as Donald Trump prepares to return to the White House, there are still many lingering questions about how the economic vision he laid out on the campaign trail will or won't materialize. On today's show, we explore some of President-elect Trump’s policy proposals and how they could affect your retirement planning.
1. The end of Social Security taxes?
Currently, 15% of all seniors' Social Security benefits are exempt from federal income tax. If your provisional income -- the sum of your gross income, tax-exempt interest, and half of your Social Security benefits -- is greater than $25,000 ($32,000 for couples), then a portion of the remaining 85% is considered taxable income. Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah , Vermont, and West Virginia also subject Social Security to state income taxes.
President-elect Trump has proposed eliminating federal taxes on Social Security benefits altogether. That would give seniors a well-deserved bump in their benefits. But, of course, no tax cut is ever really free money. The income that the government would lose could put further strain on the trust funds that cover Social Security, Medicare, and Medicaid. And while it's doubtful that leaders from any party would let these funds run out of money without acting, eliminating Social Security taxes could necessitate raising or creating a different tax, or reducing benefits to seniors down the line. Raising the full retirement age at which future seniors can collect their full benefits could be another way to keep the trusts solvent.
2. Lower interest rates?
President-elect Trump has not been shy about his displeasure with how the Federal Reserve has managed interest rates during the last couple years. As we've discussed on our podcast before, many economic observers feel, generally, the same way. It's possible that, post-2008, the Fed kept rates too low for too long and then, post-COVID, raised them too fast to try to keep inflation down.
Unfortunately for President-elect Trump, the Federal Reserve is an independent body that sets its own policy. Chair Jerome Powell -- whom Trump appointed in 2018 -- has said that he plans to serve out the remainder of his term, which ends in 2026. Until then, President-elect Trump can only try to influence the Fed. And, in two years, he'll be able to reappoint Powell or choose his successor. But given that Powell probably can't be removed, inflation continues to drop, and the economy continues to grow, I wouldn't expect any major changes to Federal Reserve policy -- or interest rates -- for the first two years of Trump's presidency.
3. Extending the Tax Cuts and Jobs Act?
In 2017, President Trump signed the Tax Cuts and Jobs Act into law. In addition to adjusting tax brackets downwards and raising the standard tax deduction, this act also created a $10,000 cap for state and local tax deductions (SALT) to level the playing field between high-tax and low-tax states.
President-elect Trump campaigned on eliminating the SALT cap because it doesn't adjust for inflation, and because he believes it would result in a tax cut for more people.
The Tax Cuts and Jobs Act also benefitted companies by lowering the business income tax rate from 35% to 21%. President-elect Trump has mentioned lowering that rate even further to 15%. Lower taxes on businesses usually translates into higher corporate earnings, and higher returns for shareholders. But, again, the government needs to collect revenue from somewhere to keep functioning. Cutting one group of taxes could result in raising another.
4. Planning for "What If?"
We won't really know what's on the next Trump Administration's agenda until early next year. Some of the ideas we discussed today will probably end up on the floor of Congress. And others won't.
But one of the benefits of Keen Wealth's comprehensive financial planning process is that you don't have to wait for government policy to take shape. Schedule your year-end review and we can run mock tax returns and other complex simulations that can help to prepare you and your money for multiple "What If?" scenarios. And no matter what happens in Washington next year, we’ll help you keep your financial plan pointed towards short-term happiness and long-term security in retirement.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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