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How Trump’s election victory could affect your taxes and investments

Vaseline3 hours ago

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How Trump’s election victory could affect your taxes and investments

Whenever a presidential election changes the policy direction in Washington DC, it’s time to take note.

Now, a particularly eventful transition could take place following Donald Trump’s victory and Republican gains in the Senate and House of Representatives.

Even before the election, many Americans (about 47%) expected their financial situation to change over the next four years, according to a survey by the National Endowment for Financial Education. Here are some ways this can happen:

Some tax changes are very likely under Trump

Trump made his mark on tax rules during his first administration, when he helped usher in the Tax Cuts and Jobs Act of 2017. That legislation lowered tax rates, limited the SALT, or state and local, tax deduction to $10,000 per year, and almost doubled the value of the tax rules. the standard deduction, the personal exemption abolished, the childcare credit expanded and more. These and other changes have also helped simplify tax return preparation for many people, without the need for more itemization.

The legislation would expire at the end of 2025, which would have led to tax brackets as high as 39.6%, compared to 37% now. It now looks almost certain that Trump, with strong support in the House of Representatives and the Senate, will try to keep the legislation largely intact.

There could be many more wrinkles, with Trump proposing changes such as making tip income and overtime non-taxable, along with Social Security retirement income. He has also proposed making interest on auto loans deductible, and he may favor eliminating current federal tax credits of up to $7,500 for the purchase of electric vehicles.

Some of these proposals could be difficult to get through Congress, especially because they would encourage some people to “game the system and claim that more worker income was actually tips or overtime,” said David Kelly, chief strategist at JP Morgan Asset. Management. Some proposals would also be costly in terms of reducing government revenues and increasing the bloated federal debt, he added.

Further reducing inflation will be difficult if Trump raises rates

Trump waged a heavy campaign to convince Americans that price levels and inflation had gotten out of control, so easing the cost of living will be a priority for his administration. But curbing inflation well below the annual rate of 2.6% will not be easy.

Relaxing regulations on businesses could help, but imposing higher tariffs on foreign imports, as Trump has proposed, would conflict with an anti-inflation goal because these taxes could be passed through middlemen to consumers.

Another problem with higher rates is that they could provoke foreign retaliation that could “slow the economy and reduce revenues from other areas of income tax,” Kelly added.

Preston Caldwell, senior U.S. economist at Morningstar, predicts that a 10% across-the-board tariff increase and a 60% tariff on Chinese goods could cut U.S. gross domestic product by 1.9%, though he also suspects Trump’s proposals could have a negotiating ploy could be to extract concessions from trading partners. Regardless, tariffs are almost universally seen as bad policy by economists, he added.

Nigel Green, CEO of the deVere Group, a global financial consultancy, sees many of Trump’s policies, including tariffs, as inflationary. “The erosion of the purchasing power of cash is a virtual certainty in this environment,” he said in post-election comments.

Inflation was lower, averaging about 1.9% per year, during Trump’s four years as president, compared with that under Joe Biden’s administration. But it was even lower over the past eight years when Democrat Barack Obama occupied the White House, averaging about 1.4% per year. Americans would be happy if inflation returns to any of these levels, but it won’t be easy.

The backdrop so far looks favorable for the stock market

The sharp Trump rally on Nov. 6 was the best one-day performance after a presidential election since at least the 1920s, with the Standard & Poors’ 500 index rising 2.5%, according to Adam Turnquist, investment strategist at LPL Financial.

Curiously, President Biden’s victory four years earlier was the second best, at 2.2%.

That uplifting initial reaction to Trump’s victory boded well for the stock market, with an overwhelming majority of investors apparently expecting business conditions to improve in the future, possibly boosted by lower taxes, including for corporations, and milder regulations with more mergers and mergers. acquisition activity.

After the nine previous times the stock market jumped the day after the presidential election, the market rose 9.5% in the following 12 months, according to LPL Financial.

It is still far too early to say whether the favorable trend will hold and whether investors will continue to adjust their outlook. However, Dave Sekera, Morningstar’s chief U.S. market strategist, cautions investors against getting too carried away with the recent rally. In a post-election presentation, he said he views the stock market as overvalued, with the exception of small companies and value stocks.

Rather, Sekera sees this as a good time to take a closer look at your overall investment allocation, especially as stocks have risen sharply while bonds have fallen lately, and consider adjustments. It may be a wise move to adjust your mix by, for example, pruning some recent big stock market winners and reinvesting the proceeds in underserved areas.

“It could be a good time to lock in some profits before the end of the year,” Sekera said.

The elections may be over, but the uncertainty is not.

Reach the writer at [email protected].

Vaseline3 hours ago

0 4 minutes read