Trump Elected: Understand the tax reform proposed by the Republican.
ORLANDO, FLORIDA - November 6, 2024
Vinicius Evangelista, Managing Partner
Last night, the U.S. presidential election resulted in the victory of Donald Trump, marking the return of the Republican to the White House and, consequently, the implementation of his proposed fiscal policies, which have direct implications for both residents and investors in the country. The elected president brings with him a set of fiscal proposals that could significantly reshape the tax landscape for both individuals and businesses, with a focus on tax cuts, fiscal simplification, and the restructuring of corporate tax policy. This article aims to analyze the key changes that may occur following his victory and the consequences for those who reside and invest in the United States.
1. Donald Trump’s Proposed Tax Reform:
Since his election in 2016, Donald Trump has advocated for a tax reform focused on reducing the tax burden, primarily for high-income individuals and large corporations. During his campaign for a second term, Trump reiterated his commitment to continuing pro-growth fiscal policies. Below are some of the most significant proposals from his administration's economic plan:
Tax Cuts for Individuals:
One of Trump’s central fiscal proposals is a reduction in income taxes for individuals. During his first term, tax reform was implemented that lowered income tax rates across various income brackets, with a particular emphasis on reducing the tax burden for higher-income earners. In his second term, it is expected that the president will propose further reductions in income taxes for the highest brackets in an effort to stimulate economic growth.
The current maximum individual income tax rate stands at 37%. Trump’s proposal is to reduce this rate to 35%, potentially resulting in significant savings for high-income earners. Additionally, there is an expectation that he will seek to raise the income threshold for tax exemptions, allowing more individuals to benefit from a lower overall tax burden.
Corporate Tax Cuts:
Another key element of Trump’s fiscal platform is the reduction of taxes on businesses. During his first term, he successfully passed a significant corporate tax cut, lowering the corporate tax rate from 35% to 21%. In his second term, Trump is expected to continue pushing for further tax cuts or the maintenance of the reduced rate, arguing that this will stimulate new investments, job creation, and the global competitiveness of American companies.
This reduction could also benefit foreign investors who own businesses or investments in the U.S., as companies would pay less tax on profits generated within the country, creating a more attractive business environment.
Simplification of Tax System:
Trump has also expressed interest in simplifying the tax system, particularly for small businesses and individuals who struggle with the complexity of the current tax code. The simplification would involve the elimination of certain taxes and an increase in the standard deductions, allowing taxpayers to pay less in taxes with less bureaucratic hassle.
Profit Repatriation Program:
During his campaign, Trump advocated for a more aggressive policy on the repatriation of profits held by U.S. companies abroad. Under this proposal, companies would be able to bring their profits back to the United States at a lower tax rate, encouraging them to reinvest those funds into the domestic economy.
This policy could have significant implications for foreign investors in the U.S., as international companies with a presence in the American market could benefit from reduced taxes on their repatriated profits, fostering new partnerships and investments.
2. Implications for U.S. Residents:
For residents in the United States, the main fiscal changes that could arise from Donald Trump’s victory involve a restructuring of income tax brackets and the impact of new tax deductions. The reduction of the maximum income tax rate would primarily benefit higher-income taxpayers, which could lead to a significant decrease in their overall tax burden.
Furthermore, an increase in the standard deductions could simplify the tax filing process for many Americans, especially those who do not have many itemized deductions. This would allow for greater tax savings and potentially higher consumer spending and investment.
On the other hand, changes to the tax exemption rules for states with high income taxes, such as California and New York, could have adverse effects on certain taxpayers who would lose previously available tax benefits.
Tips: Current Tax Treatment:
Tips are commonly received in industries such as restaurants, hospitality, transportation services, and other customer-facing professions. In the U.S., tips are considered additional compensation and, therefore, are subject to taxation. However, the way tips are treated may vary depending on the context.
Income Tax on tips:
By default, tips are not exempt from income tax in the United States. This means that, in general, workers who receive tips must include them as part of their gross income when filing taxes, both for federal and, where applicable, state and local taxes.
If you receive tips, as is common in industries such as restaurants, these must be reported as income. The IRS (Internal Revenue Service) requires that any tip received, whether in cash or not, be reported and taxed as income.
Donald Trump’s Proposal for Tip Tax Exemption:
Donald Trump has proposed a federal tax exemption for tips received by workers, aiming to relieve the tax burden on this income. The idea is to allow tips given directly to the worker — which would normally be taxed as part of the worker's total income — to be exempt from federal income tax, provided the payment is made directly to the employee and does not pass through an intermediary, such as the employer. This proposal would offer a potential tax break for workers who rely heavily on tips, particularly in sectors like restaurants and hospitality.
Overtiime - Current Tax Treament:
Overtime pay, which is paid at a higher rate than the regular hourly wage (typically 1.5 times the normal rate, as per the Fair Labor Standards Act - FLSA), is not exempt from taxes. Overtime compensation must be included in the calculation of income tax just like any other salary or additional payment. In other words, both federal income tax and state and local taxes apply to overtime pay.
Overtime wages are subject to the same types of taxes as regular wages, including:
• Federal Income Tax: Overtime pay is taxed according to the progressive federal income tax brackets.
• Social Security and Medicare Taxes: Overtime is also subject to Social Security and Medicare taxes, which are withheld by the employer.
• State and Local Taxes: Depending on the state and municipality where the worker resides and works, overtime pay may also be subject to local taxes.
Therefore, even though overtime compensation is paid at a higher rate, it is taxed in the same manner as regular wages under the U.S. tax system.
In his 2024 campaign, Donald Trump also proposed a federal tax exemption for overtime pay. According to his government proposal, the amounts received as overtime would not be included in the Taxable Gross Annual Income.
This would mean that workers would not have to pay federal income tax on overtime earnings, which could result in significant savings, particularly for those who rely heavily on overtime to supplement their regular income. If implemented, this change could provide relief to many workers, especially in sectors where overtime is common, such as retail, hospitality, and manufacturing.
3. Impacts for Foreign Investors in the U.S.:
Trump's victory also has significant implications for foreign investors looking to invest in the United States. The reductions in corporate taxes make the U.S. market even more attractive, as companies operating in the country now pay lower taxes on their profits. Foreign investors who purchase shares in American companies or make other types of investments could see an increase in the value of their holdings as companies benefit from higher profitability due to the lower tax burden.
Capital Gain Tax:
Regarding capital gains taxes, Trump suggested during his campaign the possibility of more favorable tax rates for long-term investors. The capital gains tax rate, which currently can reach up to 20% for high-income investors, could be reduced. This would stimulate investment in long-term assets and benefit those holding stakes in American companies or investment funds, making such investments more attractive.
International Taxation:
Another key proposal for foreign investors involves the taxation of foreign assets and the elimination of certain taxes on dividends and interest paid to foreign investors. A reduction in the taxation of foreign investments could make the U.S. market more competitive, attracting even more international capital. By making it more tax-efficient to invest in the U.S., Trump’s tax reform could encourage greater foreign participation in the American economy, benefiting both U.S. businesses and global investors.
4. Proposal for a 10% to 20% Tariff on Products Imported from China:
In 2024, the proposal for additional tariffs ranging from 10% to 20% on products imported from China became a central issue in U.S. trade policy, especially under the leadership of Donald Trump. While the former president adopted protectionist policies and implemented high tariffs during his first term as part of a trade war with China, the possibility of introducing new tariffs or increasing existing ones in 2024 could have widespread economic repercussions for both countries and for the global market.
This proposed tariff is a continuation of the tariff measures initiated in 2018, which aimed to reduce the U.S. trade deficit with China and address unfair trade practices such as intellectual property theft, state subsidies for Chinese companies, and forced technology transfers. The proposed increase to 10%-20% on certain Chinese imports brings to light several important issues regarding economic impacts, international trade relations, and business adaptation strategies.
The proposed 10% to 20% tariffs could apply to a wide range of products imported from China, including but not limited to:
Eletronic Products: Items such as smartphones, computers, televisions, electronic components, and telecommunications equipment. Many of these products are manufactured in China due to its dominance in global electronics production. An increase in tariffs would lead to higher prices for consumers in the U.S. and potentially slow down the growth of the tech industry, which relies heavily on these imports.
Textiles and Apparel: Clothing, shoes, and other textile products that are commonly produced in China and imported into the U.S. China is a major supplier of low-cost textile and apparel goods to the U.S. market. Higher tariffs would increase the cost of these products for both businesses and consumers, potentially leading to price hikes for everyday clothing items.
Machinery and Tools: Industrial equipment and manufacturing machines that are often sourced from China. This would impact industries that rely on machinery for production, including the manufacturing, construction, and automotive sectors. A tariff increase could raise the cost of production, making U.S. goods more expensive and potentially hurting domestic industries reliant on Chinese-made equipment.
Consumer Goods: From furniture to toys, appliances, and other consumer goods, many of these products are produced in China due to lower labor and production costs. Imposing higher tariffs on these goods could directly impact retailers, which may pass the increased costs onto consumers, leading to higher retail prices for products that Americans use on a daily basis.
Raw Materials and Quimicals: Including plastics, metals, and industrial chemicals, which are often imported from China for use in various manufacturing processes. The imposition of tariffs could increase production costs for industries that rely on these materials, such as the automotive, electronics, and packaging sectors. This would likely lead to increased production costs, and ultimately, higher prices for finished goods.
The impact of these tariffs would be particularly significant for industries dependent on cheap imports from China, as an increase in the cost of raw materials or finished products could drive up final prices for U.S. consumers. Industries such as retail, electronics, automotive manufacturing, and consumer goods would be among the hardest hit, as they rely heavily on Chinese imports to keep production costs low.
5. Final Considerations:
Donald Trump's victory in the recent U.S. elections promises significant changes to the U.S. tax system, with a clear focus on reducing taxes for individuals and businesses. For U.S. residents, this could mean a lower tax burden and a more simplified tax system. For foreign investors, the more favorable tax environment may represent an opportunity for growth in the U.S. market.
Therefore, it is recommended that citizens and investors with interests in the United States closely monitor the ongoing tax reforms and consider consulting a tax specialist to adjust their tax planning strategies in line with the changes that are likely to be implemented.
Contact us for personalized guidance on how to navigate these evolving tax policies.