What Trump's 2024 Term Could Mean for Taxes and Social Security

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Curious. Are you ready for some of the biggest changes to your taxes and Social Security and how that could affect your financial future? Listen, you could be totally overwhelmed with the idea of rising taxes and expiring benefits and what's the future hold for Social Security? And you wouldn't be alone. The fact is that these are massive issues that could shape your income, it could shape your retirement, it could shape your whole financial security and future if you're not careful. And so I don't want you to worry because I got your back. This episode's here to help.

All right, before I get into this episode, I want to make it really clear that this is not a political episode. This is a financial episode. But politics affect finances. They affect taxes. And I want to talk about two critical things that, that are on the horizon that could have a huge impact on you personally. And we'll see where they go. But here's the thing. That there were tax cuts that benefited millions of Americans that, that people have relied on since 2017. And they're about to expire. They're about to expire at the end of 2025. And there's another element in this idea of Social Security. Nearly half of the retirees are paying taxes on their Social Security benefits, money that they actually already paid tax on. This is something that's been discussed. It is something that's been brought up during the campaigns and all of that stuff. But I know that it will be on the horizon and the agenda in this coming 12 months. So I thought it would be important for us to look at them and look at them through the eyes of what we know and is going to happen and what could happen with, with respect to the return of a Trump administration. Like I said, this isn't political in any way, shape or form. But the reality is that the tax cuts and Jobs act and Social Security reform are hot topics that Congress and the president, the incoming president are going to have to deal with and the decisions they make are going to directly impact your wallet, whether you're a working professional, whether you're a retiree, whether you're somewhere in between, whether you're an entrepreneur. It's just going to happen. So I want to hit on both of those. Let's start with the Tax Cuts and Jobs act, because that is the thing that is most immediate. This was, this was a tax law that was signed in, in 2017. It was one of the most significant tax overhauls in, in decades. And the goal was to stimulate economic growth, to simplify the tax code. I don't think that. Okay, I don't know. Don't get me started on the simplification of the tax code and to make US Businesses more competitive internationally. And there's some provisions in the tcja, as I call it, that I'm just going to summarize here, because I think you'll then understand where this goes, and I'm going to run some numbers behind it. So the first thing was that they wanted to look at individual tax cuts. So what they did is they. They lowered the tax rates across all brackets. So the 22% bracket dropped to 12%. Okay? They doubled what we call the standard deductions. So in for single filers, it was $13,850 in 2023, versus $6,300 before the TCJA. They expanded the child tax credit. They went from $1,000 to $2,000 with $1,400 of it being refundable. So if you look at it, what they were doing is trying to give benefits across the board, but a lot to middle and lower income with the child tax credits and the standard deduction if you don't own a home and those kinds of things to reduce the individual taxes. They also impacted the corporate taxes. And the corporate taxes are more permanent. They reduce the corporate tax rate from a 35% rate to a 21% rate. Now, everything I'm talking about is on the federal level. The states are all different, okay? But they introduced a whole host of incentives that allow for accelerated deductions for certain types of investments in business. So what they did is they lowered the taxes, the tax rate on, on corporations. That would be a burden on, on them from a profitability standpoint. And they allowed them to get higher deductions on some things. They also took some things away. They did something called a salt deduction. They put a cap on it, salt standing. It's. It's state, state taxes. It's real estate taxes. And they put limited limitations on state and Local and real estate taxes to a maximum of $10,000, meaning that if you paid state income taxes and or real estate taxes over $10,000 in aggregate, you would only get a $10,000 deduction. So it really heavily impacted high tax states like California or high real estate tax states like California or high property value states like California. So California, the coasts, a lot of. Because what happens is that if you have a high value property that has real estate taxes, you're going to exceed the 10,000. And let's say you have a $25,000 in real estate taxes and state taxes that you paid, you'll only get a deduction for 10,000. You lose out on the 15. It's been a big to do. They've tried to find a way around it, but it is there. That was part of the original act. They made some changes to deductions that you could do. They limited mortgage interest deductions. So you were only able to deduct interest on $750,000 worth of mortgages, new mortgages. So if you got $1 million mortgage, there's 250,000 that the interest on that is not deductible. So it again affected more expensive, higher, higher income individuals. And then they raised the threshold for medical expenses. So those are the things they did. But the questions, and a lot of this benefited a lot of people because taxes went down and it went down across the board. Like I said, low income, high income and middle income. But by and large the lower levels, what's going to happen? Well, the way that they got this thing signed into law is they basically said we will put it in place for a period of time and they, they allowed it to expire in 2025. Well, Trump's going to come in as president and he's got 12 months, less than 12 months by the time he's inaugurated to do something about it or they expire. In other words, what's going to happen is this, those individual tax cuts, the tax rates will go back up to their higher rates than they were before, which remember the 22% went down to 12%. So all of a sudden, if you're in the 12% bracket, you might be in the 22% bracket paying 10% more on federal taxes. So tax rates will go back up, standard deduction will go back down. So all across the board you'll pay more taxes and the child tax credit will revert back to thousand dollars instead of $2,000 like it is now. The salt deduction would go away. So real estate Taxes and state taxes would be fully deductible and everything. But it has an impact on a lot of folks. And so what I want to do here is let me break down the provisions that are expiring that would affect low income households versus middle income households versus high income households. So on the lower income households some of the biggest things are going to impact is the child tax credit reduction. Literally. Now understand this. A tax credit is more valuable than a tax deduction. Here's how I would look at it. A deduction is like a discount, but a credit is like a gift card. So if you have $1,000 tax credit, you can take $1,000 off your taxes. If you have $1,000 as a deduction, you take 1,000 off of your income. But then you have to calculate the tax around it. So realize that this is a big number. Especially let's say if they have three kids, this could be a $3,000 cost. If this goes away, the standard deduction goes from 13,850 in 2023 back to 6,350. So you lose another $7,000 in ded would impact low low income earners who don't itemize. They would be paying taxes on a higher amount.

The other thing that I think will happen is that just by the mathematics and I didn't talk about it at the beginning, is that the earned income tax credit, which isn't directly related or impacted by the expiration, but the loss of other benefits could impact the ability to get the earned income tax credit in, in there. So what's the overall impact if it expires? It's going to cost low income earners. Now how much? Let me run some numbers for you and this is just generic numbers, but let's assume that I have an individual that's making $30,000 in income, that at that low income level, $30,000 of income, your tax under the current law would be somewhere around 1,740 dol. Under the expired law it would go almost to 3100, $3081. So it's a 1341 dollar difference. If you were an individual single, $30,000 in income. Well what happened if you had a family and maybe a family say with two kids, you would end up in a situation where $60,000 in income, both people making $30,000, they've got two kids and at that level under the current law they pay zero tax because of the deductions and everything that come in place. But they would go from zero tax to almost $4,200 in tax. So it's a big jump.

As a family for the low income earners. Okay, so it does affect. Now let's look at the middle income earners and middle income earners I'm looking at is 75,000 for an individual on up. So middle income earners, they, they're going to get hit because the tax brackets are going to go up. Right now you've got a 12%, a 22% and 24% tax bracket, but they're going to face higher tax rates because the 22% will go to 25%, the 24% will go to 28%. So all of, all of the tax brackets are going to go up. They're going to pay higher, higher tax rates. Now they are going to get the SALT deduction cap removal. So now instead of being limited to $10,000 on real estate taxes and state taxes, they're going to be able to take their full deduction for real estate taxes, state tax. And that could be a huge number depending on where they live and what, what they, they have. Now the other thing is that current, currently there is a limit on what you can deduct as mortgage interest. You can only deduct mortgage interest on the first $750,000 of mortgage.

This would go away and take it back up to the million dollars. So you get a little bit of benefit for additional mortgage interest.

And you would lose. A middle income family would lose the impact and the value of the child tax credit. So by and large hits them. Again, let's look at some numbers. An individual earning $75,000 a year, no kids, single, would pay under the current rules, $9,243. If they expire, it would go from $9,200 to $12,900. Literally a 40% increase. Okay, now what if you were a family with two kids, $150,000 each person making 75,000.

Your tax under the current rules would be 14,486. Under the expired rules, they would be 23,802. It's a 64% increase. Okay. It's huge. So it has a big impact on the middle income. Now let's look at the high income. All right, tax brackets would increase. They would go from 37 to 39.6. If they're high income, they're making a lot of income. They're going to be at the higher tax brackets. They could get hit with, with alternative minimum tax, the SALT tax. The deduction cap will be gone. So they're going to get a benefit of that, but still they're going to end up paying more taxes.

Someone that is in the higher income, let's say, is at $200,000 in income, they would pay.

An additional 9% in taxes. Okay. And if they had kids and they were a family, you're looking at a family with two kids making 400,000. So it's a substantial income. They're going to pay $77,000 in tax under the current rules. Under, under the expired rules, they would pay over $101,000 in taxes. So it would be a 30, call it a 33% increase or 30% increase in minimum in their taxes.

And, and everything. And so the, everyone, it doesn't matter whether you're low income, middle income or high income, will get hit if this doesn't get extended. The bottom line is it's going to expire at the end of 2025 and you'll need to prepare for that and everything. So here's the thing. What are the implications? Okay, Congress, the president, they got to decide are they going to extend it, are they going to modify it, Are they going to extend some of them? There's, it's to be determined. I don't have any idea what's going to happen. Last thing I'm going to do is predict what politicians are going to do. Okay. But here's what you need to do. You're going to need to prepare for the fact that there's potential changes coming down the road and that might mean that things get more expensive from a tax standpoint post 2025. Now we will have more indication and I will do more content around it as I know more. But I just, this is kind of a shot across the bow to say, hey, let's pay attention because this is coming about now. We'll talk more about how to prepare for all of this. But before we do, I also want to touch on this idea of Social Security because I think it's a, it's another hot topic that is on the horizon and needs to be, needs to be considered as part of this. And Trump during the campaign said he was going to look at it. But let's just go back for a moment because Social Security was put into place as part of the new deal to provide financial security for retirees, disabled people and survivors. It was done in 1935. It has been around for a long time. It was originally designed as a pay as you go system. And the, the current workers, they pay taxes in the form of Social Security and Medicare and that funds today's retirees. So we're paying for it in, in, in that way, in. It used to be that there was no taxes paid on it. When you received Social Security, you didn't pay taxes on it. And, but they realized that this was something that they could not sustain because they were paying out benefits at a faster rate than accumulating the, the cash and the, the value to be able to pay those benefits. And so in 1984, they started to look at how do we target it, how do we start to bring in a little more income. And they started to tax a portion of Social Security. Now, mind you understand this.

When you pay into the Social Security system, you are paying for it from your paycheck. In other words, they already took it away from you and now when you get it back in the form of Social Security benefits, they want to tax you on it. Now, they didn't tax it 100%, but the bottom line is they started out with this whole thing at, at 50% taxable if your income is above a certain level. And the reason they did that is they were trying to give the non taxable benefits to the lower income people and to allow them to get the most benefit because that's the way this thing was supposed to be is a social program. And they said, we will start to tax it at the higher income levels, which means that the higher income would be paying more into the Social Security system to support the lower income. It's kind of a redistribution. And so they went to 50% and then they went to 85%. And so now we're in a situation where if your income's above a certain level, it's going to be taxed at your Social Security benefits can be taxed as high as 85% of the benefits taxed. Now that in and of itself wouldn't necessarily be a problem. However.

When they put this in place decades ago, they did not set it in a place where it would index for inflation. And so what that means is that the threshold for taxation has not changed, even though incomes have gone up because of inflation and all of those things. And so what we have is a disproportionate number of people at the lower levels paying in additional taxes on Social Security. That wasn't really planned. They didn't think it through. So there's something that has to be done. But we have this other thing of saying, hey, in, you know, 2035, we might run out of money. I don't Think we're going to run out of money. Based on some of the data that I see. Does it mean that the benefits could change? Yes, but the problem is, is that right now there's a lot of retirees that are trying to survive on Social Security and now Social Security is being taxed and something needs to be done to work through that. And so, so it's important to look at now. What are they going to do? I don't know. You know, they said Trump says he's going to eliminate taxes on Social Security altogether. I don't see that as a workable solution. When you start to look at how do you support this program on an ongoing basis. And so, but changing the brackets, changing the way it's taxed to help people that are in lower income, especially retirees, to ease the burden is huge. But if we completely eliminate taxes, it's a one and a half trillion dollar.

Revenue item that will impact obviously solvency in it. So bottom line is this.

In this new administration and in the next 12 months, there are some huge decisions that need to be made around the current tax law, the expiring tax law, Social Security that are going to have a material impact on you, your financial security and your financial future. And it's important for us to start to, to look at it now. We don't have control of it. We have the, the, the, the peeps in, in Washington that I don't know, do I trust them? Who knows? So here's what I want you to do. How do you prepare? Well, let's just look at it. The only thing we can do is work with what we know right now. Things will expire at the end of 25. Do not panic. Right now we have a Social Security system that's taxed. Okay. Bottom line is we have to work within those rules. So I would look at planning for higher taxes until we know more. That means adjusting retirement plans accounts. That means thinking about potential increased tax liability as you get older or you start to draw down funds out of your retirement plans or anything like that. It also means that using tax advantaged accounts like Roth IRAs or a Roth 401k if you qualify, becomes hugely valuable because when you take those out, they're not taxed at all. And so if we think we're going to have taxes that are higher in the future.

Getting things into a Roth right now, either through backdoor or conversions or contributions can become really important. So that's number one is plan for the higher taxes. And if they don't come Great. Number two, monitor the legislation. Don't put your head in the sand. Stay informed about the decisions. Subscribe to this channel. Stay with me here because I will be doing more and more around this as I, as I get it. Just like I'm trying to give you this. This isn't about fear. This is about knowledge. It's about awareness. It's about preparation, doing it right. Okay, so let's stay informed about what's going on. Stay with me. I'll let you know about the expiring tax, tax elements, what they're doing with them. I'll let you know if I know of any Social Security reforms and what I hear through, through the grapevine. Okay? And then the third thing is to get professional advice. If you're unsure about it, are you working with anyone that can help you do a plan, do a financial plan? When we work with our clients to build that, their money machine master plan, we build it out now, look at it and say, well, what happens when these things expire? What does it do to their financial plan? I'll look at it and say, what happens if the market drops? I'll look at it and say, what happens if Social Security drops down? We will test it and test it and test it all different ways with all different assumptions to make sure that we can look at the highest probability of success. So if you're not doing that kind of stress testing on your financial journey, got to get it done. All right, so here's the deal. Major tax cuts coming, are set, are set to expire. Social Security reforms are on the table. Lots of things are going to change. Be prepared, stay in the game, stay informed and don't panic. Whatever comes our way, we'll find the path to plan around it, to work around it and make it work for us. All right? That's why I'm here. That's why I have this show. That's why we're here to do this. I hope that this helps. I hope that you start to look at things through an understanding and aware set of eyes versus head in the sand. Like I said, not about politics, not about whatever administration. I don't care what side of the aisle you're on, both sides of the aisle will have to deal with this because it is an issue that is on the horizon that can't be ignored anymore. And so just stay informed, stay with me on the journey. All right? It is an unusual episode, but I think it's an important episode for us to do this because if I'm really going to do what I want to do, which is to help you find the path to financial freedom, to light the path to financial freedom, to give you the tools, to give you the education and equip you to be in control of your financial destiny the way you should be. Then I got to tell you the good, bad, the ugly, and give you the guidance in the process. All right? I hope that you found some value and, and if you haven't done so already, subscribe to the channel. And do me a favor, if you found this helpful, then share it with a friend. Let them know, get them on the journey with you. Stay with me. I'd love to hear from you. I'd love to hear some of the comments or some thoughts about this. And in the meantime, until I get a chance to see you on the road, your financial freedom, always, always strive to live a life. Thank you for listening to the affluent entrepreneur me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building your money Machine where we help you learn how to master your money, eliminate financial stress, and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcast or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.