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Whither Taxes?

Adam M. Grossman

IN WASHINGTON, 2025 is beginning to look a lot like 2017. Republicans again control the White House, the Senate and the House of Representatives. But a key difference between then and now is that today the Republican majority in the House is far narrower.

This means more negotiation will be required, and agreement on a new tax bill may take months. In the meantime, here are some key areas that investors will want to keep an eye on.

Income tax rates. The 2017 Tax Cuts and Jobs Act (TCJA) cut ordinary income tax rates virtually across the board. A key feature of that legislation, however, was that the cuts were temporary. They’re set to expire at the end of this year. That’s why, in a recent interview, incoming Treasury Secretary Scott Bessent noted that his top priority is to maintain the current rates and ideally to make them permanent. This will likely be the centerpiece of any new tax package.

SALT cap. The TCJA cut rates and, at the same time, broadened the income ranges covered by each bracket. Consider a married couple with gross income of $400,000 in 2024. In the absence of the TCJA, that couple would have been squarely in the middle of the 33% bracket. But with the benefit of the TCJA last year, that couple landed in a far lower 24% marginal bracket. But to help pay for those substantial cuts, the 2017 law imposed a new restriction that, for some taxpayers, resulted in a tax increase.

Prior to 2017, state and local income taxes—often abbreviated as SALT—were fully deductible, providing an enormous benefit to those with higher incomes. But since 2017, the SALT deduction has been capped at $10,000. As a result, it’s not uncommon for those with higher incomes, or with high real estate taxes, to lose tens of thousands of dollars in deductions.

For that reason, the SALT cap is extremely unpopular, and it’s seen as unfair, penalizing those who happen to live in high-tax states. Compounding the unfairness, some states have enabled a workaround to skirt the SALT cap, while others haven’t. That’s why congressmen like Rep. Mike Lawler of New York have already begun lobbying for a change.

If the TCJA is extended, Lawler has proposed that the cap be raised from $10,000 to $100,000 for individuals and $200,000 for married couples. Other proposals are more modest, but the SALT cap is clearly a key focus. As Andrew Garbarino, another New York House member, put it, “There’s about five or six of us that will die on this hill.”

That means they may have significant leverage, since the Republican majority in the House may be no more than five seats. Representatives from higher-tax states have wasted no time reminding the incoming administration that when the TCJA first passed, 11 Republicans voted against it, largely because of opposition to the SALT cap. It seems likely that any new tax bill will include at least some relief in this area.

The implication for taxpayers: If you have significant state or local taxes, a change to this provision might deliver a meaningful benefit as soon as this year, and that might change the calculus on tax strategies such as charitable giving. Of note, high-income taxpayers who haven’t been able to itemize deductions in recent years may be key beneficiaries of a change to the SALT rule.

Social Security. An unwelcome surprise for many taxpayers is the fact that Social Security benefits are often subject to tax. For individuals with so-called combined incomes north of about $34,000 or couples with incomes over $44,000, the IRS taxes 85% of Social Security checks. One of the new administration’s more popular proposals is to make Social Security entirely exempt from tax. Unlike the SALT cap, this is one that cuts across geographies and party lines.

The only downside is that the cost would be significant because Social Security is such an enormous part of the federal budget (about 22%). There’s only limited appetite in Congress for further ballooning the country’s debt load. But this is another provision to keep an eye on this year. If it does pass, it would be of particular benefit to those in retirement who regularly complete Roth conversions, because it would provide room to complete larger conversions in any given tax bracket.

Spending cuts. How will the government pay for these potentially expensive tax cuts? The new administration has ambitious plans to cut spending. To that end, a new Department of Government Efficiency will soon open its doors. Scott Bessent, the incoming Treasury secretary, has said that his goal with spending cuts isn’t just to pay for new tax cuts but to also reduce the government’s deficit. His target is to cut the deficit in half.

If this can be accomplished, it would likely have salutary effects on investment markets. Smaller deficits would allow the government to pay lower rates on new debt offerings, and these lower rates would ripple through the economy, bringing down everything from credit card to car loan to mortgage rates. And lower rates generally provide a lift to stock prices.

A smaller deficit, therefore, should be a welcome development. On the other hand, if the government tightens its belt, the effects might not be all positive. Unemployment could tick up, and certain businesses could see their revenue hurt. It’s too soon to tell how the effects will net out, so this is a reason to remain diversified—both between stocks and bonds and within each asset class—and to avoid trading based on expectations.

Tariffs. As I discussed a few weeks back, the Trump administration’s proposal to increase tariffs has been met with raised eyebrows. That’s because there’s near universal agreement among economists that tariffs aren’t a good idea. They cause prices to rise and result in what’s known as “deadweight loss” to the economy. But Bessent argues this view is too simplistic.

For starters, he points out that imports make up only a small slice of consumer spending—just 10%, he says, though others argue that it’s higher. Second, any price increases would be just one-time increases, since tariffs wouldn’t necessarily rise every year. Also, if foreign producers want to remain competitive in the U.S. market, they might cut their own prices, thus moderating the impact on consumers. Finally, Bessent notes that the dollar might strengthen, further offsetting the effect on consumer prices. In other words, we shouldn’t worry that tariff increases are guaranteed to result in the inflation that many fear.

Estate taxes. A final area where there’s likely to be horse-trading this year: potential changes to the estate tax. A generous bump in the lifetime estate-tax exclusion is scheduled to expire at the end of this year. This appears to be another area where the new administration would like to take uncertainty off the table by making the current rules permanent.

A key challenge, however, is that no legislation is ever truly permanent and, because the estate tax is a political football, it’s volatile. It can change with each administration. Ultimately, the only rate that matters is the rate that’s in effect in our own final year. That’s why, even if current estate-tax rules are extended, it’s still worth keeping ongoing tabs on the developments in Washington if your assets fall somewhere between the old limit and the new one.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

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Cammer Michael
9 days ago

I find the tax code fascinating and useful to know, but we also need to look at how the IRS and other gov’t agencies operate. For instance, the last time I sent estimated payment checks to the IRS, it took weeks for them to clear. After three weeks of not seeing the checks clear, I shot off an email to my accountant asking him if I should worry that the mail got stolen. His reply was, they’re understaffed and working remote, so wait another week or two.

My point: tax code is important, but a functional or dysfunctional IRS may play a role in how we behave.

We are in uncharted territory here.

Things are changing fast.

We should be very troubled by recent access given to the Social Security computer system to the newly appointed efficiency experts. This indicates how government is rapidly changing. Can we responsibly continue to have the discussions we have here, which assume stability, while the systems themselves are being radically altered?

Winston Smith
14 days ago

Adam,

This is another one of your clear explanation posts of some very complex topics.

Thank you so much for sharing your thoughts on these issues.

Please keep posting!

William Perry
15 days ago

I expect we will not see comprehensive tax reform or reasonable levels of national deficit or debt control during my lifetime. With those beliefs I am planning accordingly to minimize our tax costs and maximize the inflation protection of our investments.

DrLefty
15 days ago

The SALT cap was a big hit to us living in California. The change in SALT deductions has cost us over $30K of itemized deductions each year. We have a mortgage and make charitable contributions, so we itemize anyway. With the changes in tax brackets, we still about broke even year over year in how much we had to pay, so for us I can’t especially complain about it—but I wouldn’t argue if they wanted to give some or all of that back, either. Having some kind of reasonable number in between “unlimited deductions” and the current 10K seems fair enough to me.

Last edited 15 days ago by DrLefty
Philip Stein
9 days ago
Reply to  DrLefty

People living in high-tax states claim that the SALT cap is unfair. People living in low- or no-tax states claim that, in the absence of a SALT cap, they’re subsidizing people in high-tax states who send fewer dollars to the federal government.

As I understand it, the argument for a SALT cap asserts that people living in high tax states presumably receive better or more services from their state government, so they should pay for it. If your state government is too profligate, then you need to focus on reducing your state’s spending and lowering the tax burden. Otherwise, you’re just shifting your state’s tax burden on others.

Jon Daley
9 days ago
Reply to  Philip Stein

Exactly right.

I’m not sure why we are subsidizing anyone who thinks they need $100k deduction on their income.

I think we should lower the caps on other deductions and credits as well. Though it isn’t popular (and would hurt me) I don’t think the child tax credit should only be phased out at $400k.

Phaseouts of various subsidies should start at $100k. Not doing so only widens the gap between the wealthy and the poor.

And though, as readers of the HD, like saving money more than the average person we also can afford more than the average person, so it wouldn’t have that much of an effect compared to where money could be spent elsewhere.

That said, I don’t really think the government is all that good at spending any money, so I’m happy putting money in my pocket for now, but it isn’t a good system.

Marjorie Kondrack
15 days ago
Reply to  DrLefty

According to Morningstar, talks about raising the SALT cap seem to be heating up, with President Trump’s backing.

David Powell
15 days ago

It’s too soon to tell how the effects will net out, so this is a reason to remain diversified—both between stocks and bonds and within each asset class—and to avoid trading based on expectations.”

Wise advice, indeed.

R Quinn
15 days ago

The SALT tax issue is clearly a high income thing. Only 10% of taxpayers itemize and the current standard deduction is helpful to most people. I live in one of the highest taxed states. My property taxes are $13,600 and I am better with the standard deduction because I have nothing significant to deduct.

No tax on SS is ludicrous and costly both to SS and Medicare. Many retirees actually think they paid for their benefits.

As I recall, high tariffs were going to offset deficits. Now what?

Kevin Lynch
13 days ago
Reply to  R Quinn

“No tax on SS is ludicrous and costly both to SS and Medicare. Many retirees actually think they paid for their benefits.”

I find this remark condescending and snarky, and based on the quality of your regular contributions, beneath you.

YOU may believe that YOU didn’t pay for your benefits, but millions of social security benefits recipients believe they did. Perhaps those millions of Americans who saw their paychecks diminished weekly or bi-weekly, for FICA and Medicare Taxes, rightfully believed THOSE funds were paying for THEIR future benefits.

You and I both know that the Social Security benefits received by one group of Americans are actually paid from taxes paid by a different group of Americans, because of the structure of the program, but that doesn’t mean ALL Americans have that knowledge.

Secondly, YOU may actually believe “No Tax on SS is ludicrous…” but I do not. I responded to you with those reason in another post, so I won’t repeat those reasons here.

I absolutely favor SS benefits not being taxed…just as I favor the increase of SALT Tax limits. The reason isn’t because of Blue State (where the majority of the tax pain is felt,) or Red State, rather it is a matter of fairness. On SS, either tax it all or tax none of it, as Congress originally set it up. On SALT, it needs to be uniform, across the country. It isn’t fair to Blue State residents, where the majority of the SALT Tax Pain is felt, to have their deductions disallowed but not the deductions of Red State residents.

But then again…that’s just me.

Quoting President Lincoln, from his 2nd inaugural address…”With Malice towards none and Charity for all…” let’s just have a fair tax system…that isn’t structured to punish political enemies or payoff your political cronies…like we have today!

Rich Duval
9 days ago
Reply to  Kevin Lynch

Strongly agree with President Lincoln’s sentiments. Also think that facts are facts. Current SS retirement benefits are paid by current workers, and not taxing SS benefits will hasten the financial crisis brewing at the SS Trust Fund. Regardless of many US citizens’ desires to believe otherwise.

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