It’s an elusive concept…or at least it’s become that way over more recent years. The American Dream was formerly a widely held believe that anyone, no matter who their parents were or where they came from, could achieve success in the United States. This dream encompassed not just socioeconomic mobility and financial freedom but also homeownership, access to affordable education and free will. The right to live your life the way you want to.
In just describing the American Dream I probably triggered you at least once but more likely multiple times. That’s not the goal of today’s blog.
Today I want to talk about an updated version of the American Dream, one that I don’t think anyone will want to argue with. (Challenge accepted.) I believe the American Dream is to live tax free and let me explain why. In my career as a mortgage lender, I have worked extremely hard. The harder I worked, the luckier I got. I am a child of immigrants who came to this country in pursuit of the American Dream to give me and my brothers a better life – those words are burned into my brain because I’ve been told countless times. When I told my Dad I was making $250,000 a year several years back – he was so proud he nearly lost his mind. And then the next year I hit seven figures.
This is where it got interesting. I wondered, what the hell did I do with all that money? Where did it go? DID I BLOW IT UP ON CHANEL?! I freaked out a little. I’m in the finance industry. I give people advice on what to do with their money…am I a fraud?! So I analyzed my spending. That year I had finished funding all three of the kid’s college funds. I had purchased a second home and a duplex. I have maxed out my 401k and also contributed the max I could to an IRA. I had saved enough cash to pay for childcare for the next year. (I was unexpectedly pregnant with that third baby.)
I was scratching my head though. Where did the rest of the money go? Then I realized. I didn’t get $1M. I earned that. I got about 65% of that after taxes.
Let me pause here. I understand taxes are a requirement for our society and the infrastructure of our cities and states. I was once a bleeding-heart liberal. So allow me to continue without accusing me of not caring about the wellbeing of my community. Just stick with me for a minute.
I started paying attention to real estate investors, especially the ones who were my clients because I had access to their tax returns. This is when I became obsessed with the US Tax Code and how it was written to benefit entrepreneurs but especially real estate investors. I spent a year doing a deep dive into tax strategies for investors and interviewing CPAs all over the country. I’m not licensed to give you tax advice so I’ll have to end my story time here but I will say this – educating myself on the tax code has not only changed my life, it will significantly impact the trajectory of my kids’ lives by creating generational wealth but more importantly by changing my viewpoint on what wealth actually means in this country.
Let’s talk about the Tax Code.
Why? It sunsets at the end of 2025. When Donald Trump was elected president, he pushed through The Tax Cuts and Jobs Act of 2017 which included several temporary changes to the tax code. It lowered tax rates for all brackets and increased the standard deduction. The TCJA also doubled the child tax credit and allowed pass through entities like independent contractors, partnerships, and S Corps to deduct up to 20% of their business income. You heard about the corporate tax cuts because they got a lot of press – the corporate tax rate was reduced 14%. Whoever is president in 2025 will need to extend this or sign new rules into law. This is likely to dominate the first year of our next president’s term.
They may not extend them because there were some downsides to these cuts. The TCJA increased the national debt significantly. If renewed, it will cost the government $5-10 trillion over the next decade according to the Congressional Budget Office and Bipartisan Policy Centre. It was criticized for only benefiting high income earners and it didn’t boost economic growth as much as Trump boasted it would.
If re-elected, Trump has promised to lower the corporate tax rate further. He also wants to make taxes on tips for waiters exempt as well as social security benefits. This could lead to higher interest rates as the national debt surges from the loss in revenue. He hopes to offset the loss in revenue with higher tariffs and eliminating green energy tax credits. Tariffs are tough on inflation, which is also the enemy of interest rates.
Let’s shift our focus to Harris’s plan.
Along party lines, she wants to extend Trump’s tax cuts for individuals earning less than $400k but those earning more would revert back to the previous tax rate of 39.6%. For corporations she wants a tax rate in the middle. It was 35% before the TCJA, Trump wants it to be 15% now. Harris thinks 28% is reasonable. She’s getting a lot of heat for wanting to tax unrealized capital gains. That is going to be very tough to track and enforce.
Harris has also proposed tax credits. She wants to further increase the child tax credit plus give $6k to families with newborns…in the form of a credit on their taxes, not a check in the mail. She wants to give first time homebuyers $25k in down payment assistance and give business startups $50k. She agrees with Trump on not taxing waiters on their tips.
When we total up the changes, she wants to make in terms of cuts and then credits, her proposed changes would generate $2 trillion in federal revenue. The flipside is that The Tax Foundation, a Washinton Think-Tank thinks her plan would reduce the GDP by 2% over the next decade.
We all know that Congress will stand as a hurdle for whoever is President. They will be highly motivated though because there is a deadline on these tax provisions. So the new president will have leverage to push through a bill to extend or change the tax code.
And that’s my lesson for today friends. Hopefully, that gives you something interesting and productive to discuss over the weekend!