Trump wooed middle class Americans with tax breaks. What are they and are they realistic?
President-elect Donald Trump campaigned to put money back into the pockets of middle-class families by lowering their tax burden, but how realistic are his promises?
Some experts shared their thoughts about Trump’s major proposals, including eliminating taxes on tips, overtime and Social Security, capping interest rates on credit card debt, deducting auto loan interest, lifting the cap on state and local taxes (SALT) and increasing the child tax credit. Here’s what they said:
No tax on tips for restaurant and hospitality workers: Bipartisan support could help pass this, said Jim Czerniak, chief investment officer at Ambassador Wealth Management in Warrenville, Illinois.
Democratic presidential nominee Vice President Kamala Harris also adopted this idea during her campaign.
But the plan’s implementation ultimately will determine its fate, experts said. Trump hasn’t offered any details.
“It wasn’t specified if this was only for income tax or also FICA,” said certified public accountant (CPA) Richard Pon in San Francisco.
FICA, or the Federal Insurance Contributions Act, is a payroll tax split between the worker and employer that’s deducted from each paycheck and helps fund Social Security and Medicare. As you work and pay FICA taxes, you earn credits that help determine your future Social Security benefits.
Even if the plan passes, economists said most people won’t benefit. “Only 5% of workers in the bottom earnings quartile earn tips and could possibly benefit from the proposal,” nonpartisan think tank Brookings Institution said in a commentary in September. “Even among tipped workers, 37% earn so little that they pay no federal income tax and so would not benefit.”
Employers wouldn't be required to pay its FICA portion on tip income, but restaurant owners "actually benefit from taxes paid on tips," Pon said. Food and beverage employers with tipped employees may be eligible to claim the FICA Tip Credit for the employer share of the FICA tax on certain employee tips, he said.
"A tax credit reduces their taxes dollar for dollar and is better than a tax deduction," Pon said.
No tax on overtime: Again, Trump hasn’t provided many details, but many people, including firefighters, police officers, and military personnel who often earn additional income working overtime, could benefit, said Lisa Greene-Lewis, CPA and TurboTax expert.
Pon warned “the proposal will likely be abused. Some (people) get overtime at double or even triple time so there will be an incentive for employers, including business owners, to classify their income as overtime.”
Trump said his plan would include unspecified “guardrails” that “could limit these behavioral effects,” the Committee for a Responsible Federal Budget (CRFB) wrote in a report in September. CFRB estimated such a plan would reduce government revenue by $250 billion to $1.4 trillion and by $1 trillion to $5 trillion if all workers eligible for the tax cut switched to hourly.
In September, Vice President-elect JD Vance said both income and payroll taxes would be eliminated on overtime pay for hourly workers.
No tax on Social Security: This “would be very popular with seniors,” said Mary Johnson, independent Social Security and Medicare policy analyst, but she questions how lost revenues from ending the taxation of benefits would be replaced.
Social Security’s trust fund will be depleted by 2035, and benefits will be cut by 23%, according to Congressional Budget Office forecasts. Trump’s proposal could deplete the fund two years earlier and Medicare six years sooner, said the center-right Tax Foundation. Revenue from federal income taxes paid on Social Security benefits also funds the Medicare trust.
About 40% of the nearly 70 million recipients pay federal income taxes on their benefits, according to the Social Security Administration. However, that proportion grows every year because the income thresholds to determine the tax aren’t adjusted for inflation.
Without plans to replace lost revenue, this proposal is “idealistic, not realistic,” said Phil Battin, founder and chief executive of Ambassador Wealth Management.
Auto loan interest deduction: Interest on auto loans would be fully deductible for cars made in America.
Americans hold a record $1.64 trillion in auto debt, New York Federal Reserve data showed.
The idea’s similar to how mortgage interest can be deducted if taxpayers itemize their returns (most don’t), but with one big difference: automobiles, unlike homes, are a depreciating asset, Battin said.
Americans “would turn over cars faster than ever” to get the latest upgrades with that monetary incentive and end up buried in debt, he said.
Capping credit card interest rates: To help Americans catch up on their record $1.17 trillion in credit card debt, Trump proposes limiting credit card interest rates to 10%, if only temporarily. The average credit card rate last week was 20.35%, according to the comparison site Bankrate.
Sen. Bernie Sanders, I-Vt., supports this idea, but “I don’t see how that passes,” Czerniak said. Deciding what banks can and cannot charge would be government overreach, he said.
“Laissez-faire Republicans in the House might have a problem with that,” he said.
Uncapping state and local tax deductions (SALT): The $10,000 cap on SALT deductions sunsets at the end of 2025, and Trump says he may let it.
The SALT cap mostly affects wealthy Americans who live in high-tax, mostly Democratic coastal states like New York and California. They no longer could write off their high property tax and sales or income tax on federal returns.
Eliminating the SALT cap would cost about $1.2 trillion over the next decade and mostly benefit rich Americans, said CRFB. Roughly 92% of the tax cut would go to households in the top 10% of earners, and less than 1% would go to the bottom 60%, CRFB said.
House Ways and Means Chair Jason Smith, R-Mo.,) said last month “there is no way in a Republican House of Representatives that you can pass an unlimited SALT deduction.” Instead, it’ll “definitely be a higher cap.”
Czerniak said he expects the cap could rise to $15,000 or $20,000.
Expanding child tax credit (CTC): Vance said he’d like to expand CTC to $5,000 from $2,000 per qualifying child and extend it to “all American families.”
Some experts interpreted that last comment as removing earnings requirements, which could cost more than $2 trillion over the first decade and be “a major departure for Republicans,” wrote Angela Rachidi and Matt Weidinger, senior fellows at the right-leaning American Enterprise Institute, in August.
“When Democrats created their temporary 2021 expansion that eliminated the CTC’s work requirement, no Republicans supported that legislation and many pointed to the elimination of the earnings requirement as the reason for their opposition,” they noted.
This story has been updated to resolve a typo.
Medora Lee is a money, markets, and personal finance reporter at Paste BN. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.