Trump Wants To Eliminate Income Taxes: 5 Ways This Could Impact Your Investments

Did you know that individual income taxes accounted for 49.3% of total government revenue in fiscal year 2024? How about that corporate income taxes accounted for another 7.6% of total revenue? One of President Donald Trump’s primary campaign stances was the plan to eliminate income taxes.

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However, with income taxes accounting for half of total federal revenue, there may be repercussions in other areas, including your investments. Here are five ways that income tax elimination could impact your investments.

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Higher After-Tax Returns

The taxability of investment income depends on the account type, but some could see higher returns without the income tax. For example, brokerage account income is taxable in the year received, while traditional IRAs and 401(k) plans defer taxes until withdrawals occur.

The elimination of income taxes could create higher after-tax returns, if investment income were to be classified as a type of income that would no longer be taxed.

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More Cash To Invest

Eliminating income taxes would mean your hard-earned income would no longer go to the federal government. Instead, you would have more money to contribute to investment accounts.

For example, if you make $50,000 annually and pay 15% in taxes, you could have an extra $7,500 to contribute to investment accounts. With more money to contribute, you could make more headway toward your financial goals.

Volatile Investments

Trump’s main idea for replacing income tax revenue is imposing tariffs on other countries. Tariffs established so far have already wreaked havoc on the stock market. When tariffs are announced, stocks fall. And when Trump has paused certain tariffs, stocks soar. This volatility is already making investors uneasy.

While domestic investments may stabilize in the long run, international investments could become more volatile. For example, if you invest in a Canadian company, what will the impact be from a new tariff? The investment return of the company might drop as they conserve cash to pay tariffs, or the stock price might decline.

Lower Barriers To Invest

Some people are hesitant to invest because of the tax implications. Paying income tax on interest, dividends and capital gains can seem like a waste of money.

With the income tax barrier removed — again, if it includes investment income — more people may make investments in the market, which stimulates growth. One of the main factors of a thriving market is consumer sentiment: If more people view market investments as safe, the market may produce excellent returns.

Fewer Tax Deductions

A potential drawback of eliminating income taxes is the removal of investment tax credits and deductions. For example, the federal government lets people contribute to traditional IRAs and 401(k) plans pre-tax, meaning the contribution is made before tax is taken out and reduces your taxable income for the year. With no income tax, these deductions go away.

Employers would likely need to find alternative ways to offer benefits. For example, one of the main benefits of being an employee is a pre-tax employer match to your 401(k). With income taxes removed, benefit packages may need to be reworked.

The Bottom Line

The elimination of income taxes could create both advantages and disadvantages for your investments. Remember, both the Senate and the House need to agree to eliminate the income tax. Only time will tell how this component of Trump’s tax plan will take shape.

Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.

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This article originally appeared on GOBankingRates.com: Trump Wants To Eliminate Income Taxes: 5 Ways This Could Impact Your Investments