5 Things the Middle Class Should Do To Prepare for Trump's Income Tax Plan
President Donald Trump has floated a dramatic change to the U.S. tax system: eliminating federal income taxes and relying more heavily on tariffs.
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The idea has some appeal. According to the U.S. Treasury Department, the federal government collected $16.3 billion in customs duties in April alone, an 86% increase from March.
While the proposal faces hurdles, even the possibility of such a shift raises key financial questions for middle-class households. How would their budget change if taxes disappeared, but everyday items cost more?
Here are the five things financial experts said the middle class can do now to prepare for Trump's income tax plan.
Tariffs act like a hidden tax on imported goods, raising prices on essentials like groceries, electronics, clothing and cars. This could hit middle-income households hard.
'Replacing income taxes with tariffs would mean potentially higher prices for everyday goods and increased cost of living,' said Aaron Razon, a personal finance expert at Couponsnake. 'It could even mean a step backward for many middle-class households.'
Razon explained that, because the middle class spends a significant amount of their income on essentials, tariffs would make budgeting more difficult due to their reduced purchasing power. 'Replacing income taxes with tariffs doesn't exactly make affordability or financial management easier for the middle class.'
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If tariffs spark inflation or job uncertainty, families may need to prioritize their spending and be prepared to make tough decisions in some cases.
'Start saving now and delay items you do not need to purchase now,' said Robert Lee, an associate accounting professor at Pepperdine Graziadio Business School. 'Evaluate your current spending habits and identify areas where reductions can be made, such as fewer vacations and less frequent dining out.'
Lee recommended building a budget to track your expenses and making 'a conscious effort to prioritize essential needs over immediate wants to safeguard your financial resources.'
Shopping local or secondhand is one way to offset rising prices while supporting one's budget and reducing reliance on global supply chains.
'In the short-term, most of us will likely feel the pinch that comes not only from imports on things like lemons and limes, but from manufacturers, such as automobile assembly plants, whose parts are sourced overseas,' said Eric Steffy, CEO of Federal Solutions Support, which advises individuals on their federal benefits like Social Security and Medicare.
'Before you buy, imagine paying 25 cents more on every dollar, and ask yourself whether there's a way to buy local, first. Consider shopping at local farmers' markets and buying a used car or secondhand phone,' he explained. 'You might be amazed by the ways you can actually save money during this season of higher tariffs.'
Inflation is a constant, and while tariffs may accelerate it, flexibility and creativity can help buffer the impact.
'Inflation could go up if tariff negotiations create a supply chain disruption, driving prices higher on limited resources,' Steffy said. 'It's wise to plan for the cost of goods and services to rise. However, to keep anxiety at bay, it's helpful to understand that inflation has been constant in America.'
He explained, 'To manage the moments when it peaks requires you to know what things you could live without for a short time. Instead of buying up all the toilet paper, see how clever you can be at coming up with creative substitutes for hoarded, unusually costly or artificially inflated products.'
Eliminating income tax would fundamentally shift how people save for retirement, especially in traditional tax-deferred accounts like 401(k) plans and IRAs.
'Maintaining a diversified investment portfolio with ties to domestic industries can help offset risks tied to international market fluctuations,' said Javier Palomarez, CEO of the United States Hispanic Business Council. 'Additionally, increasing contributions to tax-advantaged accounts like IRAs, 401(k) [plans] or Health Savings Accounts (HSAs) can reduce taxable income and build long-term savings.'
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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Sources
U.S. Department of the Treasury, 'Monthly Treasury Statement.'
Aaron Razon, Couponsnake
Robert Lee, Pepperdine Graziadio Business School
Eric Steffy, Federal Solutions Support
Javier Palomarez, United States Hispanic Business Council
This article originally appeared on GOBankingRates.com: 5 Things the Middle Class Should Do To Prepare for Trump's Income Tax Plan
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