How will taxes change after the election?
How will taxes change after the election?
Finally, the election is over! The Republican party won most seats in both the Senate and the House of Representatives, and their nominee will occupy the White House. With much of the election rhetoric focused on taxes, is it right to wonder what this Republican sweep means for your taxes?
The answer is far from clear, but one thing we feel certain about is that not all the tax breaks touted during the election will be enacted. That is neither an accusation nor a bold prediction; we could say that after every election and be correct.
…not all the tax breaks touted during the election will be enacted.
In 2020, Joe Biden ran on the idea of significantly raising taxes on everyone making more than $400,000 a year. During his first two years, his party controlled the House and the Senate, by virtue of Vice President Harris’ tie breaking vote, but the increase never became law. He did get some of his other proposals passed.
In 2016, Donald Trump ran on the idea of compressing the existing system of seven tax brackets down to just three, simplifying the income tax system so most families could file their taxes on a piece of paper no bigger than a postcard, and eliminating the estate tax. During his first two years, his party controlled the House and the Senate but none of those proposals became law. He did get some of his other proposals passed.
Fully extending all provisions expiring at the end of 2025 is unlikely
So, we have confidence that not everything proposed during the campaign will pass. We also have confidence that some things will. What came to be in President Trump’s first term was the Tax Cuts & Jobs Act (TCJA) of 2017, a far-reaching array of mostly tax cuts affecting nearly every part of the tax code. These rules were set to expire at the end of 2025.
With the Republican sweep, the odds are good that key elements of TCJA will be extended, maybe for up to a decade, but a complete extension of the existing law is unlikely. The priorities of the incoming legislators vary greatly and not all the provisions of TCJA are popular, even among Republicans. Further, the Republicans do not have enough votes to overcome a filibuster in the Senate.
With filibuster possible, the likely course of action is the “reconciliation” process. Reconciliation avoids filibuster and allows bills to pass with a simple majority – but only when the legislation affects the budget, i.e. bills that raise or lower taxes, or increase or decrease spending. If the Republicans want to move quickly to pass a “core TCJA extension,” they cannot add matters like immigration policies to that effort.
Things are even more complicated due to the budget deficit and national debt.
Things are even more complicated due to the budget deficit and national debt. Extending TCJA will add approximately $4.5 trillion to the national debt, according to the bi-partisan Rutledge Policy Group. That does not include other proposals made during the campaign such as eliminating taxes on tips, overtime pay, Social Security benefits, and foreign income for Americans living abroad. Other proposals include making interest on loans deductible for domestic automobiles and adding a new family caregiving credit for newborns. Estimates are all these would cost $3-$5 trillion more and that does not include any of the proposals to reduce corporate taxes.
With so many representatives in Congress running on a platform that includes lowering the deficit and slowing the growth of the national debt, many of these proposals seem unlikely to become law.
The debt ceiling and other issues that could cause vigorous debate
To complicate things even more, the debt ceiling will be reached in January. As it has many times before, the Treasury will keep things going while Congress negotiates a deal to raise the limit. It will be interesting to see if the new Congress tackles that as a single issue or pairs it with the TCJA extension effort.
It would be awkward to argue that the debt ceiling should be raised to a specific limit and then turn around and pass legislation that has the country on a course to far exceed that new limit.
Since the TCJA was a far-reaching piece of legislation, there are many issues that could be sticking points as Congress works to write a bill which extends the 2017 tax cuts. Below, we highlight three that appear likely to be vigorously debated.
- $10,000 State and Local Tax (SALT) limitation Real estate taxes on your home, sales tax, and state and local income taxes are totaled to form an itemized deduction found on Schedule A. The SALT limitation caps the entry on Schedule A at $10,000. There are supporters and opponents to this cap on both sides of the aisle. Some want to keep it, some want to raise it, and some want it eliminated.
- Alternative Minimum Tax (AMT) This is designed to ensure that higher income households pay a certain level of tax even if they have a large amount of deductions. Currently, AMT does not affect a lot of households but that could change. Lowering the income levels at which the AMT applies could generate revenue to help offset other tax cuts like raising or eliminating the SALT cap.
- Section 199A deduction for Qualified Business Income (QBI) for pass-through owners This deduction might be increased especially if Congress agrees to lower corporate tax rates. Raising this deduction would help keep the proportionate difference between pass-through and corporate tax rates similar to what it is today. Many small businesses are pass-through entities.
While we expect a new tax bill to extend and/or replace TCJA, the consensus seems to be it will probably not be a dramatic shift from the current code. However, since any given change can affect one’s taxes, we’ll be keeping an eye out for what comes out of Congress and incorporate the changes into our planning.
At this point, there is nothing to indicate that a radical strategy change is in order for most households. There is a real possibility that TCJA is largely extended, and we come out of this with some relative stability in the tax code for the next several years.
There will be many proposals floated during 2025, but most will go nowhere. Fear not. We will be on top of it and are committed to remaining “A Sanctuary From The Noise®” for our clients.