Tax Strategy: Prospects for year-end tax legislation

November 8, 2022 9:00 AM

The post-election lame duck session of Congress offers a last opportunity to take action on matters that have kept getting put off through the two years of the current Congress. If action is not taken before the term ends, bills must be reintroduced and the work must begin anew in a new Congress. Election outcomes can influence what happens in the lame duck session. A party losing control may view it as a last opportunity to try to get a piece of legislation through. A party gaining control may prefer to try to put off any legislative action until the new Congress when they will have a greater voice.

In the current Congress there will be considerable pressure to take some action. A new budget for the 2023 fiscal year has not yet been approved, along with the related spending bill. While the fiscal year began on Oct. 1, 2022, a continuing funding resolution has pushed the current deadline to Dec. 16, 2022. Although there is as usual talk of shutting down the government if agreement cannot be reached, and this has happened in the past, usually there is a lot of pressure to reach a deal to avoid being blamed for a government shutdown.

Bipartisan proposals

There are several tax items that one or both parties would like to see enacted. There is strong bipartisan support for a package of retirement reforms referred to as SECURE 2.0 as a follow-up to the SECURE Act enacted in 2019. The House passed a version of the legislation in March 2022 by a vote of 414 to 5. The relevant Senate committees — Finance and Health, Education, Labor and Pensions — have approved their own versions of the bill. The Senate would still need to act, and then differences would have to be worked out with the House version; however, the differences do not seem insurmountable given the broad bipartisan support.

Disaster aid for Florida, Puerto Rico, and Alaska may also draw bipartisan support.

Republican proposals

Senate Majority Leader Mitch McConnell, R-Ken., surrounded by fellow Republican senators

There are a few tax provisions that the Republicans would like to see enacted. The ability of businesses to write off research and development costs enacted as part of the Republican Tax Cuts and Jobs Act in 2017 expired at the end of 2021. Failure to extend the provision would require five-year amortization of research and development expenses, rather than immediate write-off. Republicans would like to restore that provision in time for the 2022 tax return filing season. Also on the to-do list are the interest deduction calculation and the phase-down of bonus depreciation.

Among the regularly expiring provisions that expired at the end of 2021 there are some non-energy provisions that Republicans would tend to favor, such as those related to depreciation of racehorses and the mine rescue team credit. The energy-related provisions were largely addressed in the Inflation Reduction Act.

Democratic proposals

Ting Shen/Bloomberg

Democrats also have some priorities. Chief among them is extension of the expanded Child Tax Credit. The expanded credit was enacted for 2021 only under the American Rescue Plan Act. Studies have shown that it had a substantial impact on reducing child poverty, and the expiration of the expansion for 2022 has shown a partial reversal of the child poverty decline. The cost of the extension may exceed the cost of Republican priorities, and Democrats are considering possible modifications that would reduce the cost and make it more palatable to Republicans.

Another provision from the American Rescue Plan Act that likely was also beneficial to children was the expansion of the Child and Dependent Care Credit. This expansion has also expired for 2022, as well as the increased limits on Dependent Care Spending Accounts. Democrats would also like to extend the expanded Earned Income Tax Credit focused on childless individuals. The charitable deduction for non-itemizers also expired at the end of 2021.

Among the non-energy regularly expiring provisions that Democrats might hope to resurrect are the mortgage insurance premium deduction and the Health Coverage Tax Credit for trade adjustment and Pension Benefit Guaranty Corporation recipients.

Technical corrections

John Hurst - Fotolia

It was in the past fairly routine to also include some usually non-controversial technical corrections to prior tax legislation in year-end spending bills as well. However, as tax legislation itself has become more partisan, it appears that approving technical corrections to a partisan bill has also become more partisan. Still, it is possible that a technical correction section could be ready for consideration in year-end legislation.

Summary

Most observers tend to believe that either a spending bill will be approved by the December 16 deadline or another continuing resolution will be adopted to extend the deadline into the new year. What finally might make it into that spending bill is always something of a surprise, just as the passage of the Inflation Reduction Act this year came as something of a surprise after so much effort over such a long time to enact the Build Back Better bill. We have even seen some tax legislation enacted early in the new year that includes provisions impacting tax returns for the prior year.