As we approach the upcoming presidential election, the potential impact on tax policy becomes a crucial point of discussion. The uncertainty surrounding tax policy can make future planning a challenge for both taxpayers and their advisors. This election season could have a more significant effect on tax policy than most. How can CPAs guide their clients through this potential volatility in tax policy?
First and foremost, it is important to understand why this election could be so consequential. To grasp this, we need to revisit the passing of the Tax Cuts and Jobs Act in 2017. When the TCJA was passed, Republicans held the House, Senate and presidency. However, the Republican majority in the Senate was slim, and due to the partisan nature of the bill, they were forced to pass the bill through reconciliation.
Under the Byrd rule, a reconciliation bill cannot increase the deficit beyond the 10-year budgetary window. Additionally, the budget resolution that allowed reconciliation to begin included a self-imposed limit of $1.5 trillion within the budget window. This meant that many of the provisions under the TCJA had to be temporary to meet the reconciliation restrictions.
In order to meet the reconciliation requirements, the TCJA included multiple revenue-raising provisions. This included the amortization requirement of 174, which began in 2022, a reduction in bonus depreciation in 2023, changes to 163(j) starting in 2022, among many others. However, the changes to individual tax rates that will take effect in 2026 are expected to significantly increase tax bills. The TCJA altered tax brackets for most taxpayers until the end of 2025, but these adjustments are set to expire soon. Neither political party wants to raise taxes on taxpayers earning under $400,000 per year, yet their approaches to resolving this issue vary drastically.
Former President Trump has expressed interest in renewing and making permanent TCJA provisions. At the same time, Vice President Harris has expressed interest in renewing tax brackets for those making under $400,000 but raising tax brackets for those in higher income brackets. Additionally, the Harris team has proposed raising top marginal tax rates back up to pre-TCJA levels and increasing corporate tax rates to 28%. The ability of either candidate to change the tax code will depend not only on whether they win but also on the makeup of the House and Senate in 2025.
What are taxpayers and their advisors to do in the meantime? The short answer is to continue as if nothing will change. Although we know what the candidates have stated on the campaign trail, it's too early to know what changes will be enacted. While it is possible that a new administration may move quickly to change tax law, tax brackets are not slated to change until 2026. This means there is still plenty of time for taxpayers to plan for both the 2024 and 2025 tax years.
Furthermore, delaying plans under the threat of change can also be risky. For example, in 2008, when President Obama won the election, many taxpayers decided to delay taking deductions because they were concerned that the Bush tax cuts would expire, and their tax rates might go up. However, the Bush tax cuts were extended until 2012, and the United States moved into a recession. As a result, many taxpayers found that the deductions they had held onto became less valuable as their taxable income dropped. Some taxpayers even found the deductions were not needed or were used against lower marginal tax rates due to the decrease in income.
For most taxpayers, maximizing credits, deductions and other tax planning opportunities is critical, even in a volatile election year. Maximizing tax deductions and credits can allow businesses to access opportunities over the next few years.
