Potential tax legislation in the new Congress
As a result of the 2022 midterm elections, the Democrats no longer hold control of both chambers of Congress, tipping the balance in Washington, D.C. While it is unclear whether and when any tax-related legislation will have the necessary bipartisan support, a close examination of particular sections in current laws may point to the potential areas that are ready for action in the coming two years.
Retirement catch-ups at risk
Technical writing errors in the SECURE 2.0 Act, which was passed at the end of 2022, may make it impossible for taxpayers to make catch-up contributions to their pre-tax or Roth retirement plans. According to the American Society of Pension Professionals and Actuaries, participants will not be able to make such contributions starting in 2024 under the current statutory language.
The Joint Committee on Taxation (JCT), a bipartisan congressional committee supporting federal tax legislation, and the U.S. Department of Treasury have received the problem from the American Retirement Association. Although the JCT has reportedly conceded that there was a drafting error in the phrasing, a quick fix is far from certain.
Legislation requiring such “technical modifications” used to pass Congress with regularity. However, the political climate has made it more difficult in the last ten years. For instance, it took three years for Congress to enact the original SECURE Act’s minimal changes. And it was when the CARES Act took effect in 2020 a problem with the Tax Cuts and Jobs Act of 2017 (TCJA) that affected bonus depreciation eligibility was fixed.
Expiring tax provisions
Tax-related legislation frequently includes so-called “sunset” dates on which tax provisions will expire without congressional action. For instance, the permitted deduction for business lunches was increased by 100% for 2021 and 2022 by the Consolidated Appropriations Act, passed in 2021. The deduction cap will go back to 50% in 2023.
JCT analysis published in January 2023 highlights numerous significant provisions with expiration dates in the following years without congressional action to extend them. For instance, several tax credits for alternative and renewable energy will run out at the end of 2024.
But the most comprehensive and valuable provisions, many of which were added or changed by the TCJA, are scheduled to expire in 2026. They consist of the following:
- Lower individual tax rates
- Enhancements to the Child Tax Credit (CTC)
- Health insurance premium tax credit enhancements
- The New Markets Tax Credit
- The employer credit for paid family and medical leave
- The Work Opportunity Tax Credit
- The increase in the exemption amount and phaseout threshold for the alternative minimum tax
- The increase in the standard deduction
- The suspension of the miscellaneous itemized deduction
- The suspension of the limit on itemized deductions
- The income exclusion for employer payments of student loans
- The suspension of the deduction for personal exemptions
- The limit on the deduction for qualified residence interest
- The suspension of the deduction for home equity interest
- The limit on the deduction for state and local taxes
- The qualified business income deduction
- The deduction percentages for foreign-derived intangible income and global intangible low-taxed income
- Empowerment zone tax incentives
- The increase in the federal gift and estate tax exemption
Elimination of bonus depreciation will occur at the end of 2026. The allowable deduction will only be 80% of the cost of qualifying assets in 2023 instead of 100%. The cap will disappear in 2027 after declining by 20% annually.
Expired tax provisions
Despite talk of extensions in Washington, several significant provisions ended up expiring or changing by the end of 2021. For instance, beginning in 2022, taxpayers won’t be able to deduct Section 174 research and experimentation costs in the year they were incurred, which includes software development costs. Instead, companies must spread these costs over five years (or 15 years if incurred outside of the United States). Additionally, a change in calculations for adjusted taxable income to determine the business interest deduction cap could reduce some taxpayers’ ability to deduct the business interest.
At the end of 2021, various tax provisions for individuals also came to an end, notably the:
- CTC expansions created by the American Rescue Plan for some taxpayers,
- Expanded child and dependent care credit,
- Increased income exclusion for employer-provided dependent care assistance,
- Treatment of mortgage insurance premiums as deductible mortgage interest,
- Charitable contribution deduction for non-itemizers, and
- Increased percentage limits for charitable contributions of cash.
Congress might incorporate these into any “extender” legislation they decide to take up this or the following year.
Potential tax legislation
The majority of federal taxes, including payroll, estate, capital gains, individual and corporate income tax, and the IRS, would be eliminated under the potential legislation. In addition, a 23% federal sales tax on goods and services, which tax credits or deductions couldn’t offset, would take the place of the current levies. The fact that the proposal has been around for 20 years without receiving a floor vote shows how unlikely it is to pass this time, particularly with Democrats in charge of the U.S. Senate.
Although the catch-up contribution error would significantly affect many taxpayers in less than a year, Congress may not feel compelled to amend tax rules that won’t expire for three years. If lawmakers take action on this or any other crucial tax issues that might impact you, we’ll let you know. Contact our RRBB accountants and advisors if you have any questions.
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