While the media focuses on the presidential election and the candidates’ tax proposals, it’s easy to overlook two key issues: Congress must vote on all new tax legislation and the IRS enforces those laws.
Regardless of our party affiliation, we can probably all agree that it seems impossible for our deeply divided government to decide on anything, and that makes sweeping tax legislation — as we saw with the Tax Cuts and Jobs Act in 2018 — rare.
So, what changes can we expect with the new Congress, and will any of the presidential candidates’ tax proposals be enacted into law?
The 2025 tax cliff
The biggest issue facing Congress is that most of the tax provisions passed in 2018 were temporary and are set to expire (or sunset) in what is being called the “2025 tax cliff.”
International accounting firm KPMG estimates that more than $4 trillion in tax reductions, primarily benefiting the wealthy, will expire if the TCJA is not extended, making 2025 one of the most critical years for tax policy since the original act was passed.
Congress will probably not be able to agree on new legislation or an extension, and many or all of the provisions could be allowed to expire. If that happens, our taxes will resemble what they were before the 2018 legislation was passed. However, not everyone will be negatively impacted if that happens.
Will my taxes go up or down?
One of the most significant changes is that the standard deduction will be cut in half, and many disallowed itemized deductions will return.
Therefore, if before the tax change, you itemized your deductions and wrote off your medical expenses, mortgage interest, state and local taxes, charitable deductions, job and other miscellaneous deductions, you will probably write off those deductions again instead of taking the larger standard deduction.
For example, if in 2023, you added up your itemized deductions, and they were $13,000, and you are single, you probably took the current standard deduction of $13,850 instead of bothering to itemize.
If the standard deduction for a single person is reduced in 2026 to $8,300, as the Cato Institute predicts, you would probably choose to itemize your $13,000 in deductions instead. In addition, the personal exemptions of $5,275 will also be available again in 2026, so your itemized deduction plus your personal exemption would total $18,275, and you would be better off than under the current law.
Some taxpayers will also benefit because many deductions eliminated with the TCJA will be available again. For instance, those who previously wrote off job expenses, including nurses, law enforcement officers, salespeople, and teachers, can again deduct their job costs. For those of us in states like California with higher taxes, our state and local tax deductions will no longer be limited to $10,000.
Many taxpayers, especially those with higher incomes and some business owners, will pay more in income taxes if the law is allowed to expire. The top marginal tax rate would revert to 39.6% from the current 37% on incomes over $609,350 in 2024 (affecting only the top 1% of earners). In a simplified example, the marginal tax increase would be just over $10,000 on a single person with $1 million a year in taxable income.
Also, the 20% deduction for qualified pass-through business income (QBI) for many types of businesses would expire. According to the IRS, 50% of those claiming the deduction in 2021 had incomes below $100,000, averaging only a $1,997 deduction. In contrast, the average deduction was just over $1 million for those with incomes of $10 million or more.
For a complete table of expiring provisions, go to crsreports.congress.gov/product/pdf/R/R47846.
Will candidates’ proposals become law?
So, aside from the tax cliff, what is the likelihood that the presidential candidates’ tax proposals will become law?
The “No Taxes on Tips” signs at rallies illustrate how a catchy policy statement made by both candidates on the campaign trail that sounds good on the surface will probably never become law.
In this case, three major tax research organizations have already agreed that eliminating taxes on tips is a bad idea.
According to the Tax Policy Center (taxpolicycenter.org), if only those with an adjusted gross income of $75,000 or less were eligible, only about 1.5% of households would benefit.
The Tax Foundation (taxfoundation.org points out that most tipped income earners already pay little or no personal income taxes, as some (mostly part-time) tipped workers earn less than the standard deduction, and others benefit from the earned income tax credit, which reduces their taxes to zero anyway.
The Brookings Institute (Brookings.edu) claims that it may not be workers who gain from such a policy. Employers might simply cut workers’ base pay, pocketing the would-be gains for themselves.
They also point out the inequity of the proposal that exempts income earned as tips for a waitress but not wages earned by a teacher, ensuring that two taxpayers with the same income level would pay markedly different tax amounts.
Finally, they warn that tax avoidance schemes must always be considered. For example, what will stop lawyers from slashing their rates and allowing clients to pay them a large, tax-free tip for their services?
As you can see, what sounds like a great idea at a campaign rally is much less feasible, equitable, and enforceable once the tax policy experts weigh in.
As Warren Buffet pointed out, “If I get a break, someone else pays. Government can’t deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch.” There will be much discussion and compromise before any policy proposals become law.
For more information, go to taxfoundation.org/research/federal-tax/2024-tax-plans to view the tax plans of the candidates. The Tax Foundation is the world’s leading non-partisan tax policy nonprofit.
Michelle C. Herting is a CPA, accredited in business valuations, and an accredited estate planner specializing in succession planning and estate, gift, and trust taxes.
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