November’s election is shaping up to be critical to tax planning

The nearing November elections will be determinative for tax outcomes, say observers. That’s not just due to the presidential election, according to Rochelle Hodes, Washington National Tax Office principal at Top 25 Firm Crowe. “It’s not just the presidential election,” she said. “Both houses of Congress are also at stake and might tip either way.”

“The tax proposals are not the kind that are able to be implemented by regulation or executive order,” she explained. “There is significant complication this time around, including the expiring Tax Cuts and Jobs Act provisions. Whoever takes control of the next Congress will have to figure out what to do about those provisions. The cost of extending all of the provisions is $4.6 trillion. Most of them are related to individuals. If they are allowed to expire, that would raise the tax for many individuals, which is an unattractive proposition for any president or for Congress. The decision will have to be made about which will be allowed to expire, whether or not some of the provisions will be changed in order to accommodate whatever budget goals are agreed upon, then the decision and consensus will have to be made concerning offsets to pay for the resolution of expiring provisions.”

Each party has taken a position on the TCJA, noted Hodes. “On the Republican side, the TCJA was the central tax policy accomplishment of the Trump administration,” she said. “They would make permanent the double standard deduction, for example. It’s unclear whether or not they want to extend only the positive and not the negative provisions. For example, the SALT cap of $10,000 has been very unpopular with high-tax states. While a lot of them might be blue states, a lot of the rest and Congress are not. So SALT has garnered a lot of attention. In general, Republicans want to make the expiring provisions permanent.”

Meanwhile, she continued, “The Democrats and the Harris campaign have put forth the view that they are in favor of extending the expiring provisions to the extent that an individual making less than $400,000 per year and small businesses are not going to have an increase in tax. There has been much written about how that will be accomplished.” 

Of the two different approaches to the TCJA, the Democrats may be “easier” in that they have put forth offsets for the TCJA extension in light of the $400,000 limit. 

Additional Harris proposals focus on the middle class and small business, according to Hodes. “They have offsets they can get, such as a 25% minimum tax on those with more than $100 million in wealth, raising the corporate tax from 21% to 28%. Their raise in the capital gains tax rate is interesting in that Harris recently took a stand that was less of an increase than originally planned in the Green Book — 28% for those with income of more than $1 million. Interestingly, I had trouble getting more concrete information about whether that would also cover qualified dividends. It was unclear from their statement if they were tied together, and was also unclear about the investment income tax. The Green Book proposal to increase that tax, as well as her comments, did not address that, so our chart [available here] assumes that the increase in the Green Book is where Harris would be. All of these increases are raised off the extension of expiring provisions for those making less than $400,000.”

On the Republican side, there are different views about offsets and when they are needed, she added: “For instance, there is a group of Republicans that view many of the TCJA provisions as good for the economy that would drive increases in the economy and economic growth so that an offset would not be necessary. It doesn’t appear that there is a consensus on which provisions in the TCJA should be permanent. How do you figure out who will win in negotiations and how do you plan for uncertainty — that kind of planning is what a lot of them will have to engage in. Some of that uncertainty will be removed after the election.”

For high-net-worth individuals subject to the estate tax, things will become more complicated, according to Hodes. “If either party wins a majority in both houses as well as the presidency, there will be a better understanding of the direction of how the TCJA issues will be resolved, and the direction that other legislation might take,” she explained. “If we have a divided government, I don’t think the November elections will bring much clarity. There will be proposals that will start to develop momentum, as well as some extenders during the lame duck session, but I don’t believe the TCJA can be resolved then. The year 2025 is going to be a very interesting tax legislative year.”

Hodes advised taxpayers to look at the various proposals and identify those that really make a difference — for example, corporate and individual rates for the highest earners. The expiration of Code Section 199A, the qualified business income deduction for pass-throughs, is set to expire. “A lot of small businesses rely on this,” she said. “Does it make another entity more attractive to conduct business? Entities that have taken the deduction need to model and see how a combination of changes will affect them.”

Meanwhile, the Harris proposal to tax unrealized capital gains, if it gains traction in a Democrat-controlled House and Senate, could become the most difficult proposal in the Tax Code to administer, according to Jeffrey Kelson, co-leader of the national tax practice at Top 25 Firm EisnerAmper.

“Harris expressed broad support for a plan to introduce a minimum income tax of 25%. Anyone with a net wealth of more than $100 million would be subject to a prepayment of tax on unrealized gain. If the asset were held and subsequently went down in value, they would be eligible for a refund,” he noted. “Once this is done, it would be necessary to start all over again to value the assets for the next year. It would be very difficult on both sides, and a lot of people might have to sell assets to pay the tax.”