Tax Strategy: Election year tax proposals kick off in State of the Union

2024 presents the rare circumstance where it appears likely that both the Democratic and Republican candidates for president have already served in that office. We have already witnessed, therefore, election-year tax proposals from both President Biden and former President Trump.

We have seen annual budget tax proposals from each. We have also seen what tax legislation was enacted during their first terms as president. It is not, therefore, too much of a surprise that the basic thrust of their tax proposals remain the same as before.

Trump tax enactments

The principal tax achievement during the Trump administration was the Tax Cuts and Jobs Act enacted in 2017. For businesses, it lowered corporate tax rates to 21%, created the 20% qualified business income deduction for pass-through entities, created an excess business loss limitation for non-corporate taxpayers, limited the deduction for meals and entertainment, eliminated net operating loss carrybacks, limited the business interest expense deduction, reformed the international tax regime, permitted 100% business expensing for capital investments, created Opportunity Zones, created an employer credit for family and medical leave, and increased Code Sec. 179 expensing for smaller businesses, among a number of other provisions.

Many of the business tax proposals were made permanent by the Tax Cuts and Jobs Act. However, in order to enact the legislation under the budget reconciliation rules, some provisions had expiration dates. The 100% business expensing provision has expired as of 2023. The business interest deduction limitation has increased, and the family and medical leave credit expires at the end of 2025.

For individuals, the Tax Cuts and Jobs Act reduced marginal tax rates, increased the standard deduction, eliminated the personal exemption, expanded the Child Tax Credit and created a credit for other dependents, enhanced retirement plans, eliminated the moving expense deduction for all except the military, eliminated many of the miscellaneous itemized deductions, put a $10,000 limit on the state and local tax deduction, increased the estate and gift tax unified credit, and modified the Alternative Minimum Tax, among other provisions.

Unlike the business provisions, most of the individual provisions, again for budget reconciliation reasons, expire at the end of 2025.

Trump tax proposals

The Trump campaign has yet to articulate a set of tax proposals for the coming four years. One primary goal would appear to be making permanent the individual provisions that are about to expire at the end of 2025 and restoring the 100% business expensing provision, raising again the business interest limitation, and restoring immediate expensing of research and experimental expenses that have already expired.

Trump has also suggested imposing more tariffs on imported goods, as he did during his first term in office.

Republicans also have a goal to repeal or modify some of the tax provisions enacted under the Biden presidency, such as the clean energy tax credits, and extra funding for the Internal Revenue Service.

Biden tax enactments

Early on, in response to the COVID pandemic, Biden enacted a number of tax provisions that have since been allowed to expire, including an enhanced Child Tax Credit, the Employee Retention Credit, and economic income payments.

Of more permanence was the Inflation Reduction Act, creating and expanding many clean energy tax credits, creating a corporate minimum tax of 15%, and significantly increasing IRS funding.

Biden tax proposals

As outlined in his recent State of the Union Address, Biden proposes to repeal or modify some of the corporate tax breaks included in the Tax Cuts and Jobs Act, raising the top corporate tax rate to 28% from 21%, increasing taxes of foreign profits, and raising the corporate minimum tax rate from 15% to 21%.

He also proposes expanding the limitation on the deduction of compensation for employees earning over $1 million to all corporate employees. Biden also announced plans to end tax breaks for Big Pharma and Big Oil, and for private corporate jets.

For individuals, Biden would raise the marginal tax rates for wealthy individuals that were lowered in the Tax Cuts and Jobs Act; however, consistent with his 2020 election promises, there would be no tax increases on those earning less than $400,000.

He would continue to push for an increase in the Child Tax Credit to levels in effect for a couple of the COVID years, which were credited with reducing child poverty in the U.S. by 50%.

Biden also proposed a two-year affordable housing credit of $400 per month to contribute to mortgage payments and try to attract new home buyers. He also proposes extending the enhanced premium tax credit to assist with health care costs.

Biden predicts that his proposals would reduce the deficit by $3 trillion.

TRAFWA

While the Biden and Trump proposals do not appear to offer much room for compromise, especially in an election year, there is still a tax proposal that has bipartisan support that could be enacted. The Tax Relief for American Families and Workers Act of 2024 has passed the House and is under consideration in the Senate. It includes an expansion of the Child Tax Credit, but less than what Biden wants, by primarily focusing on expanding the refundable portion of the credit.

For the Republicans, it would restore provisions of the Tax Cuts and Jobs Act related to bonus depreciation, the business interest deduction limitation, and expensing of research and experimental expenses.

The legislation also includes an increase in Code Sec. 179 expensing, extension of disaster relief, limiting the filing date for the Employee Retention Credit, and increasing related penalties on fraudulent promoters, an increase in the affordable housing credit, and modifying the filing thresholds for Forms 1099-MISC and 1099-NEC.

Summary

Aside from the possible passage of the Tax Relief for American Families and Workers Act, prospects for additional tax legislation do not look promising. The Trump and Biden proposals seem to be incompatible with each other. The success of either set of proposals will depend upon the outcome of the presidential election and which party manages to control the House and Senate. These outcomes could result in widely different tax policies being enacted, or a continued stalemate if there is a split result.