President Joe Biden’s tax plan in his recent tax proposed budget calls for $3 trillion of deficit reduction by increasing taxes on the wealthy and big corporations. For anyone following politics for the last few years you know this plan will be dead on arrival. With Republicans in control of the House of Representatives, it will be impossible to pass any tax increases.
Don’t be fooled by the headlines and talking heads proclaiming increased taxes… just yet. Although Biden’s wish list of tax increases may not come to fruition, the ghost of Christmas past may soon come to haunt.
A Bit of History
Just three days prior to Christmas day, then President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. At the time there was concern if there were enough votes to get the bill on Trump’s desk for signature. Because of the filibuster, moving legislation through the Senate can be difficult unless one party has 60 plus seats. To avoid this hurdle, each party has increasingly resorted to the reconciliation process. Filibusters are not permitted under reconciliation and only a simple majority is needed to pass legislation.
Although the reconciliation process can be a way to ram through a partisan agenda, it has its limitations. One specifically is the “Byrd rule”. Named after the former Democratic Senator from West Virginia Robert Byrd, the Byrd rule, among other things, blocks provisions that increase deficits outside of the 10-year budget window. In order to get the TCJA Byrd compliant Congress simply put sunsets on many of the tax provisions.
Tax Increases Expected in 2025
The TCJA made major changes to the tax code which are set to expire over the coming years. These changes include
- reducing tax rates for individuals,
- increasing the standard deduction while eliminating personal exemptions,
- increasing the child tax credit,
- limiting deductions for state and local taxes (SALT),
- limiting the mortgage interest deduction on new mortgages over $750,000,
- eliminating the reach of the alternative minimum tax (AMT) for individuals,
- doubling the estate tax exemption, and
- increasing first year bonus depreciation to 100%.
Without congressional action, these tax provisions will expire and increase the tax liabilities of millions of taxpayers.
Instead of debating tax increases that have no a shot of passage we should be discussing what’s on the horizon. Like it or not, here is the default tax package that’s on the table:
- Increase tax rates from 10%, 12%, 22%, 24%, 32%, 35%, and 37% to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% respectively,
- Cut the standard deduction in half and bring back personal exemptions,
- Repeal the SALT cap
- Reduce the child tax credit from $2,000 to $1,000 per qualifying child,
- Significantly reduce the estate tax exemption,
- Reduce the AMT exemption amount and subject more than 7.6 million taxpayers to the AMT by 2030
- Cap itemized deductions to 80% of the total amount otherwise allowable for high income earners,
- Bring back miscellaneous itemized deductions
- Increase deductibility of mortgage interest on loan balances in excess of $750,000 and certain home equity loans.
Double It and Give It to the Next Person
As much as we like to complain about taxes, the US is a low-tax country. For some comparison, the U.S. had a tax-to-GDP ratio of 26.6% in 2021. This is well below the 34.1% average of other OECD countries. With the U.S. deficit becoming top of mind post COVID-19 budgetary spending it’s only a matter of time before Biden’s tax plan becomes law… even if Congress doesn’t take action. Better get ready to start communicating new tax changes to clients.