How will a new Congress affect your taxes?

While the media focuses on the presidential election and the candidates’ tax proposals, two important issues can be easy to miss: 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 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 the presidential candidates’ tax proposals be passed into law?

The tax cliff of 2025

The biggest problem facing Congress is that most of the tax provisions passed in 2018 were temporary and will expire (or disappear) in what is being called the “2025 tax cliff.”

International accounting firm KPMG estimates that more than $4 trillion in tax cuts, which will mainly benefit the wealthy, will expire if the TCJA is not extended, making 2025 one of the most critical years for tax policy since the original law was passed .

Congress is unlikely to agree on new legislation or an extension, and many or all provisions could expire. If that happens, our taxes will resemble what they were before the 2018 legislation was passed. However, if that happens, not everyone will be negatively affected.

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 you itemized your deductions before the tax change and wrote off your medical expenses, mortgage interest, state and local taxes, charitable deductions, work deductions, and other miscellaneous deductions, you will likely write off these deductions again instead of following the higher standard. deduction.

For example, if you totaled your itemized deductions in 2023 and they amounted to $13,000, and you are single, you probably used the current standard deduction of $13,850 instead of bothering to itemize.

If the standard deduction for a single person is reduced to $8,300 in 2026, as the Cato Institute predicts, you would likely choose to itemize your $13,000 in deductions instead. Additionally, the $5,275 personal exemptions 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 current law.

Some taxpayers will also benefit because many deductions eliminated with the TCJA will be available again. For example, those who have previously written off work expenses, including nurses, law enforcement officers, salespeople and teachers, can deduct their work expenses again. For those of us in states like California with higher taxes, our state and local tax deductions will no longer be capped at $10,000.

Many taxpayers, especially those with higher incomes and some business owners, will pay more income taxes when the law expires. The top marginal tax rate would return to 39.6% in 2024, up from the current 37% on incomes above $609,350 (affecting only the top 1% of earners). In a simplified example, the marginal tax increase would be just over $10,000 for one person with a taxable income of $1 million per year.

It would also eliminate the 20% deduction for qualified pass-through business income (QBI) for many types of businesses. According to the IRS, 50% of those claiming the deduction in 2021 had incomes of less than $100,000, for an average of just a $1,997 deduction. In contrast, the average deduction was just over $1 million for people with incomes of $10 million or more.

For a complete overview of the expiring facilities, go to crsreports.congress.gov/product/pdf/R/R47846.

Will the candidates’ proposals become law?

What are the chances of the presidential candidates’ tax proposals becoming law, barring the tax cliff?

The “No Tax on Tips” signs at rallies illustrate how a compelling policy statement from both candidates on the campaign trail that sounds good on the surface will likely never become law.

In this case, three major tax research organizations already agree 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 income tax, as some (usually part-time) tipped workers earn less than the standard deduction, and others take advantage of the earned income tax credit, which still reduces their taxes to zero.

The Brookings Institution (Brookings.edu) claims that it may not be the employees who benefit from such a policy. Employers could simply cut their employees’ base wages and pocket any profits for themselves.

They also point out the unfairness of the proposal that exempts tip income for a waitress but not wages earned by a teacher, guaranteeing that two taxpayers with the same income level would pay markedly different amounts of tax.

Finally, they warn that tax avoidance schemes should always be taken into consideration. For example, what will stop lawyers from lowering their rates and allowing clients to give them a large, tax-free tip for their services?

As you can see, what sounds like a great idea at a campaign rally becomes much less feasible, fair, and enforceable once the tax policy experts get involved.

As Warren Buffet noted, “If I get a break, someone else pays. The government cannot provide a free lunch to the country as a whole. However, it can determine who pays for lunch.” It will take a lot of discussion and compromise before policy proposals become law.

For more information, visit taxfoundation.org/research/federal-tax/2024-tax-plans to view the candidates’ tax plans. The Tax Foundation is the world’s largest nonpartisan tax policy nonprofit.

Michelle C. Herting is a CPA accredited in business valuations and an accredited estate planner specializing in estate planning and estate, gift and trust taxes.