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Tax planning in an unpredictable political and financial climate



When the Republican Congress passed the Tax Cuts and Jobs Act in 2017, it was considered the most sweeping change to the Tax Code since 1986. Many believed that the United States would not see such significant tax law changes for decades. Instead, due to fluctuating political majorities and unforeseen world events, the U.S. has had a significant tax legislation change nearly every year since. 

In 2020 we saw the beginning of the COVID-19 pandemic and the passage of both the Families First Coronavirus Response Act and the CARES Act. In 2021, the American Rescue Plan and the Bipartisan Infrastructure Act passed as well; with each containing some, though not significant, tax provisions. And in 2022, in what was a surprise victory for Senate Democrats, a scaled-back version of the long-awaited Build Back Better plan was enacted as the Inflation Reduction Act of 2022. While not as sweeping as the original bill, it contained significant tax changes.  

After over a decade of steady growth, volatility is back in the U.S. economy, and it never left its politics. As unpredictability reigns over the economy, inflation, the markets and elections, the question becomes: How do you plan in uncertain financial and political times?

While the future is never certain, we can always look to the past and to certain trends to predict some potential outcomes. By keeping an eye on the future and potential new tax developments, tax advisors can offer their clients a sense of stability and proactive tax planning.

2022 through 2024, a holding period

For nearly the past year, the general expectation has been for a mild to moderate Republican “wave” in the midterm elections, particularly for the House of Representatives. However, recent weeks have seen many political pundits downgrade that forecast from a “wave” to more of a “puddle.” While it is still likely that Republicans will gain control of the House of Representatives, more and more predictions are keeping the Senate as a 50-50 split. Barring any upsets, the most likely outcome for the 2022 midterms will be a split government — it is unlikely that Democrats will hold both the legislative and the executive branches.

In the immediate future, the RISE and SHINE Act and the EARN Act are the most significant pieces of legislation with major tax implications that could pass before the end of 2022. The House version of the bill already passed with an incredible bipartisan majority of 414-5. These three bills combined are being referred to as “SECURE 2.0,” as they expand upon the SECURE Act from 2019. 

These are targeted at improving retirement and have had major bipartisan support. They have also been sponsored and supported by multiple retiring Republican members of Congress, many of whom spent years on tax and financial committees. They may consider them their last hurrah and cash in political favors to get them passed. The current thought is that the bills will likely end up in the omnibus spending package for 2023. 

Beyond the retirement bills, the next two years will likely be a holding period in terms of tax legislation. Don’t expect to see major tax developments pass through both chambers of Congress. The fact of the matter is that in a narrowly divided Senate, who the 49th and 50th votes are will determine any tax policy changes. Any pieces of federal tax legislation will likely be limited to extenders or clarifications of other provisions. Changes are more likely to be made piecemeal, and as part of bipartisan legislation or compromises.

One area where we might see legislation? Cryptocurrency. As blockchain technology becomes more and more a part of everyday life, and as some countries create and accept digital currencies, we may see more pressure to address the future of cryptocurrency taxation. However, don’t be surprised if real legislation is kicked down the road for the 2024 elections.

2024 elections, a pivotal moment

Over the years, divided government has become less common in the two years following a U.S. presidential election. Whichever party wins the White House in 2024 will most likely have a majority in Congress to carry out its agenda in 2025-2026. Because the Tax Code is such fertile ground for policy-making, major tax changes will become the norm for whichever party controls Congress and the presidency. And as we’ve learned in the last two years, the senators who are most willing to withhold their vote exercise the most power in the legislative process.

The election year in 2024 may be a watershed moment in American politics: For the first time since the 1970s, boomers are not expected to be the dominant electorate. This honor will go to millennials and Gen Z (sorry, Gen X!). So what can we expect from this shift for the 2024 elections and onward? While no generation is a monolith, there are many issues that a majority of millennials and Gen Zers agree on.

Millennials and Gen Z generally have a much different view of government than the baby boomer generation. Where boomers tend to have a more skeptical approach, millennials and Gen Z generally have a more favorable view of the role the government plays. Boomers have more wealth and income in general than the generations that have come after them, and they are much more focused on keeping that wealth. Millennials and Gen Z, on the other hand, are not as optimistic about their financial future overall and are more likely to support social benefit programs with a “rising tides lift all boats” mentality. (It should be noted that millennials entered the workforce in the aftermath of the 2008 financial crisis, and as a result are behind boomers and Gen Z economically at similar career stages. This may tilt their political priorities toward more immediate gains rather than long-term problems.)

Another major difference between the millennials and Gen Z electorate and baby boomers is their opinion of taxes. Whereas boomers are more likely to have a negative attitude about tax rates, Gen Z and millennials harken back to the greatest generation/WWII era perception of paying taxes as being a patriotic duty. As these voters elect more like-minded individuals, expect to see that reflected in tax legislation.

One major aspect of tax legislation that could see significant changes as more tax-friendly voters influence elections is the highest tax rates and brackets. Younger voters are much more supportive of higher individual income and corporate tax rates, and especially supportive of taxing ultra-high-net-worth individuals. Could we see the estate tax exemption plummet? Sen. Bernie Sanders, who has strong support among this group, has long championed reducing the estate tax rate to $3.5 million. A surtax on multimillionaires is also not outside the realm of possibility. 

Another area where we could see significant changes is in the treatment of student loan forgiveness. Student loans are top of mind for many millennials and Gen Z voters. The American Rescue Plan Act made the forgiveness of federal student loans tax-free until 2025, but many younger voters would like to see that extended permanently. Other changes to look for regarding student loan treatment include a higher student loan interest deduction, a higher student loan interest deduction for married couples (currently it is limited to $2,500 per return, regardless of marital status), and changes to how the adjusted gross income formula for income-driven plans is calculated. 

Millennial and Gen Z voters — and those in the younger, as-yet-unnamed generation —  are much more likely to cite environmental policy as a major voting issue. The importance placed on the environment and the urgency felt by these generations means that policies will need to do more to incentivize carbon-neutral, green energy. One thing we can expect to see is more credits and incentives for companies and individuals to make environmentally friendly changes to their businesses and lives. Congress has shown it is more comfortable influencing change in this area through the Tax Code and credits than through other legislative efforts, as evidenced by the recently passed Inflation Reduction Act.

For the 2024 elections, look for candidates to bring us full circle to the Tax Cuts and Jobs Act again. Many provisions of the TCJA will begin expiring in 2025-2026, and Republican members of Congress may campaign on extending popular provisions such as the Qualified Business Income Deduction, expanded standard deduction and bonus depreciation. Democratic members of Congress, for their part, will likely highlight the fact that the corporate provisions of the TCJA were permanent, while the individual provisions were not. There is a likelihood of the expiration of the TCJA provisions becoming a campaign issue for the 2028 presidential elections.

Again, there is no way to foresee the future. As millennials and Gen Z gain more wealth, their attitudes toward taxation and the economy may shift to a more conservative approach. But for the foreseeable future at least, tax policy looks like it will trend toward higher income taxes, more incentives for clean energy, more tax-free forgiveness for student loan debt and potentially higher wealth taxes. Both parties will need to embrace some aspects of these policies in order to court what will soon become the largest segment of the electorate in the U.S., as many of these attitudes cut across party lines for younger Americans.

Knowing what is important to your clients is a large part of advising. As the newer generations begin to dominate elections, they will also become the main drivers of the economy. What is most important to a client in an older generation may not be what is most important to a younger client. Staying current on trends can help ensure your services remain relevant for all.

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