Tax policy takes center stage: What to watch on Capitol Hill
With the expiration of most individual tax provisions, brackets, and rates scheduled at the end of the year, deliberations on Capitol Hill are in full swing as lawmakers consider proposals for the future of tax rates.
The cost of extending the Tax Cuts and Jobs Act (TCJA) for 10 years exceeds $4 trillion, according to Congressional Budget Office (CBO) estimates. Last week the House narrowly passed a budget resolution in a key step toward drafting actual tax legislation. (See details about the resolution and extension of the TCJA in the Ways and Means release ).
In recent weeks, the Senate passed a scaled-back budget resolution addressing funding around immigration and energy. The House and Senate actions are part of a broader effort, referred to as budget reconciliation. In this process, Congress can pass fiscal-related legislation requiring only a simple majority in the Senate. This paves the way to advance tax legislation with only Republican votes.
For more details on budget reconciliation see the Congressional Research Service’s educational piece, “The Budget Reconciliation Process: Timing of Legislative Action.”
As a next step, the Republicans from the House and Senate will need to agree on a combined plan to move the process forward. This will provide a framework for tax-writing committees in Congress to draft legislation.
For more information on the expiring TCJA, see “Looking ahead to the expiration of the TCJA.”
Here are three key areas we’re watching:
Will the “one big bill” plan move forward?
The House plan contemplates one comprehensive bill that would combine tax provisions with funding for immigration and energy-related initiatives. Republicans in the Senate have been less enthusiastic about a one-bill approach, fearing that working through all the details on the tax portion would delay funding for border needs, for example. Instead, Republican leadership in the Senate have called for moving quickly on immigration and energy items, while providing more time to tackle tax proposals later in the year. House Republicans are concerned that executing two budget reconciliation bills this year (one for immigration/energy and one for taxes) would be a steep hurdle.
Will there be relief on SALT?
This is one of the most contentious issues related to extending the TCJA. Given the ultra-slim Republican majority in the House, every vote is critical. There are approximately 20 Republicans in the House from higher-taxed states like CA, IL, NJ, and NY. Many of their constituents are clamoring for relief on the $10,000 cap for deducting state and local taxes (SALT). For example, there has been some discussion on doubling the cap for married couples or raising the cap to $15,000 for individuals and $30,000 for married couples. To what extent will House Republicans from those states tie their final vote to achieving some movement on the SALT cap? Of course, any relief on SALT would add cost to an already expensive price tag to extend the TCJA which may further complicate the broader process.
Planning note: If the SALT cap is raised for 2026, taxpayers may want to consider lumping deductions into next year to take advantage of a higher cap. For example (depending on personal circumstances), a taxpayer could claim the standard deduction this year, defer charitable contributions into next year, and itemize deductions in 2026 given the potential opportunity to deduct a higher amount of state and local taxes.
What tax provisions may be added?
On the campaign trail last fall there were a number of tax-related proposals floated that are outside the scope of extending the TCJA. What are the chances that any of these items are included in a final tax package? Adding additional tax relief would further complicate the goal of extending the current provisions of the TCJA.
Here are three proposals that have been mentioned and the estimated cost:
Given cost constraints, providing some type of tax relief on tips may be more likely of any of these items to make it to the final tax bill. Certain limitations based on income levels could be implemented to reduce the cost (i.e. income phaseouts at certain levels).
Planning beyond the current landscape
While many households may avoid a higher tax bill next year if there is a final agreement to extend the TCJA, the longer-term outlook on taxes is unclear. For this fiscal year, the CBO estimates a deficit of $1.9 trillion. This marks the sixth consecutive year the federal budget deficit has exceeded $1 trillion. As part of longer-term planning, taxpayers should consider these factors as well as their own personal circumstances to explore options that may help hedge the risk of higher taxes in the future. For example, a series of partial Roth conversions at more favorable tax brackets could provide a source of tax-free income in the future.
Seek advice
When considering making adjustments to your plan, it’s important to consult a qualified tax or legal professional and your financial advisor. Personal circumstances vary widely, so it is critical to work with a professional who has knowledge of your specific goals and situation.
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