One-party control in Washington has come to an end. The 2022 midterm election has resulted in a split in Congress, with Republicans taking over the House of Representatives while Democrats held on to their Senate majority. While these party divisions mean that partisan gridlock will likely prevent any major legislation from being passed in the next two years, this shift in party lines could still lead to changes that may affect your finances.
Below is a snapshot of six critical areas that could be affected by the recent election results, plus insights on what impact those results might have on you and your business.
In December 2017, President Trump signed a tax reform bill, commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA), into law, enabling sweeping changes to the tax code. However, many of the TCJA-related tax breaks tied to individuals are set to expire after 2025.
Because Republicans won the House, the individual TCJA-related tax breaks may live to see another day. Chances are high that the Republican-led House will propose legislation to make the tax cuts permanent, including doubling the standard deduction claimed by most taxpayers, reducing the top rate paid by most taxpayers from 39.6% to 37% and making permanent a 20% deduction for organizations that operate as pass-through entities (sole proprietorships, S-corporations, etc.).
There are also a handful of other GOP bills proposing tax incentives for startup businesses, tax breaks on intellectual property transferred to the U.S., deductions on business interest and other measures aimed at making permanent or enacting new business tax breaks.
Protecting Trump-era tax policies will likely be a priority that Republican lawmakers pursue over the next couple years. Extending the legislation (or making it permanent) will prevent individuals from seeing an imminent tax hike. Additionally, it’s likely that the GOP will push to remove specific tax increases on corporations that were designed to offset the cost of overall cuts to the corporate tax rate, lowering tax rates for businesses.
But, there’s also speculation that these tax plans could only fuel the current record inflation levels — so the true benefit to your bottom line remains to be seen.
Now that midterm elections have passed, Congress will need to reconvene to address 2023 government spending. This could present an opportunity to pass a year-end tax package.
Democrats will be looking to push their remaining agenda items and maximize returns while they still hold Congressional control. However, the prospect of a new tax package appears unlikely. With control of the House shifting to the GOP, there will likely be low support of lame-duck spending, especially because a Democrat-controlled Congress already passed the Inflation Reduction Act in August.
Critics speculate that the legislation to be discussed in this year’s winter session threatens to drive up government spending and the federal deficit. And ultimately, this could lead to high-earning taxpayers footing the bill.
Tax provisions regarding research and development (R&D) credits and bonus depreciation may be subject to change. Prior to 2017 tax reform, Section 174 allowed businesses to write off expenses in the year they were incurred. This tax break expired at the end of 2021. Going forward, businesses must amortize their R&D costs over five years. This leaves many organizations, particularly manufacturing and pharmaceutical companies, hoping for relief.
Though the GOP seized control of the House, lawmakers on both sides of the aisle could have reason to come to the table on bipartisan R&D tax relief. Some recent speculation suggests that Democrats could agree to support R&D relief if Republicans agree to reinstate the expanded child tax credit.
Aside from the obvious tax benefits R&D relief could bring to your organization, R&D tax breaks also encourage research activities and have broader economic benefits. But they don’t come without a price tag. The cost of extending the expired R&D tax relief has been estimated to be about $45 billion, while a full revival of expanded child tax credits is projected to be approximately $100 billion expenses that will trickle down to the individual taxpayer.
One important piece of year-end legislation that has garnered much discussion is the possible revival of the expanded child tax credit. Temporarily increased through the American Rescue Plan Act (ARPA) in 2021, the child tax credit allowed eligible families to receive advanced payments of up to $300 a month per qualifying child for up to six months, depending on the age of each child. Congress did not extend the credit, and this provision has since expired.
In 2017, the GOP doubled the child tax credit as part of the TCJA, but it’s unclear whether extending the higher child tax credit would become part of the current Republican policy agenda. However, as mentioned above, there is a possibility that a Republican-controlled House could support a full restoration of the expanded child tax credit in exchange for R&D tax breaks.
President Biden has emphasized that making the child tax credit permanent is part of his agenda. But when he proposed a yearlong extension, the proposition was blocked by Sen. Joe Manchin (D-West Virginia), who cited concerns over restoring the increased credit without a work requirement attached. However, because Democrats retained control of the Senate, reinstating the expanded child tax credit will likely become a priority.
For eligible families, a restored expanded tax credit would be a welcome boost in today’s volatile economy, particularly amid such high inflation. Data shows that this expanded credit can effectively grow the middle class and could reduce food insecurity and the child poverty rate by as much as 45%. However, it could also be tied to tax hikes for corporations and high earners.
The Inflation Reduction Act of 2022 (IRA), signed into law by President Biden on August 16, aims at reducing the nation’s deficit by $300 billion and speeding up the development of clean energy by way of a $369 billion investment in energy security and climate change programs. Additionally, in line with Biden’s plan to tax the wealthiest taxpayers, a key measure in the bill allocates $80 billion to the IRS over 10 years, to increase enforcement with better technology and additional employees. Currently, the funds would be used to focus on taxpayers with income over $400,000.
With Republicans back in control of the House, there is speculation that they may try to dilute the impacts of the historic law. Minority Leader Kevin McCarthy (R-California), for instance, has vowed to block the $80 billion in funds allotted for the IRS.
Historically, the IRS has been understaffed and underfunded. Repealing the multi-year IRS funding would intensify these issues. While increased IRS funding may mean more future audits, it also means funding for better taxpayer services, including technology upgrades and replacements for employees expected to quit or retire over the coming years.
In another rare showing of bipartisan support, both sides of the aisle appear to be in favor of major retirement legislation. The EARN Act, a bipartisan proposal recently introduced in the Senate, aims to improve Americans’ ability to save for retirement by encouraging small businesses to adopt retirement plans and making it easier for part-time workers to participate in retirement plans.
If signed into law, the Act would also expand the saver’s credit for low and middle-income workers and allow penalty-free withdrawals during certain emergencies.
Congress will have to reconcile the EARN Act with the bipartisan House-passed SECURE 2.0, which would also make significant changes to retirement plans, including raising the age for taking required minimum distributions (RMDs) and reducing the penalties for failing to take RMDs from 50% to 10%.
The shakeups in the House could certainly signify changes to the Congressional agenda over the next two years. But that doesn’t necessarily translate to changes for individuals and businesses. Though partisan stalemates will make passing major legislation more difficult, it’s important to monitor key bills and provisions that might affect your business, and make sure you prepare accordingly.
If you need assistance understanding or preparing for any impending changes, contact our experts.
