With the election only just completed, tax preparers aren't yet sure how much it will change the tax landscape, but they do know there's a different set of leadership in place with a different approach to tax, the tax burden and tax administration.
"It will be curious to see how much the balance shifts," observed Kelly Myers, an advisor with Myers Consulting Group LLC, and formerly a career IRS officer with 30-plus years of experience. "The Republicans won't have a super-majority, so there will still be a give and take in their congressional negotiations. If you have some Republicans who break stride with a proposal, they won't be able to force their way through. Republican legislators are less likely to operate in lockstep, as the Democrats do."
"People will be watching as they move forward on the Tax Cuts and Jobs Act; the biggest thing is the SALT limitation with its $10,000 cap," he continued. "There have been discussions on it, particularly as it creates a marriage penalty — a married couple filing jointly has the same $10,000 cap as a single filer. So there should be some palate for action, creating a $20,000 cap for a married couple."
Also, there is wide support for a renewed R&D credit to operate on a dollar-for-dollar basis, instead of a five-year amortization procedure, according to Myers. There may be a stronger appetite to modify this with a Republican House in January. The bonus depreciation that was passed to act as a stimulant may not fare so smoothly, since, with inflation a continuing issue, it may not be desirable to stimulate the economy.
Another TCJA issue is the qualified business income deduction, Myers remarked. "It will be hard to touch that since it was put in the legislation to create equality with the corporate tax rate," he said. "If they had a super-majority, they could ram through their dream provisions, but it's probably a good thing they don't — one party can't ram something through in one direction or the other. We'll know more about the party priorities once the cabinet gets settled."
Theory versus practice
"Trump said a lot of things during the campaign that may be difficult to implement," according to Bill Nemeth, president and education chair of the Georgia Association of Enrolled Agents. "Many things he will not have direct control over. He has said that any of the $80 billion in funds for the IRS that hasn't been spent will be seized. He would also do that with the CHIPS Act, where they're building a chips factory in Upstate New York. It's questionable how much of this he can accomplish. At this point it's all speculation. The net is that he made a lot of promises during the campaign that he may not be able to bring to pass."
"As one who prepares a lot of individual returns, the suggestion by Trump of repealing the tax on Social Security would make things easier for a lot of people and make it easier to do returns for retirees, but it's not clear how it would work in practice," said Stephen Mankowski, tax chair at the National Conference of CPA Practitioners. "And making overtime pay nontaxable would likewise add to the complexity. Payroll systems would become very complicated. Companies that have hourly workers would be more apt to get workers willing to work overtime when they know they wouldn't be taxed on the additional pay."
One of the complications of the "no tax on tips" proposal, he added, is the situation where tips are below the minimum wage, with the employer obligated to make up the difference where a worker has a slow night and brings in little in tips.
"Our hourly rate is $7.65," he said. "It hasn't moved in years. If a server or bartender gets paid $3.00 per hour, the business makes up the difference at the end of the shift. That would be difficult where they are only taxed up to $7.65. And issues would arise as to how it would affect the Social Security base, and how much income could be labeled tip income. Hopefully with the new Congress they will do what they can to ensure the IRS has proper funding. They're looking at modernizing the IRS and they need sufficient funding to do that — additional funding to the IRS can pay for itself many times over."
One casualty of the Republican victory is likely any immediate attempt to tax unrealized gains, according to Gil Baumgarten, chief executive of Segment Wealth Management in Houston.
"You can only have an income tax on something that is income. Unrealized gain is not income," he said. "Overall, the election was good for business — that's the reason the market went up more than 1,500 points the day after the election. I can't think of a better approach to government. Elon Musk is right — sooner or later we'll run out of money. There is so much government waste. I would love to see 90% of government workers laid off. There's nothing that government can do that the private sector cannot do better. Trump understands this."
