Sikich Series on Tax Reform: American Idle – Post Mid-Term Election Outlook on Taxes

The much anticipated 2018 mid-term elections are over. While there are still several unresolved races, there has been a change in Congress. As was expected, the House will move from a Republican majority to Democratic majority when the new Congress starts up in January 2019, while the Senate will remain in Republican control. This split in Congress will lead to a different dynamic in Washington on many fronts. This article will just focus on the prospects of tax changes in Washington.

Leadership

With a change in control, comes a change in the leadership of various positions in Congress. The key tax-writing committees in Congress are the House Ways and Means Committee, and Senate Finance Committee. Here is the current leadership in each chamber of Congress and the expected new positions come January:

Possible Changes

Last year brought about comprehensive tax reform legislation with the passage of the “Tax Cuts and Jobs Act” (“TCJA”). This tax bill was passed along party lines. It is unexpected that another comprehensive bill will move forward with the new Congress for a couple reasons:

• First, it is unlikely the House and Senate would agree on provisions for a major tax bill.
• Second, it is also unusual to have two comprehensive tax changes in a short time span. There is usually at least some time to allow the first bill to take affect and be implemented before again making wholesale changes.

So, while another major tax bill is not looming on the horizon, there will still be tax issues debated in Congress without much success. Here are several tax areas that could be addressed either in a lame duck session this year, or with the new Congress next year:

• TCJA Technical Corrections. There are several tax items in the TCJA that contained drafting errors that need to be corrected. While both parties would agree that drafting errors exist, fixing the issue requires that both parties agree on making the fix, which might entail some other tax change as a trade-off for making the fix. One such technical correction relates to “Qualified Improvement Property” (QIP) additions made in 2018 and whether these can receive the new 100% bonus depreciation. The IRS indicated it could not remedy this situation in regulations, thus leaving it to Congress to make the technical corrections fix. This technical correction will come up in the lame duck session and could be adopted before the end of the year.
• “Tax Reform 2.0.” This legislation added on to last year’s tax bill and was passed by the House earlier his Fall, but it was not yet addressed in the Senate. One of the major changes in this bill would be to make the individual tax changes in TCJA permanent. It is unlikely that this bill will move forward this year.
• Further Middle-Class Tax Cuts. The Administration and House leaders offered a middle-class tax cut this Fall. This cut would be on top of last year’s individual tax changes made in the TCJA, but may come with higher corporate tax rates and a hike in the top individual tax taxes. It is uncertain that both the House and Senate would agree to these changes, but this may come up in 2019.

• “SALT Shaker.” One of the more controversial items enacted in last year’s tax bill was the cap of $10,000 on the deduction for State and Local Taxes (SALT) by individuals. Many democrats objected to this measure last year and may seek to raise this cap or remove it entirely. There are no formal proposals for this change yet, but don’t be surprised if there is a move to shake up this SALT limit.
• Tax Extender Items. There are several tax provisions that recently expired – many of which are energy-related items. These items have a short “shelf life” and Congress has rolled these over on a regular basis, but has yet to do so in 2018. Many are non-controversial, but these still need to be dealt with, and will most likely come in the lame duck session this year.
• Retirement Plans. One of the major areas left out of the TCJA last year was any retirement plan changes. A bi-partisan retirement plan bill moved forward earlier this year but was not finalized yet. Look for this bill to be enacted either in the lame duck session, or sometime next year.
• IRS Reforms. Another item that was gone through Congressional hearings this year and has some bi-partisan support is legislation making some IRS reforms. While not a major overhaul of the IRS, it would make several changes that Congress feels are warranted. Something to also keep an eye on.   

Takeaways

So, following this week’s election results, taxes will continue to be something for taxpayers to monitor. Look for some action still this year, but it may take awhile in 2019 for any tax measures to move as both parties will be adjusting to their new roles. Please contact your Sikich tax advisor with any questions you have.