The 2018 midterm elections are over, and we will have a divided government through at least 2020. Here are the possible federal income tax implications for individual taxpayers:
Tax gridlock
With the Democrats now in control of the House and the Republicans still in control of the Senate, we have the classic recipe for tax gridlock. That’s because any tax legislation must originate in the House and then pass both the House and the Senate before being signed by the president. The Democrats want to roll back most or all of the taxpayer-friendly changes included in the 2017 Tax Reform and Jobs Act (TCJA), but there is no way the Republicans will allow that to happen.
Tax reform 2.0 is probably dead
The main idea of so-called Tax Reform 2.0 was to make permanent the TCJA’s temporary federal income tax rate cuts for individual taxpayers, the doubled child-tax credit, and the deduction for up to 20% of qualified business income (QBI) from pass-through entities (sole proprietorships, partnerships, LLCs, and S corporations). These pro-taxpayer changes are scheduled to expire at the end of 2025.
Republicans have called the TCJA changes critical to boosting the U.S. economy. Democrats have called these giveaways to wealthy individuals and corporations that will increase federal budget deficits for years to come. House Democratic leader Nancy Pelosi described the tax cuts that benefit the non-rich as “crumbs.”
Whatever your view, Tax Reform 2.0 will be a nonstarter once the Democrats take official control of the House in January. And I don’t think the Republicans will attempt to pass it in a lame duck session before the Democrats take charge on January 3rd.
Middle-class tax cut and indexed capital gain
Right before the election, there was talk from the Republicans about enacting an additional 10% tax cut for the middle class. It’s not going to happen, folks.
There has also been talk of indexing capital gains for inflation. Indexing would allow taxpayers to increase the tax basis of capital gain assets--such as stocks, mutual fund shares, and real estate — to account for inflation. Indexing would result in lower taxable gains when affected assets are sold for a profit.
Some have argued that indexing could be achieved without the need for legislation, by simply by issuing IRS regulations that allow indexing. Maybe so. But I’m betting the Trump administration will choose to avoid making a change that the Democrats could characterize as “yet another tax cut for the rich.”
The extenders
The so-called extenders are a bevy of “temporary” tax breaks that our beloved Washington politicians have habitually allowed to expire before retroactively renewing them for another year or two.
For individual taxpayers, the two most-important extenders are: (1) the deduction for up to $4,000 of qualified higher-education tuition and fees and (2) tax-free treatment for up to $2 million of forgiven home mortgage debt. Both of these breaks expired at the end of 2017.
Other extenders that expired at the end of 2017 include a number of business depreciation and expensing breaks and a number of energy-related breaks.
A potential new extender is the reduced threshold for itemized medical-expense deductions. The TCJA lowered the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI, but just for 2017 and 2018. For 2019 and beyond, the threshold is scheduled to go back to 10% of AGI.
What is the fate of these extenders? The Republicans might attempt to pass an extenders bill in a lame duck session. Barring that, I am not optimistic that the House Democrats will be willing to consider any tax breaks for anybody.
Technical corrections
Like most major legislation, the TCJA included some errors, oversights, and omissions that were not intended by Congress. Such glitches are usually fixed retroactively by so-called technical corrections legislation.
Perhaps the most important technical correction is one that would allow first-year bonus depreciation for qualified real property additions, as Congress intended. The Republicans might attempt to pass a technical corrections bill in a lame duck session before year-end. Barring that, I am not optimistic that corrections will be made.
Too much tax deferral?
In a companion story, I make the point that in today’s federal income tax environment, you could potentially have “too much” tax deferral. The election results make that point more meaningful. So please read the other story in conjunction with this one.
