Gearing Up for Future Tax Policies: What Taxpayers Should Anticipate

November 25, 2024 | by Atherton & Associates, LLP

The tax landscape is ever-changing, influenced by shifts in political leadership, economic dynamics, and legislative priorities. For taxpayers, whether individuals or businesses, staying informed about potential tax policy changes is crucial. With the recent political developments and impending alterations to tax laws, it’s more important than ever to anticipate what lies ahead. Preparing now can help you optimize your financial strategies, minimize liabilities, and take advantage of opportunities that may arise. This article delves into the potential future tax policies on the horizon and offers insights on how you can gear up for these changes.

Background: The Importance of Staying Ahead in Tax Planning

Understanding the impact of political shifts on tax legislation is essential for effective financial planning. Tax laws are not static; they evolve with changes in administration and congressional priorities. Historically, significant tax reforms have occurred during transitions in leadership. For instance, the Tax Cuts and Jobs Act (TCJA) of 2017 introduced sweeping changes that affected nearly every taxpayer and business in the United States. Proactive tax planning enables you to adapt to these changes, align your financial decisions with current laws, and achieve your long-term financial goals.

Current Tax Provisions Set to Expire

Overview of the Tax Cuts and Jobs Act (TCJA)

Enacted in 2017, the TCJA represented one of the most substantial overhauls of the U.S. tax code in decades. It introduced significant tax cuts for individuals and corporations, aimed at stimulating economic growth. While many corporate tax provisions were made permanent, several individual tax benefits are temporary and scheduled to expire after 2025. These impending expirations create uncertainty and underscore the need for taxpayers to stay informed and prepared.

Key Expiring Provisions

Among the TCJA provisions set to expire are the elimination of the Qualified Business Income deduction, lowered individual income tax rates, increased standard deduction amounts, and changes to itemized deductions. The limitation on state and local tax (SALT) deductions to $10,000 has been particularly contentious, especially in high-tax states. Additionally, the doubling of the estate and gift tax exemption, which significantly increased the threshold for estate tax liabilities, is also slated to sunset. Without legislative action, these changes could result in higher tax burdens for many individuals and families.

Potential Future Tax Policy Changes

While specific future tax policies depend on legislative developments, several proposals and discussions provide insight into what taxpayers might anticipate. Staying abreast of these potential changes allows you to strategize and adapt your financial plans accordingly.

Extension or Modification of TCJA Provisions

Given the significant impact of the TCJA, there is momentum to either extend or modify its provisions. Discussions include making the individual tax cuts permanent, thereby preventing tax rates from reverting to pre-TCJA levels. Potential adjustments to tax brackets and rates could result in changes to taxpayers’ liabilities. It’s also possible that standard deductions and personal exemptions might be revisited to align with economic conditions and policy priorities.

Adjustments to Estate and Gift Taxes

Another area of focus is the estate and gift tax exemption. With the current exemption levels set to decrease from the 2025 level of $13,990,000 to approximately $7,000,000 per person after 2025, there is speculation about potential legislative action to either maintain the higher thresholds or allow them to reset. Changes in these exemptions have significant implications for wealth transfer strategies and estate planning. Taxpayers with substantial assets need to monitor these developments to ensure their estate plans remain effective and tax-efficient.

Changes to Itemized Deductions

The cap on SALT deductions has been a sticking point for many taxpayers. High-tax states have felt the brunt of this limitation, prompting calls for its removal or adjustment. Potential changes could include lifting the cap, which would restore the full deductibility of state and local taxes, or modifying it to provide relief to affected taxpayers. Additionally, deductions for mortgage interest and charitable contributions may also see revisions, impacting homeownership incentives and philanthropic activities.

Corporate Tax Changes

Businesses are also eyeing potential changes to corporate tax rates. Proposals to adjust the corporate tax rate, whether increasing or further reducing it, can significantly impact profitability and investment decisions. Moreover, adjustments to business deductions and credits, such as for research and development, could influence corporate strategies and economic growth. The Qualified Business Income Deduction for pass-through entities might also be re-evaluated, affecting many small businesses and independent contractors.

Small Business Considerations

Small businesses could be affected by alterations in depreciation rules.  Provisions like bonus depreciation and Section 179 expensing have allowed companies to deduct a substantial portion of the cost of qualifying assets in the year of purchase. Bonus depreciation under current law has decreased 20% annually from the 100% maximum since 2022. Changes to these rules could impact cash flow and investment strategies. Potential new tax incentives for certain industries may also emerge, providing opportunities for growth and expansion in targeted sectors.

International Tax Policies

On the international front, discussions around tariffs and trade policies could affect taxes related to imports and exports. Implementing new tariffs or adjusting existing ones may impact businesses with global supply chains. Companies involved in international trade need to consider strategies to mitigate the effects of such changes, such as diversifying supply sources or exploring domestic alternatives.

Implications for Individual Taxpayers

Changes in Tax Rates and Brackets

Adjustments to tax rates and brackets directly affect your take-home pay and overall tax liability. Potential increases in tax rates or changes in income thresholds can result in higher taxes owed. Planning strategies such as income timing and deferral become essential. For instance, accelerating income into a lower-tax year or deferring deductions to a year when they might be more valuable could be advantageous.

Impact on Deductions and Credits

Deductions and credits play a significant role in reducing tax liabilities. Changes to these provisions can either enhance or limit the benefits available to taxpayers. Maximizing deductions for charitable contributions, medical expenses, and education costs requires careful planning. Staying informed about potential modifications allows you to adjust your financial behavior to take full advantage of available tax benefits.

Retirement and Investment Planning

Tax changes can significantly impact retirement savings strategies. Adjustments to contribution limits, the taxation of retirement distributions, or incentives for certain types of accounts can alter the effectiveness of your retirement plan. Considering options like Roth conversions, which can provide tax-free income in retirement, or maximizing contributions to tax-advantaged accounts like 401(k)s and IRAs, can help mitigate future tax liabilities.

Estate Planning Strategies

With potential changes to the estate tax exemption and related laws, revisiting your estate plan is prudent. Strategies such as gifting assets during your lifetime, setting up trusts, or leveraging insurance products can help reduce the taxable value of your estate. Early planning ensures that your wealth is transferred according to your wishes while minimizing tax implications for your beneficiaries.

Implications for Businesses

Corporate Tax Rate Adjustments

Businesses must prepare for possible changes in corporate tax rates that could affect their bottom line. An increase in tax rates would reduce after-tax profits, impacting reinvestment and growth strategies. Companies may need to re-evaluate their financial projections, consider cost-saving measures, or adjust pricing strategies to maintain profitability.

Business Deductions and Credits

Deductions and credits are vital tools for managing a business’s tax liability. Changes to these provisions can influence decisions regarding capital investments, research and development, and hiring. Maximizing available deductions, such as those for qualifying equipment purchases under Section 179 or the R&D credit, can significantly reduce taxable income. Businesses should stay alert to changes that might enhance or restrict these benefits.

Strategies for Tax Planning and Preparation

Proactive Financial Review

Regularly reviewing your financial statements and tax positions is critical in a changing tax environment. A proactive approach allows you to identify opportunities and challenges early. Working with tax professionals can provide insights into how legislative developments affect your situation and enable you to adjust your strategies promptly.

Timing of Income and Expenses

The timing of income recognition and expense deductions can influence your taxable income. Strategies such as deferring income to a future year or accelerating expenses into the current year may be beneficial, depending on anticipated tax rate changes. Careful planning around significant financial transactions ensures you optimize tax outcomes.

Investment in Tax-Advantaged Accounts

Maximizing contributions to retirement accounts like 401(k)s, IRAs, and Health Savings Accounts (HSAs) allows you to benefit from tax-deferral or tax-free growth. These accounts can reduce your current taxable income and provide long-term tax advantages. Additionally, Education Savings Accounts offer tax benefits for funding education expenses, which can be part of a comprehensive tax planning strategy.

Estate and Gift Tax Planning

Taking advantage of current estate and gift tax exemption levels before potential decreases can result in significant tax savings. Gifting strategies, such as annual exclusion gifts or funding 529 education plans for beneficiaries, can reduce the size of your taxable estate. Implementing trusts or family partnerships may also provide tax-efficient mechanisms for wealth transfer.

How Atherton & Associates LLP Can Help

Navigating the complexities of tax law requires expertise and foresight. At Atherton & Associates LLP, we offer a comprehensive range of tax services designed to help you effectively manage your tax obligations and plan for the future.

In an environment where tax laws are subject to change, preparation is key. Anticipating future tax policies allows you to adjust your strategies, seize opportunities, and mitigate potential challenges. Whether you’re an individual taxpayer or a business owner, staying informed and working with knowledgeable professionals can make a significant difference in your financial outcomes. At Atherton & Associates LLP, we’re here to help you navigate the evolving tax landscape and plan for a prosperous future.

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Contributors

Jackie Howell – Tax Partner ([email protected])
Jackie Howell has been in public accounting since 2010, specializing in tax compliance and planning for individuals, privately held corporations, partnerships, non-profit organizations, and multi-state taxation. She assists clients across a broad range of industries, including agriculture, real estate, construction, retail, manufacturing, and distribution services.

Natalya Mann – Tax Partner ([email protected])
With seventeen years of experience, Natalya practices in tax and collaborates with clients in healthcare, professional services, real estate, manufacturing, transportation, retail, and agriculture industries. Her expertise includes tax compliance, tax planning, business consulting, and strategizing the best solutions for her individual and business clients.

Craig Schaurer – Tax Partner, Managing Partner ([email protected])
Craig has been in public accounting since 2006, focusing on tax compliance and planning for the agricultural industry. He has extensive experience with entity and individual taxation, estate planning, and litigation support. Craig works with clients across the agricultural supply chain, including landowners, custom farming operations, equipment manufacturers, and commodity processors.

Rebecca Terpstra – Tax Partner ([email protected])
Rebecca specializes in tax planning, consulting, and preparation for individuals and all business entities. She has extensive experience working with large corporations and high-net-worth individuals across various industries, including agriculture, manufacturing, telecommunications, real estate, financial institutions, retail, and healthcare.

Michael Wyatt – Tax Manager ([email protected])
Michael has served in public accounting since 2019, specializing in corporate, partnership, and individual taxation, as well as tax planning. He provides tax services for clients in the agricultural, real estate, and service industries, and has experience with business and real estate transactions, estate and business succession planning, and multi-state taxation.