What to Expect on the Federal Tax Front This Election Year

Last issue, I wrote about the status of the national debt, which has since grown to $34 trillion,¹ as has the probability that there will have to be considerable pain as we adapt to this growing burden. Entitlement spending, the primary cause of the increases and over half of our federal budget, is expected to continue to squeeze out the discretionary side, and result in the insolvency of the underlying trust funds within 10 years.² Now, with interest expense forecast to soon become our second largest budget item and GDP growth expected to be meager, we face a serious challenge that will probably lead to substantial tax increases or spending cuts, unless we accept high inflation from “printing more money.”

Not only has Congress not proposed any serious solutions, both leading presidential candidates (Donald Trump and Joe Biden) have said they do not want to touch entitlement spending.³ Perhaps after the votes are cast in November, the winner of the election will get serious about the debt and support whatever proposals come from the Fiscal Commission panel, which arose from the Fiscal Commission Act of 2023.⁴ I would not count on it. The winning side in national elections rarely reaches out to the losing side, and the losing side generally has no appetite to meet a winner’s proposal halfway. But intransigence will make the coming challenges more difficult for all.

Now on to what I want to discuss in this column: policies affecting the filings of 2023 returns prior to tax law changes that will be effective in 2024, 2025, and thereafter, and the preparing of 2024 tax estimates. Although the marginal tax rates are not scheduled to change until after 2025 per the Tax Cuts and Jobs Act (TCJA) of 2017, we have known since last year that the normal annual “inflation adjusted items” increased by about 7% from 2022 to 2023. This has affected the following:

• The starting dollar amount of the various ordinary tax rate brackets – e.g., the lowest 10% bracket starts at $11,000 and $22,000 for single (S) and married filing joint (MFJ), respectively. (The capital gains tax brackets also increased.)
• The standard deduction increased to $13,850 and $27,700 for S and MFJ, respectively.
• The alternative minimum tax (AMT) exemption increased to $81,300 and $126,500 for S and MFJ, respectively, as well as their phaseout amounts.
• An increase in the Earned Income Tax Credit – up to $7,430 for three or more qualifying children.
• The child tax credit is not adjusted for inflation and is still at $2,000 per qualifying child, although the refundable portion of that credit is adjusted for inflation and increases to $1,600 for 2023. As of this writing, Congressional leaders had agreed to introduce legislation to expand the refundable portion of the child tax credit for 2023, 2024, and 2025, which would allow taxpayers starting in 2024 to use the higher of their current year taxable income or their prior year in determining their child tax credit.⁵
• An increase in the annual gift tax exclusion from $16,000 to $17,000, and an increase in the lifetime estate and gift exclusion to $12.92 million per person.
• The Section 199A qualified business deduction threshold and phase-in range amounts increased to $182,100 - $232,100 and $364,200 - $464,200, for S and MFJ, respectively.
• The Section 179 small-business expense election increases to a maximum amount of $1.16 million and its phaseout begins at $2.89 million of property placed in service in 2023.
• The excess business loss limitation increased from $270,000 for S and $540,000 for MFJ, to $289,000 and $578,000 respectively for 2023.
• For a complete list, see Revenue Procedure 2022-38.⁶

Let’s now look at tax law changes that were already enacted as part of the TCJA that will impact 2023 income tax returns and 2024 estimates. In general, although the TCJA has most of its individual provisions expiring after 2025, there are some provisions expiring even earlier.

Bonus depreciation – The TCJA reduces bonus depreciation to 80% for property placed in service in 2023 and to 60% for 2024. The proposed legislation mentioned above looks to restore the 100% amount retroactively to 2023 through 2025. (There is also a proposed small increase in the Section 179 expense limitations effective for 2024.)

R&D credit – Although the 20% credit remains in place, the immediate expensing of such expenditures expired after 2021, and must be capitalized over five years. Proposed legislation looks to restore immediate expensing, retroactively to 2022 through 2025.

Business interest expense – Also after 2021, the business interest expense limitation can no longer be calculated on the basis of earnings before interest, taxes, depreciation/depletion, and amortization (EBITDA). Instead, the amounts of depreciation, depletion, and amortization expenses must be added back, and effectively the 30% limitation is taken on earnings before interest and taxes. Proposed legislation looks to generally restore EBITDA retroactively to 2022 through 2025.

The next group of items affecting practitioners and taxpayers for 2024 is in the area of preparing estimated tax payments. As you can guess from the above, 2024 tax estimates will be affected by both inflation adjustments (already announced for 2024 in Revenue Procedure 2023-34⁷), as well as TCJA expirations occurring prior to 2026. Once again, these common inflation-adjusted items (about 5.4% this time) are for 2024 tax returns to be filed in 2025, but they will affect related 2024 estimated tax payments, the first of which is due April 15, 2024, for most taxpayers:

• The starting dollar amount of the various ordinary tax rate brackets – e.g., the lowest 10% bracket starts at $11,600 and $23,200 for S and MFJ, respectively. (The capital gains tax brackets also increase.)
• The standard deduction increases to $14,600 and $29,200 for S and MFJ, respectively.
• The AMT exemption amount increases to $85,700 and $133,300 for S and MFJ, respectively, and their  phaseout amounts also increased.
• The Earned Income Tax Credit also increases up to a maximum of $7,830 for three or more qualifying children.
• The child tax credit remains at $2,000 per qualifying child, although the refundable portion of that credit is adjusted for inflation and increases from $1,600 in 2023 to $1,700 for 2024. As mentioned above, Congress introduced legislation to expand the refundable portion of the child tax credit for 2023, 2024, and 2025, and would allow taxpayers starting in 2024 to use the higher of their current year taxable income or their prior year in determining their child tax credit.
• An increase in the annual gift tax exclusion from $17,000 to $18,000 for 2024, and an increase in the lifetime estate and gift exclusion to $13.61 million per person.
• The Section 199A qualified business deduction threshold and phase-in range amounts increased to $191,950 - $241,950 and $383,900 - $483,900 for S and MFJ, respectively.
• The Section 179 small-business expense election increases to a maximum amount of $1.22 million and its phaseout begins at $3.05 million of property placed in service in 2024.
• The excess business loss limitation increased from 2023 limitations of $289,000 for S and $578,000 for MFJ, to $305,000 for S and $610,000 for MFJ for 2024.
• For a complete list, see Revenue Procedure 2023-34.

I hope the above alerts you to at least a few items of which you were not aware, and I wish you luck with your tax filings. In future columns, I expect to cover an update on the proposals referred above, the status of the Supreme Court case Moore vs. United States⁸ on the validity of taxing certain unrepatriated income (which could impact any future wealth tax proposals), planning considerations related to the TCJA expiring provisions, and briefly introduce other possible deficit reduction pathways, such as a carbon pricing mechanism. 

¹ https://fiscaldata.treasury.gov/americas-finance-guide/national-debt

² www.cms.gov/oact/tr/2023

³ www.politico.com/news/2023/03/01/trump-gop-medicare-social-security-00084845 and www.washingtonpost.com/politics/2023/02/08/biden-state-union-medicare-social-security

⁴ www.congress.gov/bill/118th-congress/house-bill/5779?s=1&r=17

⁵ www.finance.senate.gov/imo/media/doc/the_tax_relief_for_american_families_and_workers_act_of_2024_technical_summary.pdf

⁶ www.irs.gov/pub/irs-drop/rp-22-38.pdf

⁷ www.irs.gov/irb/2023-48_IRB#REV-PROC-2023-34

⁸ www.supremecourt.gov/oral_arguments/argument_transcripts/2023/22-800_9ol1.pdf

The information in this article is general in nature. Seek professional tax and legal advisers for specific advice.