Little time left for tax changes this year

The likelihood of Congress passing any year-end tax legislation before 2024 is looking dim right now, as it continues to face self-imposed deadlines just to keep the government up and running beyond its latest stopgap spending measure and continuing resolution.

However, given the demands from various constituencies for tax breaks, lawmakers may still introduce new legislation, if only to position themselves ahead of next November's election. In the meantime, it's up to the Treasury Department, the Internal Revenue Service and the courts to provide taxpayers with answers to their questions about how the existing tax laws and regulations apply.

"There's a lot of pent-up demand for tax legislation, but because of the time of year that we're in, the number of days that are left, the big issues that are probably a priority, and using a lot of members' time, I'm not sure it's realistic to think that tax legislation can be agreed upon and put together and bills introduced, even within each of the caucuses in each of the chambers," said Rochelle Hodes, principal in the Washington National Tax office of Crowe LLP, a Top 25 Firm.

The IRS budget had been facing the threat of cuts from House Republicans to fund aid to Israel in the wake of the Hamas invasion, but that appears to be off the table since an agreement was reached to keep the government running. However, IRS Commissioner Danny Werfel and Treasury Secretary Janet Yellen have been making the case for why the extra funding it received under the Inflation Reduction Act of 2022 is so necessary to making sure the IRS can improve its service. Further legislation to repeal that funding would be blocked in the Senate by Democrats and by the Biden administration's veto threat.

"The IRS is putting out lots of information about what it is doing with the money that it's received, and Secretary Yellen went to the IRS and made a statement about the progress that's being made in updating and modernizing technology for notice responses and processing," said Hodes. "We've seen over the fall a couple of news releases about the IRS's initiatives on enforcement and a lot of varying think tanks and stakeholders have been making statements about their views regarding IRS funding, so it appears that there is a significant effort to try and help the IRS to keep the funding that it received under the IRA."

The IRS has been rolling out a steady stream of guidance for implementing various provisions of the Inflation Reduction Act no matter what happens in Congress, including recent guidance on how buyers of electric vehicles can transfer their tax credits to automobile dealers and get advance payments that effectively lower the cost.

"The IRS and Treasury are making large efforts to show what they're doing with the money," said Hodes. "For dealers regarding the energy credits, they put out notices around that, so there's been a very large effort to try to demonstrate how they've been using the funding that they received in a way that's consistent with the IRA, in an effort to show that they're good stewards of the money. Whether that will succeed in protecting the funding that they received is anybody's guess."

The IRS has also been working on interpreting another recent tax law change from the Infrastructure Investment and Jobs Act of 2021 that requires cryptocurrency brokers to report on sales and exchanges of digital assets. The IRS held a hearing recently to garner feedback on proposed regulations for implementing that provision. 

Reporting originally was set to begin in 2024 but was delayed until final regulations are issued. Under the proposed regs, reporting on a Form 1099-DA would be required for digital asset sales made on or after Jan. 1, 2025.

"Significant concerns have been raised," said Hodes. "There were a large number of comments, and a number were generally unfavorable toward the regulations, and there are other comments that are more in depth that provide more specifics around the concerns about the digital asset reporting regulations."

Some of the primary concerns in the comments revolve around how expansive the definition of "broker" is in the regulations and whether it potentially covers DeFi, or decentralized finance, software platforms, she noted. There are also significant concerns about the privacy of information that would need to be collected. Other concerns were expressed about duplicative reporting because of all the parties in the blockchain that would be treated as a broker, and the timing for when the broker reporting will be required.

Lawmakers in Congress have proposed crypto legislation to address the industry's concerns, but with added protections for consumers after the high-profile collapses of crypto exchanges like FTX. Yet that legislation also appears to be stalled for now, like so much in Congress. 

Tax planning with the TCJA in mind

Another area of uncertainty is the provisions of the Tax Cuts and Jobs Act of 2017 that are due to expire in 2025, but that will likely be left to the next Congress that's elected in 2024.

"Certainly, we have lots of clients who are interested in knowing when they're going to see legislation on the provisions that will expire at the end of 2025," said Hodes. "I think, based on being a watcher of how these things happen, and the fact that we have an election in 2024, it's going to be a little while until we have a really good idea of how that's going to be addressed."

Both accountants and tax attorneys will be busy dealing with all the lingering tax questions in 2025.

"Lots of things could happen in terms of the sunset," said Edward Renn, a partner on the private client and tax team of international law firm Withers. "Are you going to get 39.6% back? Are you going to get higher tax brackets or are capital rate gains rates going to be more income-based? Are you going to get more progressivity there, where higher earners are going to pay at higher rates?"

The highly anticipated Moore tax case in the Supreme Court, for which oral arguments are scheduled on Dec. 5, could also have an impact on tax planning.

"Watching the corporate 15% tax case in the Supreme Court may very tell you whether there's going to be any life in the idea of a wealth tax going forward, or is it going to be held unconstitutional," said Renn. "People that are in a position to do estate tax planning to transfer out significant sums to their family should do it sooner rather than later, because we're only a couple of years away from that sunset. Boy, we're going to be really busy in the fall of 2025. If you want to consider a number of different options, and you want to talk about how it's the family business and how we are going to handle control of the business and those sorts of issues, go see your lawyers now. Don't wait, because we're not going to have time to deal with you in 2025."

Tax bracket changes

The recently released tax brackets for tax year 2024 will offer some clues to tax planning for next year. 

"They're not insignificant," said Renn. "I think last year's boosts were bigger, but they're still nothing to sneeze at. We gained $690,000 on the applicable exclusion amount piece, $1,000 on annual exclusions, and $1,500 on standard deductions for married filing jointly. It all helps. ... Wealthier clients were in a position to gift $27 million to Gen Two or Gen Three. If they haven't done it already, they need to take advantage of it before 2026 because I'm expecting the exemption to basically be cut at that point in time, because that's what was agreed in the 2017 tax act. That's what's going to happen, so clients really should plan with that. Even if you did planning last year, well, for a married couple, it's nearly another $1.4 million. Certainly, you can find something creative to do with that if you have the resources to transfer it."

"I thought the increase in the annual exclusion by $1,000 is useful," he added. "Most of the income tax rates where the brackets kick in went up about a little over 5%, so you can make 5% more than you did last year before you trigger the top 37% bracket. The 401(k) contributions only went up by $500, but $23,000 in deferrals are a good thing. The DC pension maximum contribution went up to $69,000, so if you're an entrepreneur in your own small business, or you're a professional running a practice or if you're over 50 you can put away $76,500 pre-tax, so that's a decent number. That helps in terms of retirement planning. Another $500 on IRAs — it's small, but if you qualify for a Roth or a deductible IRA, those exemptions have all moved up a little bit. They're probably worth taking advantage of."

Taxpayers and practitioners will be looking at which deductions to claim with the TCJA expiring in two years.

"It remains to be seen how that's going to play out," said Renn. "Given the caps that we have in place on state and local taxes, the standard deduction seems to be working for more people more than ever. If you can bunch your deductions into one year and not have caps on them, it doesn't do any good to pay property taxes in one year because you're not going to be able to deduct them anyway, but if you can get interest deductions or other deductible expenses into one year, that probably makes sense to do it. It might lower your bracket or shelter more income than you'd otherwise be able to do."