What Midterms Could Mean for Your Tax Rates
Midterms are fast approaching, and the question on everyone's mind is how new legislation may impact tax preparation and planning.
Many companies are still reeling from the impact of COVID-19 and navigating rising inflation. During the first waves of the pandemic, the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) provided needed cash infusions to businesses. Now, the economic landscape is shifting drastically, and business owners need to adjust to rising costs and changes in consumer behavior without the support of pandemic-related financial relief.
Will midterms usher in new financial obstacles or incentives? As voters get ready to head to the polls in November, here's how you can prepare for new tax legislation.
How Elections Impact Tax Policy
Since Congress is responsible for passing fiscal policy measures, taxing the public and allocating funding, bills passed through the Senate and House of Representatives can significantly impact businesses and individuals. For instance, Congress recently passed a climate, tax and health package which will certainly make an impact come election time and could influence future tax policy.
Under the Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, individuals and families can transfer significant assets to younger generations with a reduced tax burden. The 2022 federal estate and gift tax exemption is just over $12 million per individual and $24.1 million for married couples.
Congress considered decreasing the exemption in 2021, and it is set to expire at the end of 2025. Midterms—and the federal election in 2024—will likely inform the future of estate planning.
When Democrats won the house and senate in 2020, many taxpayers anticipated raises in individual and corporate tax rates. In reality, the tax landscape has changed less drastically than some predicted. However, to prepare for future policy changes, it pays to understand where your current tax rates stand and what legislation could be on the horizon.
Shifting Priorities
While tax legislation may be born on Capitol Hill, movement in priorities and processes within the IRS influence tax planning, too. When TCJA reduced corporate tax rates from 35% to 21% in 2017, the IRS leaned on the accumulated earnings tax to ensure companies continued to pay out dividends at a reasonable level. The 20% penalty is imposed by the IRS when corporations retain earnings rather than paying dividends to shareholders to avoid higher tax rates.
Recent U.S. Tax Court petitions suggest the IRS has upped its efforts to enforce the penalty, putting pressure on companies to demonstrate that they are using and distributing their earnings effectively.
Staying Informed
At SMCPA, we stay abreast of new tax laws and legislation to identify key opportunities to minimize our clients' tax liabilities—current and future. And while tax policy shifts, our overarching strategy remains consistent: to reduce your tax bill by accelerating expenses and maximizing depreciation deductions.
To prepare for midterms and the 2024 elections, talk to your tax advisor about the possible outcomes of a higher or lower tax rate for your return. Ask questions such as:
How could it impact my tax planning if the composition of Congress shifts following the midterm elections?
What opportunities are there for me to mitigate changes in tax policy to protect myself and my business? What steps should I be taking now?
With our team of tax specialists by your side, you'll have the expertise and knowledge you need to make informed decisions throughout the year.
To learn more about how SMCPA can assist with your tax preparation, planning and service, contact us now.