What GOP Control in Washington Could Mean for Taxes

Patrick Horning is an attorney in the sophisticated planning strategies department at Northwestern Mutual.

Later this month, Republicans will officially take control of both chambers of Congress along with the White House. President-elect Trump says one of his top priorities will be taxes. Currently, many of the provisions in the Tax Cuts and Jobs Act (TCJA), which were passed during the first Trump administration, are set to expire at the end of the year. That would result in a tax increase for most Americans. With Republicans back in control, however, it appears much of TCJA will likely be extended.

Here are some of the key tax provisions that we’re watching

TCJA had many different provisions that primarily affected three groups: most Americans, business owners and corporations, and high-net-worth individuals.

Key TCJA provisions that affect Americans broadly

Personal income tax rates

TCJA lowered income tax rates across the board. It’s likely these will be extended, with the possible exception of the highest tax rate.

The standard deduction

TCJA doubled the standard deduction that taxpayers could use to reduce their taxable income if they choose not to itemize. This higher standard deduction is likely to be extended.

The child tax credit

TCJA doubled the child tax credit from $1,000 to $2,000 per child. It also raised the amount of income taxpayers must earn before the credit phases out. As a credit, this can be a substantial break for parents, as a credit reduces the tax you owe, not your income.

The SALT cap

The State and Local Tax (SALT) deduction cap is an unpopular TCJA provision in high-tax states, as the cap limits the amount of state and local taxes that you can deduct on your federal return to $10,000 per year. It is unlikely to be extended in its current form due to opposition from Republicans in high-tax states, and we’ll be watching to see how Congress decides to reform the cap or allow it to lapse altogether.

Taxes on tips, overtime, and Social Security

This is a potential new development on taxes that we’ll be watching. Mr. Trump campaigned on the idea of eliminating taxes on tips, overtime pay and Social Security benefits.

Key TCJA provisions that affect business owners

The qualified business income tax deduction

The qualified business income (QBI) deduction allows many business owners to take up to a 20 percent deduction of qualified business income. The QBI deduction is likely to be extended or modified in a way that creates a more equal playing field between flow-through businesses and larger corporations.

Bonus depreciation

These provisions can help businesses get a more immediate tax benefit from putting assets to work. Bonus depreciation could be extended.

Corporate tax rate

This is another potential new development. President-elect Trump ran on the idea of lowering the current corporate tax rate from 21 percent to 15 percent for certain types of businesses.

Key TCJA provision that affects people with a high net worth

The estate and lifetime gift tax exemption

We had been watching this provision closely since Congress might have allowed TCJA’s higher exemption levels to expire if the election outcome had been different. With Republicans controlling the White House and Congress, it appears more likely that the current exemption limits will be extended—with the possibility that additional estate tax relief could be under consideration.

Uncertainty about taxes remains

Additional tax revenue may be necessary to offset TCJA extensions and new tax cuts. The Republicans’ narrow margin of control in both the Senate and the House of Representatives will require complex negotiations. We will continue to monitor developments on Capitol Hill and will share more information as the debate evolves.

While it’s likely that the tax reform debate will finish by year’s end, it’s important to note that the tax code will still be up for grabs further down the road. Given the increasingly unsustainable deficit and debt situation in Washington and the widening partisan divide in Congress, it's difficult to predict what will happen over the longer term. Just as the tax cuts from the first Trump administration are scheduled to expire, the same may be true for whatever Congress decides during this tax reform effort. Plus, if the Democrats retake power, they will likely want to revisit whatever the Republicans decide to do on tax policy this year, especially for high-net-worth individuals and businesses.

The tax code is only as permanent as the next Congress and President think it should be. That's why it's so important to work with your advisor and tax professional to ensure your financial and estate planning is flexible and takes uncertainty into account. Good planning helps to set you up for success regardless of the tax environment.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.