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The Tax Debate of 2025
Regardless of the outcome of the upcoming election, Congress will have to work with the next president on dealing with the expiration of the Tax Cuts and Jobs Act (TCJA). Most provisions will expire at the end of calendar year 2025. According to the Tax Foundation, full extension of the TCJA would result in $4 trillion less in federal tax revenues over the next 10 years. A tax bill this large, which affects individual taxes, corporate taxes, estate taxes, standard deduction amounts, and other key areas, is fair game for any tax change.
By: Tony Roda, Williams & JensenThere is great uncertainty regarding the outcome of the elections on November 5. There is even uncertainty as to how long it will take after the elections to know who our next president will be, and which party will control the House and the Senate.
The latest polls on the presidential race in the key battleground states all are within the margin of error, with Vice President Kamala Harris holding slight leads in Pennsylvania, Michigan, and Wisconsin, and former President Donald Trump holding slight leads in Georgia, North Carolina, and Arizona. Other states, such as Nevada, also are very close.
There are 70 competitive House races, with 27 rated as true toss ups and those are almost equally split between seats currently held by Democrats and those held by Republicans. As you can see, the House could go either way. The Republicans have the inside track on winning the Senate majority. The current Democratic majority is 51-49, but West Virginia will flip into the GOP column and Senator Jon Tester (D-MT) is trailing in the polls. Other Democratic held seats in Ohio, Pennsylvania, Wisconsin, and Michigan are tight.
All this uncertainty, however, does not extend to the fact that the next Congress, no matter which party controls each chamber, will have to work with the next president on dealing with the expiration of the 2017 tax law, known as the Tax Cuts and Jobs Act (TCJA). Most provisions will expire at the end of calendar year 2025. If Congress does not act, taxpayers will see major changes to their tax treatment when they file their return for tax year 2026, which would be in the first quarter of 2027. To prevent this, Congress needs to act in 2025 or early 2026, and it will need the next president to sign the measure into law.
According to the Tax Foundation, a Washington, D.C.-based think tank, full extension of the TCJA would result in $4 trillion less in federal tax revenues over the next 10 years – a staggering amount. A tax bill this large, which affects individual taxes, corporate taxes, estate taxes, standard deduction amounts, and other key areas, such as the $10,000 annual cap on the deductibility of state and local taxes, is fair game for any tax change.
This fact has not been lost on the pension staff of the Congressional tax-writing committees, namely the House Ways and Means Committee and the Senate Finance Committee. The retirement community still is in the throes of navigating the new tax-related retirement provisions of the SECURE Act of 2019 and the SECURE Act 2.0 of 2022. Regulatory guidance is being released by the Treasury Department and the Internal Revenue Service and retirement plans are making changes and adapting accordingly. However, once Congress begins down the path of extending the tax benefits of TCJA, there will be an opportunity for additional changes to retirement tax law.
Specifically in the case retired first responders, the next round of retirement changes could bring about an increase in the annual cap under the Healthcare Enhancement for Local Public Safety Act (HELPS). The SECURE Act 2.0 made direct payment under HELPS optional and created an alternative to the original method by allowing the retirement system to make the distribution to the retired public safety officer. The retiree can now make the premium payment to the insurance provider and remain eligible for the up to $3,000 per year tax exclusion.
Successfully fixing the direct payment requirement in the SECURE Act 2.0 now allows NCPERS and others in the public safety stakeholder community to focus on increasing the annual exclusion cap. The $3,000 cap has not been increased since its inception in 2006 despite significant increases in premiums for health care and long-term care insurance over the past 18 years.
In addition, numerous retirement-related provisions in the tax code are indexed for inflation, including annual limits for contributions to 401(k), 457(b), and 403(b) accounts. This is done as a matter of fairness for taxpayers. During consideration of the next tax bill, we expect discussions on whether to index the HELPS annual exclusion for inflation in future years.
Also on the first responder front, S. 4267, which was introduced by Sen. Michael Bennet (D-CO) in the 117th Congress, would create a new tax credit for retired first responders for health care premiums of up to $4,800 per year.
On the defensive side of the ledger, bear in mind that the original House-passed version of TCJA contained a provision to specifically subject investments of state and local governmental pension plans to the Unrelated Business Income Tax (UBIT). Analysis of the provision at the time concluded that UBIT would cover certain private equity and hedge fund investments. NCPERS, among other stakeholders, took the lead in lobbying against this provision, and it was not included in the final TCJA. However, because it was a Republican initiative, it may resurface in the next Congress in a GOP-controlled Senate or House.
Please know that NCPERS will be closely monitoring tax legislation in the next Congress. We will look for opportunities to advance our offensive agenda, and play defense, if necessary, on UBIT and any other problematic proposals that arise. We will keep you apprised of significant developments as the new Congress gets underway.
Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Nebraska, Ohio, Tennessee, and Texas. Tony has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.
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