On January 20, 2017, Republican President-elect Donald J. Trump will be sworn in as the 45th U.S. President. Additional factors, such as the incoming Republican majorities in both the House and Senate and indications of a Congress motivated to take up reform early in the session, combine to make the prospect of tax legislation and comprehensive tax reform important planning considerations. Here’s what you need to know to evaluate the possibility of tax changes in 2017.
Before considering what tax change might look like, it is important to reflect on legislative process aspects in light of the recent election results. Ideas for tax change can come from anywhere; however, the U.S. Constitution provides that all bills for raising revenue, i.e., tax legislation, must originate in the House. Bills introduced proposing tax change are referred to the House Ways and Means Committee for study; a public hearing is typically held and, after deliberation, the committee votes to determine if the bill will advance to the House floor for consideration. If the bill passes with a majority in the House (218 of 435 representatives), the bill is considered by the Senate Finance Committee before advancing to the Senate floor for debate and approval. With a simple Senate majority (51 of 100 senators), the bill will go to a conference committee consisting of House and Senate members to reconcile any differences between the two versions of the bill. The result is voted on again by Congress and, if approved, goes to the president for signature or veto. Enacted tax bills become tax law and part of the Internal Revenue Code.
While only a simple Senate majority is necessary for a bill’s approval, 60 votes are necessary to overcome a filibuster, which can stall the bill and prevent it from advancing through the legislative process. Republicans will control the Senate in January, with 51 Republican Senators and a possible 52nd pending the results in Louisiana. Lacking the 60 votes to invoke cloture in the Senate, House Republicans have indicated the Republican-controlled Congress may advance tax reform legislation using budget reconciliation procedures, which expedite legislation and prevent filibuster. However, there are limitations to the use of these procedures; importantly, a 60-vote supermajority is necessary under the Congressional Budget Act and Impoundment Control Act of 1974 to approve provisions that lose revenue beyond the budget window. Initial unofficial estimates show Republican tax proposals losing revenue from the budget window, meaning compromise likely will be needed to garner bipartisan support and advance any tax reform legislation outside the budget reconciliation procedures.
Republican control of the White House and the 115th Congress means the tax proposals of President-elect Trump and House Republicans likely will heavily influence any tax change. The House Ways and Means Committee’s blueprint of tax reform, A Better Way: Our Vision for a Confident America (Better Way Blueprint), was released June 22, 2016, and provides the tax reform vision of House Republicans. President-elect Trump’s campaign tax proposals similarly calls for comprehensive tax change. Many of Trump’s tax proposals have yet to be fully developed and are expected to be refined in early 2017 with a formal budget proposal.
The following compares current tax law provisions to highlights from the business, individual and transfer tax proposals of President-elect Trump and the Better Way Blueprint at the time of writing:
The Outlook for Tax Change Is Uncertain
It is impossible to predict the possibility or the substance of tax reform. This creates a large amount of uncertainty for taxpayers and their advisors in 2017 and beyond. Public hearings and deliberation by the House Ways and Means Committee already have occurred on Better Way Blueprint tax proposals, possibly paving the way for tax legislation to move quickly through Congress. However, it is uncertain if the tax proposals of President-elect Trump and House Republicans can be reconciled and bipartisan consensus achieved early enough in the year to be considered in 2017. Furthermore, it’s unclear if any tax legislation enacted during 2017 would be retroactive to January 1, 2017.
While there are many differences between the tax proposals of President-elect Trump and Better Way Blueprint, both plans call for lower individual and business tax rates. Taxpayers that expect to see tax change and lower tax rates in 2017 should evaluate year-end tax planning strategies to accelerate deductions to 2016 and defer income. To learn more, see BKD’s article, “Planning for Tax Change & Lower Tax Rates under the Current Tax Proposals.”
Other factors create additional complexity in navigating the tax landscape. Numerous individual and business extenders that were retroactively and temporarily extended by the Protecting Americans from Tax Hikes Act of 2015 are set to expire December 31, 2016. The fate of these provisions is uncertain pending future legislation, which may be considered during the “lame-duck” session of Congress or in 2017 with a retroactive application. For a complete list of provisions scheduled to expire at the end of 2016, see BKD’s 2016 Tax Advisor article.
The fate of recent controversial treasury regulations, particularly the proposed regulations limiting valuation discounts under Internal Revenue Code Section 2704, also are uncertain following the election due to the change in the political landscape. For more discussion on these new proposed regulations, see BKD’s August 2016 article.
The uncertain tax environment makes year-end tax planning difficult, and careful consideration must be given to the implementation of any plan related to possible tax reform. Reviewing your tax plan with your BKD advisor on an ongoing and regular basis will prepare you for whatever the future holds.
To learn more about how the election results and outlook for tax change may affect your tax situation and discuss planning opportunities, contact your BKD advisor.