Perspective :

Tax code changes

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Ideas are easy. Passing them is harder.

I’m a lifelong Dallas Cowboys football fan. I come by it naturally, having been born and raised in the Dallas-Fort Worth area. Back in 1985, the Cowboys were about to play the Chicago Bears – who had one of the greatest defenses of all time. I remember Cowboy coach and legend Tom Landry being interviewed before the game about how Dallas would move the ball with purpose against the Bears. The Cowboys lost 0-44. It was brutal. It was much easier to talk about scoring against the Bears than actually doing it.

As we head into the November election season, investors will hear many takes and analyses on what may or may not change regarding the tax code. However, just like Tom Landry’s pre-game views, getting meaningful tax change across the goal line is much easier said than done.

For tax changes, a President cannot make changes to the U.S. tax code by fiat. You may recall the great School House Rock video How A Bill Becomes A Law. It takes agreement from the President, the House, and the Senate.

Much of the discussion will be around what – if anything – happens around the planned expiration of parts of 2018’s Tax Cut & Jobs Act (TCJA). I wrote about some of the key parts last November in our blog: What Advisors Need To Know About Expiration of TCJA. The key point is that absent government action, rates for many may well increase.

These individual portions of the TCJA were temporary because the budgetary costs were too high. By making the cuts temporary, they could thread the needle regarding the total cost of the bill. The Congressional Budget Office (CBO) forecasts that making the lower tax rates permanent would add $2.2 trillion to the deficit for the years 2026-2034.

President Biden included some proposals in his recent budget submittal. Many of these ideas were also part of his 2020 platform. However, even with two years of narrow majorities across the House and the Senate in 2021 and 2022, none of these were implemented.

Headline items that may impact individual investors from President Biden’s proposals

Headline items from presumptive Republican nominee Donald Trump’s proposals

For the Biden proposals, it’s worth reiterating that many of these same proposals were part of his 2020 platform and most did not see the light of day – even with two years of majorities in the Senate and the House.

The real discussion will be how to address the expiration of the parts within the Tax Cut Jobs Act. We know that – absent government action – those rates will change. It will be an interesting summer/fall, for sure. If the Republicans capture the White House and only the House or only the Senate, deal-making may well occur regarding how to address the expiring items. Even after all the votes are counted, tax policy for the next 18 to 24 months may be uncertain.

The takeaway

Like investing, advisors should focus on probabilities, rather than possibilities when it comes to tax changes. We know that being tax smart and understanding the intersection of investments and taxes will have a meaningful impact on your clients. We also know that proposing tax changes is easy, but passing them can be quite challenging.

Sources: White House Release March 11, 2024. Tax Foundation: Tracking 2024 Presidential Tax Plans. CBO:  Budgetary Outcomes Under Alternative Assumptions About Spending and Revenues, May 8, 2024

Information provided herein reflects Frontier’s views as of the date of this presentation and can change at any time without notice.

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Frontier does not provide tax advice. Please consult with a CPA for recommendations pertaining to individual circumstances.

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