Strategic tax planning: Responding to political change

The current tax landscape

The tax landscape has undergone significant transformations driven by technological advancements and pivotal regulatory changes.

These changes have introduced new uncertainties and challenges for tax and accounting firms, compelling them to adapt swiftly to maintain efficacy and compliance. Additionally, the political and legislative shifts anticipated with the 2024 U.S. election could further influence tax policies, potentially altering the operational dynamics for professionals.

Legislative uncertainty and complexity

The tax landscape is marked by uncertainty, primarily due to the expiration of provisions under the TCJA. This complexity is heightened by constant changes in tax laws and regulations, both domestically and internationally. Shaun Hunley, Executive Editor at Thomson Reuters, noted during a recent webcast, "The tax landscape is very uncertain. I think it's complicated. I think people are really worried about what kind of legislation we're going to see, primarily in response to the sunset of the Tax Cuts and Jobs Act." One certainty for professionals is the continuous need to adapt to these changes, which may even be retroactive.

Expiring provisions of the TCJA

The Tax Cuts and Jobs Act, enacted in December 2017, brought significant tax code reforms affecting individuals and businesses. It simplified filing for many Americans by increasing the standard deduction and lowering tax rates across the board. However, many of the provisions enacted by the TCJA will expire at the end of 2025.

Critical expiring provisions include:

1. Standard deductions. The TCJA nearly doubled the standard deduction amounts, but these will revert to approximately half their current value, adjusted for inflation, starting in 2026.
2. Individual tax rates. The reduced individual rates will return to their pre-TCJA levels, which include higher brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
3. Child tax credit. The credit, which increased to $2,000 per qualifying child, will revert to $1,000 per child with more restrictive phaseout thresholds.
4. State and local tax (SALT) deduction. The current $10,000 cap on SALT deductions will be lifted, generally allowing taxpayers to deduct all eligible state and local taxes.
5. Estate and gift tax. The exclusion amount will decrease from $10 million to $5 million per decedent, adjusted for inflation.
6. Qualified business income (QBI) deduction. This deduction for pass-through entities will be eliminated, impacting many small business owners.

While both businesses and individuals will be impacted, most of the provisions set to expire will notably impact individuals and families. Monitoring legislative developments is essential, and accountants must remain aware of any possible extensions that could affect their individual clients and proactively communicate with them in order to manage expectations and prepare for financial impacts.

Using tools and resources like Thomson Reuters Checkpoint Edge can help professionals keep up with tax policy changes as they happen with timely alerts and trusted guidance so they can manage the latest regulatory changes effectively.

Implications of the U.S. election on tax policies

The 2024 U.S. election presents a pivotal moment for tax policies, with the two major political parties offering distinctly different visions that reflect their broader ideological stances. This divergence creates a landscape filled with both opportunities and challenges for tax professionals and taxpayers. Comparing Democrat and Republican Party platforms can shed light on the possible post-election tax landscape.

Republican tax policy proposals:

• The Republican Party aims to solidify the temporary measures introduced by the TCJA by making them permanent, which would include maintaining reduced individual and corporate tax rates.
• They propose a significant reduction in the corporate tax rate to 15%, specifically for companies that manufacture within the U.S., aiming to boost domestic production.
• Republicans are advocating for the extension of all expiring TCJA provisions and are pushing to eliminate taxes on social security benefits, gratuities, and overtime pay.
• They favor a reduction in IRS funding, especially in enforcement areas, and oppose the OECD's Pillar Two framework, which seeks to establish a global minimum tax rate.

Democratic tax policy proposals:

• The Democratic Party plans to let the TCJA provisions expire for taxpayers earning more than $400,000, effectively increasing their tax rates.
• They propose raising the corporate tax rate to 28%, reversing a major corporate tax cut made by the TCJA.
• In contrast to Republicans, Democrats support maintaining or even increasing IRS funding to enhance enforcement capabilities.
• They favor adopting the OECD's Pillar Two framework, aligning with international efforts to combat tax avoidance.
• Democrats also advocate for social equity through tax policy by proposing increases in the child tax credit and extending subsidies under the Affordable Care Act.
• They aim to make the estate tax exemption more restrictive and ensure that any tax reform does not add to the national debt, focusing on tax increases for large businesses and high-income individuals.

The stark differences in these policy platforms underscore the significant impact the election results could have on the future tax landscape. Professionals must prepare for various scenarios, as the outcome could substantially shift strategies and compliance requirements.

Strategies for tax professionals

In this ever-changing tax environment, professionals must adopt a strategic approach to remain effective and provide value to their clients. Doing so means not just keeping up with new laws but also mastering the art of data analysis, proactive client communication, and comprehensive advisory services.

Emphasize continuous education

Continuous education is paramount for tax professionals aiming to stay current with evolving laws and regulations.

Consider these fundamental strategies to prioritize:

• Engaging in regular training sessions
• Attending industry conferences
• Subscribing to tax law updates

Tax professionals can effectively navigate changes and challenges by prioritizing continuous education and staying informed and proactive while also addressing clients’ needs. This method enhances their expertise and ensures that their advice is based on the most current information, thereby increasing the trust and reliance placed on them by their clients.

Leverage data analysis

Effective data analysis is crucial for understanding and predicting the potential impacts of tax changes on various client segments. By employing data-mining techniques and scenario modeling, professionals can uncover patterns and forecast future trends, allowing for more informed decision-making.

This approach helps craft personalized strategies for clients, optimize their tax positions, and mitigate risks associated with legislative changes.

Communicate proactively with clients

Maintaining open lines of communication with clients is essential, especially during periods of uncertainty. Promptly addressing concerns builds trust and shows commitment to client success.

Regular updates about potential tax changes and their implications can help manage clients' expectations and prepare them for necessary adjustments. This strategy not only reinforces positive relationships with clients but also positions tax advisors as essential partners in financial planning.

Expand advisory services

The advisory role of tax professionals is crucial in the evolving landscape as it allows them to position themselves as informed advisors amidst legislative changes and increasing client demands. By staying updated with these changes, professionals can provide valuable advice, helping clients navigate disruptions effectively. Dan Winnick, Principal at KPMG, noted during a recent webcast, "This is a great way to build relationships with clients and think about the future of their businesses.” An advisory role aids in managing stress by turning challenges into opportunities and also strengthens client relationships.

Engage in scenario planning and prepare staff

Preparing for future changes is critical, and scenario planning plays a vital role in this process. Tax firms should conduct regular training sessions to ensure they’ve equipped all team members to handle various scenarios.

For instance, creating detailed plans for different potential outcomes of tax legislation can enable a swift and effective organizational response when changes occur. This readiness ensures that the firm can continue to provide high-quality service without disruption.

By implementing these strategies, tax professionals can effectively navigate the complexities of a fluctuating environment, ensuring they remain ahead of changes and continue to offer valuable, strategic advice to their clients.

Navigating the uncertainty with proactive strategies

The complexities of the ever-evolving tax landscape and political shifts create uncertainty and complexity, and understanding the implications of these shifts is crucial.

By staying informed and adopting proactive strategies, tax professionals can effectively navigate these uncertainties with confidence. For techniques and tools to navigate the uncertainties ahead, watch our on-demand webinar, “Strategic tax planning in a changing political landscape.”

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