In Brief: A Year in Review
The 2024 tax environment was shaped by a conglomeration of mixed majorities in Congress, in the composition of the U.S. Supreme Court, and a heightened activity from the IRS. All of it was performed in advance of an election year, amplifying the consequences of these actions. The year began with a bipartisan effort to provide tax breaks to businesses and families alike in the form of the Tax Relief for American Families and Workers Act, but halted months later due to legislative actions.
The U.S. Supreme Court issued significant decisions this year regarding taxation of unrealized income and overturning law-forming deference provided to federal agencies. Meanwhile, the IRS put new funding provided by the Inflation Reduction Act (IRA) to work, with a focus on high-income tax evasion. This year, the IRS identified three additional reportable transactions involving basket contracts, basis shifting, and certain charitable remainder annuity trust transactions while also rolling out proposed and final regulations on the clean energy incentives of the IRA. Here is a deeper look into what happened this year.
The Tax Relief for American Families & Workers Act of 2024
On January 17, 2024, House Committee on Ways and Means Chair Jason Smith (R-MO) introduced the Tax Relief for American Families and Workers Act of 2024. The act sought to provide relief to working families through an expanded child tax credit and spur business innovation and growth primarily through increased deductions for research and experimental expenditures under Section 174, business interest under §163(j), and 100% bonus depreciation for business assets. Furthermore, the act sought to assert increased global competitiveness with treaty-like provisions with Taiwan, provide further assistance for disaster-impacted communities, expand access to affordable housing, and increase Form 1099 filing thresholds. In an effort to provide a revenue-neutral bill, the act also proposed to increase penalties on Employee Retention Tax Credit (ERTC) promoters (a new defined term) related to illegitimate claims of the Employee Retention Credit and shortened the claim period to end after January 31, 2024.
The act passed out of committee by a 40-to-3 vote. This was nearly matched by the House-wide vote, which sent the legislation to the Senate after a 357-to-70 vote. At that point, the bill’s momentum was halted as sufficient support for the legislation never materialized. Of particular concern to Senate Finance Committee Ranking Member Mike Crapo (R-ID) was the act’s allowance for taxpayers to elect to use earned income from the prior taxable year to calculate the credit, potentially allowing individuals who did not work in the current taxable year to receive the credit.
After failing to pass as an amendment to Federal Aviation Administration (FAA) funding legislation, the bill remained inactive for months. That is, until Senate Majority Leader Chuck Schumer (D-NY) filed a cloture motion in late July, prompting a Senate vote on the advancement of the act to a floor vote. On August 1, 2024, the procedural vote occurred, failing 48 to 44 and leaving it short of the required 60 votes. While the act is technically not “dead” and could be reconsidered, the proposals within the act are more likely to be integrated into legislative discussions in 2025 rather than as part of the upcoming “lame duck” session following the November elections.
Supreme Court Rulings
During the summer of 2024, the Supreme Court issued several opinions on consequential tax-related arguments.
Moore v. United States
The Supreme Court held 7-2 in Moore v. United States that the Mandatory Repatriation Tax (MRT), a one-time tax on deferred foreign income included in the 2017 Tax Cuts and Jobs Act (TCJA), does not exceed Congress’ constitutional authority. Charles and Kathleen Moore challenged the constitutionality of the MRT, arguing that they had not realized any income because they did not receive distributions from the controlled foreign corporation (CFC) they owned. The court disagreed with the Moores’ interpretation of a realization requirement. “This Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, confirms that Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners and then tax the shareholders or partners on their portions of that income,” according to the ruling written by Justice Brett Kavanaugh.
The 16th Amendment does not explicitly contain a verbatim realization requirement for income to be taxed, which some lawmakers view as relevant for possible wealth taxes on unrealized earnings. Understanding the effect the ruling could have had on the realization argument, the majority opinion stipulated that the ruling is “narrow” and “limited,” adding that “this decision [does not] attempt to resolve the parties’ disagreement over whether realization is a constitutional requirement for an income tax.” The ruling only interprets Congress’ ability to attribute to a shareholder or partner an entity’s realized and undistributed income and tax them on their portion.
Loper Bright v. Raimondo
The decision in Loper Bright v. Raimondo overturned a four-decade-old precedent—referred to as the “Chevron doctrine”—providing that federal courts give deference to reasonable federal agency interpretations of ambiguous laws. Consequently, the legislative branch may need to write more detailed and specific legislation while the courts retain a greater responsibility in interpreting these laws. As a consequence of the ruling, taxpayers may find more success in arguing a particular tax regulation that they may feel exceeds the IRS’ statutory authority.
Reportable Transactions & IRA Guidance
Reportable Transactions
The IRS issued three proposed regulations this year identifying three proposed reportable transactions involving partnership basis-shifting schemes, basket contract transactions, and certain charitable remainder annuity trust (CRAT) transactions. Participants in designated reportable transactions are required to provide additional information with their tax returns to the IRS because the IRS has determined that the transaction has the potential for tax avoidance or evasion. The transactions have been identified only in proposed regulations and are therefore not in effect until final regulations are promulgated.
IRA Guidance
Many proposed and final regulations related to the IRA clean energy incentives were issued in 2024. That being said, there is still much clarification—or potential changes to proposed regulations—to come. The investment and production tax credits will be shifting to new code sections in 2025 (§§45Y and 48E), both of which received proposed regulations this year. With this shift, taxpayers should be aware of the changing qualifications for eligible properties. Final regulations were issued for the new “Direct Pay” and “Transferability” mechanisms that allow certain tax-exempt and taxable entities to monetize their tax credits. The IRS registration portal required for these mechanisms was live for the first time this year, and taxpayers were able to either receive cash back or sell their credits following receipt of their registration number. Further clarifications were issued related to “bonus” credits, such as the domestic content requirement, that allowed for a new safe harbor that may make the opportunity more broadly pursued and available. In addition, a slew of final regulations related to clean vehicles were issued. All of this to say, clean energy tax credits are still very much a reality and will continue to be so to some extent regardless of the November election outcome.
2024 Election
Election 2024: Possible Implications
The Republican-passed TCJA included some of the biggest tax reforms since the 1980s. The act brought sweeping changes to individual taxpayers by reducing tax rates, doubling the estate tax exemption, and capping deductions for state and local taxes. For businesses, the act slashed the corporate tax rate and introduced a 20% deduction for pass-through businesses. The TCJA was passed with the stipulation that it may not increase deficits beyond 10 years. Therefore, many of the included reforms are now sunsetting at the end of 2025.
Despite Democratic objections to the TCJA historically, based on statements by the Kamala Harris campaign it is likely that Democrats will not oppose TCJA extensions benefiting a certain group of taxpayers. In Harris’ economic agenda released in August, she stated that she “is committed to ensuring no one earning less than $400,000 a year will pay more in new taxes.” The TCJA increased the standard deduction, doubled the child tax credit, and decreased tax rates. Therefore, it is likely that Harris will support TCJA extenders to those making less than $400,000. Harris’s agenda also calls for an increase to the child tax credit to $3,600 per child and $6,000 for newborns, expanding the Earned Income Tax Credit, and cutting taxes to help Americans afford health insurance. Also substantial are her housing affordability initiatives, which incentivize homebuilders to build more starter homes, rental units, and a $25,000 down-payment support for first-time homeowners.
During the Republican National Convention, the party adopted its tax platform containing promises to make permanent the TCJA—including the expanded Child Tax Credit—and eliminate taxes on income derived from tips. It also seeks to shift the nation’s tax burden on foreign exporters through a baseline tariff on imported goods and institute legislation to address “unfair” trade practices. At an estimated price tag of around $4 trillion, the Republican extension of the TCJA may face stiff resistance from its more fiscally conservative faction due to deficit concerns. At the TCJA’s passing, “financing” the bill was partially accomplished through business provisions such as the gradual decrease of bonus depreciation, elimination of the immediate research and experimental expense deduction, and a stricter calculation to deduct business interest. These provisions were considered for repeal or adjustment in the 2024 tax bill noted earlier. Therefore, Donald Trump and congressional Republicans will likely need to look for other measures to fund any TCJA extensions pursued.
Looking Ahead: 2025 & Planning
The monumental changes coming to the tax landscape, coupled with uncertainty as to what Congress wants or will be able to do in the coming legislative year, places taxpayers in a planning predicament. While it may be difficult to ascertain what the laws will be and exactly what to do, beginning with an understanding of some of the more consequential changes and possible planning opportunities is helpful. Also, getting a head start long before the December 31, 2025 sunset deadline will be key to executing any plans made. These things take time, which will be a precious commodity among estate planning attorneys, financial planners, and tax advisors as taxpayers rush to develop and execute plans before the end of next year.
Estate & Gift Tax Exemption
The estate and gift tax applies to transfers of money or property a taxpayer makes, whether while alive (gift tax) or at death (estate tax). The lifetime estate and gift tax exemption allows taxpayers to avoid tax on these transfers up to a certain amount. This threshold doubled from $5 million to $10 million per individual with the passage of the TCJA. These figures are adjusted for inflation annually, resulting in a $13.61 million exemption amount in 2024. Thus, a married couple would have exemption amounts equal to $27.22 million in 2024. However, the exemption is due to return to an amount estimated to be between $6 million and $7 million per individual after indexing for inflation in 2026. Therefore, the amount that a taxpayer may transfer tax-free—while alive or at death—will be reduced significantly.
The historically high lifetime estate and gift tax exemption might provide a once-in-a-lifetime opportunity to transfer hard-earned wealth at a reduced or eliminated tax burden. Strategies may include gifting to family and friends, charitable gifting, use of trusts, family business succession planning, and other means to utilize the exemption while it is still available. To learn more, see our FORsights™ article, “Estate & Gift Tax Exemption Sunsets After 2025.”
Qualified Business Income Deduction
The TCJA dramatically and permanently reduced the corporate income tax rate from 35% to 21%. The term “permanent” is used loosely, as Congress can always change the corporate income tax rate; however, the term distinguishes the reduction from other notable provisions of the legislation set to expire December 31, 2025. The reduced corporate income tax rate does not have a built-in expiration date at the end of 2025. This reduction begged the question of whether a corporate or pass-through entity structure is most advantageous.
The TCJA incorporated a 20% deduction on pass-through business income—the §199A deduction—to counterbalance the new tax rate benefit afforded to corporations. The simultaneous, yet temporary, relief of the §199A deduction for pass-through business income, along with the reduction in the corporate income tax rate, kept the two tax regimes in near parity.
The parity may turn to partiality toward a C corporation structure due to the potential sunset of the 20% deduction on pass-through business income, bringing the top potential tax rate on pass-through business income to approximately 40% versus a flat and permanent corporate rate of 21%. In fact, the Congressional Budget Office (CBO) is trying to calculate the cost to the government due to the expected flood of conversions if §199A is allowed to sunset, according to CBO Director Phillip Swagel in a recent Senate Budget Committee hearing. On the surface, this may appear to be a cut-and-dry analysis; however, considering the potential double taxation associated with corporations and the administrative burden a conversion may incur, a deeper analysis of an organization’s facts and circumstances should occur before quickly adopting a type of entity conversion.
A Whole Lot More
There are dozens of other sunsets coming such as the expiration of the New Markets Tax Credit and the Work Opportunity Tax Credit, elimination of the cap on state and local tax deductions, reintroduction of miscellaneous itemized deductions, the alternative minimum tax exemption and phase-out reductions, and a whole lot more.
Time is of the essence in planning for these changes. Please reach out to a professional at Forvis Mazars for additional information and assistance in considering which of these changes you should begin preparing for and strategies for doing so.
Be sure to join our October 8 webinar as a panel of tax professionals from Forvis Mazars will discuss all of these updates and potential impacts to be prepared for.