In this episode of Adam Talks, IRA Financial’s Adam Bergman Esq. discusses the recent midterm elections and how the divided government may impact your taxes for the next couple of years.
Divided Government – Impact on your Taxes
Hey everyone, Adam Bergman here, founder of IRA Financial and tax attorney. Welcome to another episode of Adam Talks. On today’s episode, we’re going to get into the impact of a divided government, where the Democrats control the Senate, they retain control of the Senate, and the Republicans took control of the House in a, I guess, less than expected victory, but nevertheless, a victory. And today’s podcast is not about going through, going back what went right or wrong for each party, but what will happen potentially to policies, specifically retirement, taxes, the economy with a divided government. And just for the record, I’m a big proponent of checks and balances and I am all in favor of a divided government. This is not a slight against the Democrats or against Republicans. I just like when things happen slowly, when changes happen slowly, methodically, and when there are checks and balances and the Build Back Better Bill, the BBB, was a perfect example when you have one party in total control. And again, the Republicans have done similar things in prior years, so this is not picking on the Democrats. This is just the latest example of when one party has total control, sometimes things get a bit out of hand, especially through the process of reconciliation.
Well, it doesn’t look like we’re going to have reconciliation. Well, we won’t have reconciliation at least until the ’24 election, so there’s going to be no opportunity for either party to have unfettered control over the process and kind of do whatever they want. So, they’re going to have to work together, which, you know what, is the way Washington’s supposed to work. So, Biden is not alone; Obama, Trump, Bush, they each saw their party lose the House. So, President Biden is going to join the club.
But again, this podcast is going to talk about what that means this year, the end of ’22, and primarily ’23. I’m not going to get into ’24 because election cycle and that’s a different subject for a different day. But, the themes I think we’ll see is that you’re going to see Republicans who want to refrain federal spending through budget negotiations and then you’re going to have the Democrats who are on the other hand, going to want to get some stuff done. So, Republicans are certainly going to be against any further tax increases and you’re going to see the Democrats want to use the budget process as a way to get some of their policies through.
So, prior to the election, House Republican members, including Kevin McCarthy, he vowed to open investigations into Hunter Biden’s business dealings, examine the origins of COVID-19 pandemic, and subpoena officials in the charge of the Biden’s withdrawal from Afghanistan. Those actions probably are still going to happen. However, Republicans have a very minor majority in the House, so even if they’re able to get these congressional hearings underway, they’re going to have limited impact because they don’t have a super majority. They’re not going to actually, and don’t control the Senate, and don’t control the presidency, so this is just going to be a lot of grandstanding. You’re not going to see a lot get done.
Let’s talk about the rest of ’22. What can we expect? Well, clearly we’re not going to see any national abortion legislation, voting rights, things like that, climate change, that ain’t happening in ’22, it’s not going to happen in ’23, as well, right? So, what can we expect to happen in ’22? I think you’re going to see, as I mentioned a previous podcast, SECURE Act 2.0 is going to pass, which is exciting new retirement legislation that has near bipartisan support. And you can check out a previous podcast I did on SECURE Act 2.0 which did a couple weeks ago, and go through all the details. I think there’s a chance you’ll see retroactively restoring expenses for research and experimentation, extending 100% bonus appreciation, which will work to 80% probably placed in service after ’22. I think you’re also going to see raising the recently lowered thresholds for payment settlements, reporting on 1099-Ks. So, those are the big stuff, but mostly it’s going to be the SECURE Act 2.0. I think that’s going to be the biggest piece of legislation remaining in ’22 and that’s probably going to get attached to some budget legislation because they’re going to need to get things passed by, I believe the December 16, there is a deadline for the budget and generally, the SECURE Act 2.0, as well as some other minor legislation will get passed along with that budget bill.
But, I think you’re going to see the Democrats be mindful of the fact that they’re not going to have control of the House next year. So, I think they’re going to look to work with their Republican counterparts a little bit closer, especially on budget and maybe look for ways to compromise to get the budget passed, which they have to get it done towards the end of the year.
What about next year? What’s going to happen next year? So, you’re looking at 118th Congress. As I mentioned, the Republicans have a minor advantage, 218 to 212; not as big as they wanted, but still never the less, a majority. What can we expect? Well, first thing, hot button item is crypto regulation. President Biden already said globally there has to be something done. We know what happened with FTX and the contagion that is still brewing around the cryptocurrency marketplace, really because there’s just zero regulation, specifically from non-US exchanges like FTX. The US exchanges, most of them have New York Bit licenses, they are regulated, at least somewhat casually, but at least regulated by the states. But still, there’s really no federal framework like the FCC, the CFTC are still fighting over regulation on certain coins and who’s going to actually regulate these exchanges which we now see are impacting millions and millions of folks with billions and billions of dollars at stake.
So, there is definitely going to be regulation. I think the Democrats and Republicans will both work together to kind of figure something out. I think there is definitely an interest on both sides to getting regulation done for the cryptocurrency market. So, we saw in the past that the CFTC, the Commodities Future Trading Commission, would likely have authority over digital assets bought markets; that can serve a basis going forward.
IRS is another area. We know that $80 billion is going for the IRS. President Biden recently nominated a new commissioner, Danny Wuerffel, served both Democrats and Republicans, okay so, it’s someone that should be supported bipartisanly. But, I think there’s going to be focus on the IRS and what’s going to happen with $80 billion of administration. Republicans could have hearings on it, but they’re not going to do much in terms of reworking that budget allocation because they don’t have super majority in the House to really change legislation.
China – another area I think Democrats and Republicans are both focused on. There’s bipartisan consensus that something needs to get done with China. They’ve grown stronger economically, militarily. So, I think China is an area that you’ll see cooperation. I think there are some must-pass bills that they’re going to have to work together on both sides. For example, there’s the farm bill, federal Aviation Administration Re-authorization Act; there’s a small number of legislative bills as well. But there’s stuff that both houses want to get done, both parties, excuse me, want to get done, and these are must pass bills that will happen in ’23.
Tax and trade, right? There’s a lot of stuff that’s going to happen. There are a number of lapsed tax and trade policies which are views more partisan than others. There will be some effort to restore these so-called lapsed provisions in the lame duck session. If it’s not accomplished in ’22, Congress is going to have to deal with it in ’23, including R&D provisions, change in interest limitations, expensing provisions, and the lapsed expanded child tax credit, which is something the Democrats are really focused on.
On trades, you’re going to see miscellaneous tariff bills, generalized systems and preferences, and other trade adjustments and system programs where both sides are going to have to work together. Congressional Investigations – Democrats will retain control of the Senate and the White House. So, the Republicans in the House will have very limited opportunity to advance policy agenda through legislation. As a result, we know Republicans are preparing to employ congressional investigations. It’s really an alternative way to advance their policy goals, right? Create a lot of noise in the public; social media, and I talked about it, it’s going to be, you know, Biden, Afghanistan, Hunter Biden, IRS, Build Back Better, spending authorization, even the Inflation Reduction Act. So, get ready for that. Potentially even the ESG social investing. Republicans are going to be busy grandstanding; they’re not going to be able to do much, right? But they want to prepare the public for ’24 and really get their policies in front of the American public, so that in ’24, they can attract voters. But, it’s really just grandstanding; there’s not much they’re going to be able to do. Again, because they don’t control the presidency or the Senate. So, they can do a lot of these investigations; they’re great for TV and social media, great sound bites for Twitter, but they’re not going to really accomplish much.
I’m not going to get into Trump and Attorney General here because who the heck knows what’s going to happen, but that’s not going to impact taxes or anything, that’s just policy for ’24. Then the ’24 election is going to be super important from a tax policy standpoint. There’s a lot of scheduled aspects of the Trump Tax Cuts and Jobs Acts of 2017 that’s been quite popular. And ’24, they’re going to have to figure that out because a lot of those provisions lapse in ’25, such as rate cuts, 199(a) deductions, the cap on state and local deductions, the increase in child credit and standard deductions, the Work Opportunity Tax Credit, New Markets Tax Credit, and the Controlled Foreign Corporations look-through rule.
So, a lot of provisions from the Tax Cut Jobs Act of 2017 that President Trump got passed, a lot of those provisions are going to expire in ’25 and whoever controlled the government in ’24 are going to have the opportunity to either extend them or cut them, or maybe renegotiate them. So, ’22 is basically lame duck session. You’re not going to see much other than, I think, SECURE Act 2.0, which will get attached to a budget bill, because they’re going to have to deal with that. The government funding expires on December 16, so they’re going to have to get some type of year-end package, and that’s where they’ll slip in probably the SECURE Act 2.0, and maybe some child credit stuff, but not sure.
And then in ’23, you’re going to see, as I mentioned, just a lot of negotiations, not much happening, but anything that does happen will be bipartisan. So, I think that’s good. As I mentioned, when we started this podcast, I’m all for change, but it should be done slowly, methodically, nothing too bold because generally doesn’t end up having everlasting success. So, I’m all for checks and balances. If I could, I would have a balanced government going forward. It’s just not possible. Some people complain that policies don’t get done, things don’t happen, but they do happen. They just need more consensus and more negotiation, more consensus building, which ultimately is the way the system should work, right? Democrats, Republicans, they should work together, and a lot do; most areas we do. It’s just the big areas like gun control, abortion, climate, some tax policy, they’re super controversial and it’s hard to get most folks on the same line. But for most other stuff, the Republicans and Democrats in the House, Senate, they work together and they respect each other, and Washington works. The big ticket stuff – more challenging, but that’s okay, these are very important areas that sometimes just need more time to come to some more national consensus. And over time, sometimes you just need to have patience to get the right policies pushed forward.
But overall, as I mentioned, look for SECURE Act 2.0 with the funding bill, December 16 or so. Next year, a lot of congressional hearings in the House, small tax policy stuff, nothing major. We’ll see about child tax credit stuff and then ’24 is obviously election year, federal election, president and bang, that’s where the next few years will be determined in terms of who controls what and what policies, especially the Tax Cuts Job Act of President Trump in 2017. How much of some of those policies, good or bad, are going to get extended or get cut or just renegotiated?
So, there you go. I hope you guys enjoyed today’s podcast. I want to wish everyone a happy, healthy Thanksgiving. I hope you get to spend a lot of time with your family, eat well, watch a lot of football, just chill, take a breather from all the craziness going on all over the place. But I will promise to update you; generally, mid-December, we’ll hopefully see SECURE Act 2.0, which is very positive in terms of its ultimate reach and its impact on your retirement accounts. And if you want to learn more about it, just scroll down YouTube or Adam Talks Channel, wherever you pick up your podcast, and you can check out my Talk on it. So, other than that, again, have a great holiday and talk to everyone again next week. Take care.