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As I write this, the U.S. Congress has once again waited until the last minute to pass a spending a bill. Rather than focusing on a long-term budget, a continuing resolution bill was passed. Such bills merely kick the can down the road until the drama repeats itself again. (In this case, in late January and early February 2024.)
What works well over the short term for bringing in campaign contributions frequently comes at a long-term cost to the country as a whole. “There is an increased risk that political divisions could further constrain the effectiveness of policymaking by preventing policy action that would slow the deterioration in debt affordability. These risks underscore rising political risk to the US’ fiscal position and overall sovereign credit profile,” noted Moody’s in early November. The credit rating agency put U.S. sovereign debt on “negative watch,” while affirming its Aaa rating.
Beyond the short-term budget battles is the looming expiration of many parts of the 2017 Tax Cuts and Jobs Act (TCJA). Lower tax brackets, higher standard deductions, the suspension of the personal exemption, higher alternative minimum tax (AMT) exemptions and other changes are set to expire at the end of 2025. Congress will need to either extend the TCJA or pass new tax reforms to prevent these provisions from sunsetting.
There seems to be little agreement right now. The Kiplinger Tax Letter recently noted that “several Republicans” from California and New York have been holding up tax bills in an effort to repeal the $10,000 cap on state and local income taxes (SALT). Democrats have their own internal divisions about tax policies as well.
One would expect taxes—and particularly the TCJA—to be a big issue in the 2024 elections, with both the White House and control of Congress up for grabs. Depending on who the major parties eventually nominate—and whether there is a third-party candidate capable of getting enough support to have a significant impact—the focus of the campaigns may well be on other topics.
Certainly, well-reasoned debates have been replaced by talking points and misinformation. This is unfortunate, because forthcoming sunsetting of many of the TCJA’s changes provides an opportunity to think about the long term. The dates are nearing for when the hospital insurance (Medicare) trust fund and the Old-Age and Survivors Insurance (Social Security) Trust fund become depleted. A long-term plan for addressing the federal debt is needed before the bond market insists upon it.
Beyond these issues, I find myself in the unenvious position of wanting to defend the Internal Revenue Service (IRS). Among the agency’s primary functions is bringing money into the government. Part of this function involves enforcement, but audit rates remain near historical lows. This makes it easier for those who want to skirt the law to do so.
There are other ways that maintaining higher funding to the IRS would help. There has been a documented backlog of processing paper returns. The agency’s computer system needs an update—including for cybersecurity reasons. Greater availability to answer taxpayers’ questions would be a positive.
The agency itself is taking a positive step forward with its Direct File pilot. This test, which will be run in 2024, will allow certain taxpayers to file their returns directly with the IRS. It doesn’t replace tax professionals or third-party applications and websites; rather it is a free alternative. Several states allow taxpayers to file directly with them, including Illinois, so it’s time the federal government does as well.
No one likes paying taxes, including me. Do I think the tax code needs to be simplified? Yes. Is my preference to keep taxes to the bare minimum required for the government to function effectively? Absolutely. Do I think Congress will wait until late 2025 before passing a follow-up bill addressing the TCJA’s sunsetting provisions? Sadly, yes.
We can’t fix the political environment. We can help you make sense of the tax code. Our annual tax guide is featured in this issue. In it, we share the key 2023 rates, deductions, limits and exemptions the majority of individual investors will need to know. We also discuss the changes coming in 2024—including those parts of the SECURE 2.0 Act that will go into effect.
On behalf of everyone at AAII, I wish you a happy holiday season,

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ROBERT A from NC posted over 2 years ago:
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