Will Any Tax Priorities Gain Ground in 2023?

As a result of the most recent midterm elections, the balance of power in Congress is split for the next two years. Democrats retain control of the U.S. Senate and Republicans control the U.S. House of Representatives. That split means that if Republicans and Democrats cannot find common ground, significant disagreements around issues like immigration, abortion, gun control, and yes — taxes, will continue. And because of that, some 2023 tax issues that can impact your finances, like whether the expanded child tax credit will be brought back, or whether the so-called Trump tax cuts will be made permanent, might not get addressed.

So, what 2023 tax priorities might be on Congress’ to-do list in 2023? A few issues —some of which involve popular tax deductions — are highlighted below.

2023 $1.7 Omnibus Spending Bill

At the end of last year, Congress came to an agreement on FY 2023 spending. The $1.7 trillion fiscal year 2023 omnibus appropriations bill contains over $770 billion for non-defense spending. That part of the package includes increased funding for nutrition, affordable housing programs, healthcare research, education, and childcare.

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There is also funding in the FY2023 budget bill for assistance to Ukraine, and NATO allies, and more than $40 billion for assistance to people dealing with U.S. natural disasters like wildfires, flooding, and hurricanes. The massive spending bill also increases funding for Veteran Administration medical care and allocates $858 billion in defense spending.

However, the FY 2023 spending bill doesn’t address several key tax issues that have been on Congress’ “to-do” list for a while. For example, the omnibus bill doesn’t address R&D credits and bonus depreciation.

Federal R&D Tax Credit and Bonus Depreciation

What’s the deal with research and development (R&D) tax credits? Businesses that, as of last year, must amortize their research and development costs over five years, would still like to see Congress address R&D tax relief in 2023. (The federal R&D tax credit is designed to incentivize R&D investment by allowing companies to claim a tax credit for certain research and development expenses.)

But given the deep divisions in Congress, it’s hard to say whether lawmakers on both sides of the aisle can garner the votes for bipartisan R&D tax changes. 

SECURE 2.0 Retirement Savings Changes

On the bright side, there was sufficient bipartisan support, at the end of 2022, to pass major retirement legislation. That legislation called the SECURE 2.0 Act of 2022, was included in the FY2023 omnibus spending bill signed by President Biden.

The SECURE 2.0 Act of 2022 makes numerous changes to existing retirement account rules including but not limited to 401(k), 403(b), IRA, and Roth accounts, and some related tax breaks. One significant change delays the age for taking required minimum distributions (RMDs).

Supporters of the legislation say that the changes in the SECURE 2.0 Act are designed to encourage more workers to save for retirement. Although others have expressed concern that some provisions in the SECURE 2.0 Act of 2022 primarily benefit high-income earners.

Child Tax Credit 2023?

Congress hasn’t passed tax extenders in the last two years, and popular pandemic-related provisions like the expanded child tax credit expired. The 2021 enhanced child tax credit was enacted with the American Rescue Plan Act (ARPA). ARPA allowed eligible families to in 2021, receive advanced payments of up to either $250 or $300 a month (per qualifying child), for six months, depending on the age of each child. 

Democrats and various advocacy organizations have pushed to reinstate the enhanced child credit, which data show effectively helped to reduce the child poverty rate. But even though Democrats have control of the Senate, they don’t have an apparent legislative path to bring back the enhanced child tax credit without Republican support.

At the end of 2022, there was some speculation that Democrats could agree to support R&D relief if Republicans agreed to reinstate the expanded child tax credit. But the cost of reinstating the expanded child tax credit, and other issues including a Republican-proposed work requirement for the credit, stalled those talks.

So, while it is unclear whether the enhanced child tax credit could be reinstated in the future, the popular tax credit is gone now.

Solar Panel Incentives and Electric Vehicle Tax Credits

Implementing the many clean energy tax credits and incentives in the Inflation Reduction Act seems to be proceeding. Currently, the Treasury Department and the IRS are seeking public input to propose regulations to implement the more than 200 tax incentives in the new law. 

Those credits include popular electric vehicle tax credits, which can be as much as $7,500 and tax credits for green, energy efficient home improvements including the installation of home solar panels.

However, House Speaker Kevin McCarthy (R-Calif.), has repeatedly vowed to block the $80 billion in funds allotted in the Inflation Reduction Act for the IRS. A debt limit deal passed by Congress in early June clawed back some of that funding. McCarthy and other Republican lawmakers have claimed that the funding will result in an “army” of 87,000 IRS agents coming to audit middle-income Americans.

Trump Tax Cuts

House Republicans have pledged to eventually propose legislation to make the so-called Trump tax cuts permanent. The individual tax cuts were enacted with the Tax Cuts and Jobs Act of 2017 and many of the tax breaks tied to individuals are set to expire after 2025.

However, it’s unclear at this time what specific tax policies the GOP will pursue and whether any of those policies can gain traction. That’s in part because the Republican House majority is narrow. 

But additionally, President Biden has veto power and the amount of political division in Congress makes any Congressional override highly unlikely.