Election 2024 – what to do about expiring Trump tax cuts?

Many provisions of the 2017 “Tax Cuts and Jobs Act” (AKA the “Trump tax cuts”) are set to expire in 2026, generating a tax increase for many individual taxpayers. The Joint Committee on Taxation estimates that extending current individual tax rules for another 10 years (the “budget window”) would increase “primary deficits” by $3.3 Trillion. 

Whoever wins in November – whether we have Democrat or Republican control or a divided government – will in 2025 have to reckon with a tax/fiscal challenge: allow the TCJA to expire (resulting in increased taxes for many individuals), find some new source of revenues, or face a significant increase in the federal deficit. And the 2024 winners’ policy priorities will (of course) inform how the choices between those options will be made. 

In this article we briefly review significant TCJA tax provisions set to expire and discuss what a reversion back to the pre-TCJA regime would mean for retirement savings incentives. We then discuss possible “revenue raisers” that policymakers might look for out of the retirement savings system. We conclude with a brief note on the effect on these issues of an increase in the corporate tax. (The TCJA reduction in the corporate tax, from a top rate of 35% to 21%, is not expiring, but it has been targeted by Democrats for an increase to 28%.) 

Major individual tax provisions that will expire in 2026

The table below shows the cost of extending the three biggest individual tax provisions in the TCJA. We provide these numbers simply to give an idea of the magnitude of the challenge Congress is facing. 

*This is the cost to make the relevant TCJA provisions permanent, as estimated by the Congressional Budget Office. 

**This amount is nearly entirely offset by TCJA changes to itemized deductions. 

***Generally (and with a number of exceptions and special rules), qualified business income from a partnership, S corporation or sole proprietorship. 

Significance for retirement savings

The first thing to note is that, at the margin, the elimination of the TCJA tax cuts would generally increase the value of saving in a tax qualified retirement plan – higher tax rates mean that retirement savings saves more in taxes. We deal with this issue in detail in our 2017 article reviewing the TCJA when it was passed. 

Particularly for high earners (many Democrat tax proposals target individuals earning more than $400,000 a year), an increase in marginal rates will make retirement savings more attractive. The same holds for small business owners, if the 20% deduction for passthrough income is cut back or eliminated – indeed, in 2017 some industry groups expressed concern that this provision would discourage small plan formation. 

Retirement policy as a source of revenues

One “solution” to the challenge policymakers will face is to increase revenues outside of the income tax system. In the past, when Congress has needed revenues, it has looked to changes in the retirement system as a way to increase revenues without literally raising taxes. These needs have been met over time by changes as diverse as pension funding relief and Roth contributions each of which delays tax deductions and is therefore scored as a revenue raiser. 

DC plan vulnerabilities

In 2017, there was serious consideration (especially by Republicans) of “full Rothification” – requiring that, e.g., all 401(k) contributions be made on a Roth basis – no tax deduction/exclusion when a contribution goes in, no taxation when it is paid out. 

As we discussed in our article on this proposal (Roth only?), such a change would push much of the cost (in increased tax benefits/reduced tax revenues) of, e.g., 401(k) retirement savings outside of the 10-year budget window. That would, in the short run, help solve the policymakers’ problem. But it would also reduce the flexibility and tax utility of 401(k) savings for many participants. Indeed, the 2017 Rotiification proposal was in the end so controversial that it was dropped from the final version of the TCJA. 

Rothification of 401(k) catch-up contributions, however, was adopted as a revenue raiser in SECURE 2.0 – so it appears that Congress is still willing to “go there” on Rothification. 

Democrats have also advocated for a cap on total account balances in qualified retirement savings vehicles, and on closing the door on back door Roth conversions. (On these proposals, see our article on President Biden’s FY2025 Budget Proposals.) 

Any or all of the foregoing may be on the table in a hunt for revenues to support an extension of all or some portion of the TCJA tax cuts. 

DB plans

With respect to defined benefit plans, Congress seems to have reached its limit on increasing PBGC premiums to generate revenues. And with interest rates still relatively high, reducing defined benefit plan funding requirements to generate revenue (via reduced contributions/reduced tax deductions) may also be a stretch. 

Obviously, we are in a very fluid policy situation, with, e.g., Vice President Harris demonstrating an openness to significant macro tax policy changes – e.g., a possible wealth tax and a tax on unrealized capital gains. If policymakers take a hard look at the retirement system as a revenue source, more fundamental changes could also be considered. 

Corporate tax

As noted, the TCJA reduction in the corporate tax will not be expiring, but at least one candidate, Vice President Harris, has proposed increasing it to 28%.  

In our article Corporate tax reform and retirement savings tax policy, we noted that, as the late Professor Edward Kleinbard (USC Gould School of Law) vividly put it in 2016: “the corporation is … a wonderful place to collect tax on those investors who otherwise would be tax exempt without punching them in the nose with the fact that we’re now going to impose tax on them.” 

Thus, the TCJA reduction in corporate taxes was a boon to retirement plans and retirement savers – they paid lower taxes at the corporate (investment) level. It’s elimination/scaling back, as part of more comprehensive tax reform, would at the margin reduce retirement plan/retirement saver investment returns. 

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We will continue to follow these issues.