The debate about Republicans’ tax legislation is still playing out in Washington, with little expectation that the Senate will move to cleanly approve the version passed by the House a few weeks ago.
A Senate-altered bill would trigger a bicameral negotiation process that could substantially alter the final legislation. As such, experts say, the tax policy outlook for 2026 and beyond is something of a mystery. While there is more certainty around President Donald Trump’s ongoing push to shrink the Internal Revenue Service, the federal tax policy and enforcement situation remains fluid.
Still, as covered by a panel of experts convened for a recent ThinkAdvisor webcast, it’s important for financial advisors to keep up with the legislative machinations — if only to be able to answer clients' questions about where the process stands.
The presentation was given by William H. Byrnes and Robert Bloink, professors who are behind Tax Facts. It addressed a number of topics, including the potential adjustments to individual and corporate tax provisions; structural IRS reforms that may affect compliance and advisory practices; the withdrawal of several IRS administrative notices; and the rollback of regulations issued under the Biden administration.
All advisors will benefit from keeping informed about potential federal policy changes, Bloink and Byrnes said. Here are seven developments — some more likely than others — to be on the lookout for.
1. A major rate reset if the tax bill fails.
Many tax law provisions are set to expire at the end of 2025, the professors detailed. These reversions would have a collective effect on clients across the wealth spectrum.
In limbo are the current tax rate brackets, the increased standard deduction, the suspension of the personal exemption, the current child tax credit level, the current mortgage interest limitations and the suspension of miscellaneous itemized deductions.
There are also significant changes affecting the Section 199A deduction for qualified business income of pass-through entities and Section 179 expensing provisions.
2. An increase in the SALT tax deduction limit.
One area of substantial disagreement among lawmakers, according to Bloink and Byrnes, is the limit on state and local tax deductions, currently set at $10,000.
The House-passed draft of the tax bill would quadruple the SALT cap to $40,000 per household, or $20,000 for married taxpayers filing separate returns. Senators have floated a $30,000 cap.
Another key feature of the House bill is that the SALT deduction cap phases out once modified adjusted gross income exceeds $500,000, which is up from $400,000 in a prior draft.
Generally, Bloink and Byrnes said, blue-state Republicans from high-tax regions support these changes, and some senators may fight to push the limits even higher.
3. No tax on overtime — but with limits.
Some overtime wages would be exempted from taxes under the House-passed legislation, but there are limits, and the entire policy would expire after 2028.
Specifically, highly compensated employees are not eligible for the deduction. In this context, the 414(q) definition of highly compensated employee applies to 5% owners and employees who the employer paid more than $160,000 in the preceding year.
4. Tax-free tips would have limits, too.
The House bill provides an above-the-line deduction for tip income, but as with overtime, highly compensated employees are not eligible.
Here, “tips” are defined as amounts that are paid voluntarily, not subject to negotiation and determined by the payor. Likewise, tipping must be “traditional and customary” in the taxpayer’s occupation, and the deduction would expire after 2028.
5. Some green energy credits could be going away.
Were the House bill to become law, credits for electric vehicles would be repealed immediately.
There are limited exceptions, including for vehicles placed in service during 2026 if the manufacturer has not sold over 200,000 vehicles in the United States from 2010 through 2025.
The credit for energy efficient homes would also be repealed immediately, with an exception through 2026 for homes where construction began before May 12, 2025.
6. Fewer audits.
As Bloink and Byrnes reviewed, the IRS lost 11% of its staff during the first three months of 2025 through terminations and voluntary separations.
About 31% of those employees were revenue agents responsible for conducting audits, according to a report by the U.S. Treasury Inspector General for Tax Administration. According to the Yale Budget Lab, reductions in force could cost nearly $160 billion from reduced collections following audits and reductions in voluntary tax compliance, the professors noted.
According to the CBO, a $5 billion reduction in funding would reduce revenues by $5.2 billion from 2024 through 2034 and increase the cumulative deficit for that period by $200 million.
7. Lighter regulation for business owners.
In April, Treasury and the IRS announced intent to remove certain partnership anti-abuse regulations that were finalized in January. In doing so, the IRS cited Trump’s executive order directing agencies to review and remove regulations that “undermine the national interest.”
The regulations would have required partnerships to disclose information about certain transactions involving distributions and transfers of partnership interests and assets when those transactions could potentially be abusive.
As the professors explained, the regulations were designed to prevent the use of transactions to shift the basis of assets between closely related partners or entities to reduce taxable gain or increase depreciation deductions without any real cost or economic value to the partnership.
Credit: Adobe Stock
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.