Taxes are a hot-button issue both in Washington and across the nation, and lawmakers are fighting over whether to close long-term budget shortfalls by increasing revenue or by cutting spending. In the end, an eventual compromise could include aspects of both, and it's important to your financial planning to consider whether new tax laws in 2014 could boost your own tax liability.
So far, the number of new tax laws that are already set to take effect on Jan. 1 is relatively small. For the most part, they include inflation adjustments on common taxes, deductions, and credits, as well as expiring provisions that are typically renewed at the last minute. But if Washington agrees to a grand bargain that includes more government revenue, it could result in many more new tax laws in 2014 and beyond. Let's take a look at some of the possibilities.
1. Lower corporate tax rates
One major area where there's bipartisan support for new tax laws in 2014 is in the corporate tax arena. President Barack Obama and congressional leaders of both parties agree that it makes sense to reduce the corporate tax rate as part of a broader reform of the way businesses pay income tax on their earnings. Globally, the U.S. corporate tax rate has become uncompetitive, leading many businesses to park their international profits abroad, rather than repatriating them for domestic use.
The challenge will be making corporate tax reform consistent with the partisan tax-revenue goals that separate the two parties. The president has suggested a rate of 28%, while Republicans have suggested a 25% rate. Republicans seek net tax cuts, while Democrats would prefer net tax increases; a revenue-neutral system that reduces rates but eliminates deductions and credits is the most likely outcome. But with so many industry-specific provisions that benefit certain major corporations, lobbying efforts will make it extremely difficult to come up with an overall package that will pass muster in Washington.
2. Eliminating estate-tax and gift-tax loopholes
Even with the estate tax exclusion amount slated to rise to $5.34 million for 2014, some rich taxpayers have used legal but controversial methods to pass wealth to future generations without paying the estate tax. One of the most popular has been the grantor-retained annuity trust, or GRAT, which Las Vegas Sands (NYSE:LVS) CEO Sheldon Adelson, Facebook (NASDAQ:FB) CEO Mark Zuckerberg, and dozens of other high-profile executives and business owners have used as part of their estate planning.
So far, discussions in Washington about eliminating GRATs and similar tax-avoiding strategies have gone nowhere, as many lawmakers would prefer simply to eliminate estate and gift taxes entirely. Yet tax advocates note that allowing GRATs to remain in place simply favors the highest-end, sophisticated potential estate-tax payers, leaving those unfamiliar with the rules left to pay the unpopular tax. As part of a larger measure, getting rid of GRATs would at least force potential estate-tax payers to go back to the drawing board for tax-saving techniques.
3. Fewer taxes, more "fees"
No lawmaker wants to be accused of raising taxes, so one way the government could raise more revenue is to follow the lead of the airline industry. Delta Air Lines (NYSE:DAL), United Continental (NYSE:UAL), and American Airlines Group (NASDAQ:AAL) have all gone from big losses to huge profits in large part by imposing add-on fees for checked baggage and other services that were formerly included in the price of airfare.
In the recently proposed Bipartisan Budget Act of 2013, lawmakers took exactly this tack, proposing to raise the passenger fee for air travel to $5.60 per one-way trip. According to the House summary of the bill, the measure would add $12.6 billion in revenue to help cover the costs of the Transportation Security Administration over the next 10 years, even though it would potentially hurt Delta, United Continental, and American by raising the costs of air travel. Similarly, extensions of user fees to benefit U.S. Customs and Border Protection and increases in the rates that companies pay to guarantee pension benefits under the Pension Benefit Guaranty Corp. could add billions more to federal coffers, even though they technically wouldn't constitute new tax laws.
Given the pace of change in Washington, it's almost naively optimistic to think that all, or even any, of these possible new tax laws for 2014 will actually become reality. As a framework for future tax policy, though, these potential new tax laws could pave the way toward the broader reform that millions of Americans believe is necessary to make the tax system fairer and more effective.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.