When watching or scrolling the news, it’s common to see new tax laws being discussed. However, just because a tax law is getting airtime does not mean it’s a done deal. And very important to remember – rarely do new tax laws affect past returns.
Below we outline the steps required for a proposed tax law to pass and take effect. The more knowledge you have, the less worried you’ll be when bombarded with “information.”
The Process Starts with Congressional Legislation
Federal tax laws originate in Congress and are signed by the president. (So, the adage something being “an act of Congress” applies to new tax laws as well.) When opposing political parties control different branches of government – e.g., a Democrat president and a Republican-controlled house – it is rare for proposed tax laws to pass. Simply put, the two parties may not agree on enough details for the proposed law to pass in Congress AND be signed by the president.
Please note, if a new tax change is passed in the House of Representatives, it usually becomes a hot topic for news outlets. However, just because it passed one congressional hurdle, it may not pass the next.
Effective Date May Not be the Current Year
Let’s say a new tax law is passed – passed in both houses of Congress and signed by the president – it rarely goes into effect immediately. So pay careful attention to the effective date.
The new law may be retroactive, meaning it applies to a certain date in the past. (In those cases, you have time to adjust amounts provided in those previous years!) But it may also have an effective date well into the future (e.g., 1-2 years). This situation occurred during the COVID pandemic because the IRS found it too onerous to have large changes take place during that time. There were several tax changes that were postponed or had the effective date changed multiple times due to COVID.
IRS Will Issue Clarifying Guidance
If a new tax law is going into effect, the IRS will issue some sort of guidance. This may be clarifying statements through articles on its website or updates posted in the instructions of an impacted tax form.
Always read form instructions for the specific year you are working with. Each year often has revised instructions, even if there are no major changes to tax laws.
Morgan & Associates Stay Updated on Tax Law Changes
While tax law changes may be intimidating, don’t worry because they’re being discussed in the news. It’s a natural part of the information cycle. Remember, there are many steps and lots of time between a law being proposed and it being passed.
We’ve helped many clients just like you with tax laws changes, and we would love the opportunity to help you as well. Complete the form below to speak with one of our team members.