Impact of Debt Ceiling Bill On Taxes


If you’ve caught more than 30 seconds of national news in the last couple of months, you’re well aware of the federal government’s feverish negotiations to “raise the debt ceiling.”

The debt ceiling refers to how much the government is allowed to borrow to pay its bills and cover its current debt service payments.

And for those unfamiliar with this age-old political dance, on one side, you had the Biden Administration and congressional Democrats crowing over the importance of raising the debt ceiling to avoid the fallout that would accompany the United States defaulting on its loan payments.

While on the other side, you have congressional Republicans perfectly willing to use the threat of such a default as leverage to empower its political agenda.

And the results of these protracted negotiations ended in the passage of the debt ceiling bill this past week. Legislation that deals heavily with tax policy. Amid this budgetary wrangling, the Republicans were able to claw back some of the most ambitious elements outlined in President Biden’s Build Back Better Act passed in 2022.

Moving forward, the question is, what are the tax implications of the new debt ceiling bill? Here’s what we know so far:

IRS Budget Cuts

Under Biden’s Build Back Better Act, the IRS was slated to receive an $80 billion budget increase. Republicans aimed to slash this significant funding hike completely. However, only about a third was cut.

According to the new legislation, Congress is taking a piece for discretionary funding. And the Biden Administration is diverting another $20 billion to fund unrelated initiatives also losing financial support in the debt ceiling agreement.

Another $1.4 billion specifically earmarked for IRS tax enforcement was also cut. A move the Congressional Budget Office (CBO) predicts will increase the deficit by an estimated $900 million, as it hampers the IRS’s ability to pursue uncollected tax revenue.

No Tax Hikes For The Rich or Corporations

The Biden Administration aimed to raise the top-end tax rate from 37% to 39.6%, an increase that would apply to capital gains for those earning over $1 million annually.

Biden’s plans also included an increase in the corporate tax rate from 21% to 28%. A jump that could have a massive financial impact on small businesses not filing under pass-through arrangements, such as LLC, LP, PC, and other limited partnership agreements.

Meanwhile, neither of these measures was included in the debt ceiling bill. A commission considered a “major blow” to Biden’s “ambitious tax reform” plans.

Real Estate Tax Breaks Preserved

The Biden Administration also proposed axing the stepped-up basis for inherited property assets and ending the 1031 exchange program, two highly popular real estate tax breaks.

Properties that have significantly increased in value over a long period of ownership are subject to potentially massive capital gains taxes. The stepped-up basis rule, however, levies capital gains taxes on the sale of inherited properties at their current value, which slashes potentially exorbitant capital gains tax bills.

In a 1031 Exchange, if an owner sells a property and uses the proceeds to purchase another property of equal or greater value, all transfer (sales) taxes are waived.

Here again, Biden’s aims were foiled, as these tax breaks were left untouched in the debt ceiling bill.

Crypto Mining Tax Delayed

Cryptocurrency oversight has been another focus of the Biden administration. And they’ve made great strides toward reigning in what was previously a largely unregulated domain.

Along with new crypto income reporting requirements ushered in last year, Biden had proposed The Digital Assets Mining Energy (DAME) excise tax. This initiative would levy a tax on crypto miners equal to 10% of the cost of the electricity used for mining in 2024 in 2025, and then scaling up to 30% in 2026.

This too was left out of the debt ceiling bill. Though this may only be a temporary stay, as Biden has intimated he still plans to pursue a Bitcoin mining tax.

How Will The Recent Debt Ceiling Bill Affect Your Taxes?

As things stand, the debt ceiling bill is good news for taxpayers. Touted tax increases, the threat of squashing long-running tax breaks, and even cryptocurrency taxes are all off the table.

But as is often the case with new tax-related legislation, the full impact isn’t always immediately apparent. As such, only time will tell.

In the meantime, if you have any questions about the debt ceiling bill or taxes in general, get in touch for a FREE consultation!


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