Midterm elections routinely adjust the congressional balance away from the sitting president and set the stage for the next election cycle. The 2026 election followed that same pattern but in a more extreme manner, with the Democratic Party regaining the majority in the House and Senate by the largest margins either party has seen in almost 20 years. That change means the return of divided government for the remainder of President Trump’s second term.
So, what does that mean for tax planning for the rest of 2026 and the years to come? The short answer is that we expect current tax law to remain largely untouched through 2028. This means short- and midterm planning should optimize tax positions based on those rules. Looking further ahead, the focus will be on the 2028 election and the potential for unified government to, once again, set the stage for meaningful changes in tax policy beginning in 2029. The main wildcard in this scenario is the potential for bipartisan tax legislation over the coming years, which could be in response to broader economic, trade, or geopolitical events.
A more detailed view of the coming years is explored through the following framework:
- We’ve been here before: The return of divided government
- What does this mean for the rest of this congressional session?
- All eyes on 2027: What to expect from the new Congress
- What else are we watching?
- Tax planning through 2028
- Where does tax policy go after the 2028 election cycle?
We’ve been here before: The return of divided government
Since the 2000 election, there have now been five cycles where unified government results from a presidential election and at least one chamber of Congress changed hands during the subsequent midterm election. In that sense, the latest results are in line with recent history. The primary difference is the scale of change in Congressional makeup, with a change from narrow majorities aligned with the president to significant majorities from the opposition party.
It’s notable that significant, broad-based tax legislation immediately followed each of the past three presidential elections as the president and congressional leaders converted campaign promises into legislative action. The periods of divided government that followed during the last two years of the last two presidential terms resulted in much more limited legislative action on taxes. Although bipartisan bills on more targeted topics did get enacted. Most notably, Congress utilized the tax code on a bipartisan basis toward the end of Trump’s first term in 2020 to respond to the COVID-19 pandemic. The theme in that era was Congress utilizing the tax code to respond to challenges, rather than signaling broader changes in policy.
What does this mean for the rest of this congressional session?
The current Republican Congress has a very limited opportunity remaining before its term ends on Jan. 3, 2027. Many competing factors will converge during this lame-duck congressional session. For Republican leaders, this will be the final opportunity to complete their legislative priorities and approve nominations. However, their motivation to pursue new tax legislation is likely tempered by the reality that the vast majority of their priorities were already completed in the One, Big, Beautiful Bill Act (OBBBA). Furthermore, the current Republican majorities are very narrow, so individual members can significantly alter the trajectory of any legislation, similar to what has occurred over the past two years.
Congressional leaders will also need to decide how much of the dwindling time on the calendar to devote to new legislation as compared to existing business such as approving currently pending nominations and other time-sensitive priorities. More specifically, government funding expires on December 11 and will require some form of congressional action to avoid a shutdown. The likely result is that the need to prioritize action will severely inhibit the opportunity to advance any complicated tax legislation.
So, what’s left for potential consideration on taxes? Tax bills with wide bipartisan support have at least some chance to move quickly either on their own or as part of a broader package to close out the year. Two possibilities include:
- The TAS Act has picked up meaningful bipartisan support. The bill would make various changes to federal tax administration, services, and dispute resolution.
- Tax extenders. Traditionally, expiring tax credits and incentives were often extended at the conclusion of a congressional session. The OBBBA made many expiring tax rules permanent, so there are fewer items for consideration now. However, some popular provisions did still expire at the end of 2025, such as the Work Opportunity Tax Credit (WOTC) and the deduction for certain entertainment productions costs.
All eyes on 2027: What to expect from the new Congress
Recent cases of divided government still resulted in changes to tax laws through legislation that had broad bipartisan support. These have tended to revolve around disaster relief, tax administration, retirement plans, and housing affordability. Instructive examples include:
- Taxpayer First Act (P.L. 116-25). This was legislation aimed at enhancing operations at the Internal Revenue Service (IRS) and modifying a variety of procedural rules.
- Consolidated Appropriations Act, 2020 (P.L. 116-94). This funding bill included the SECURE Act, which broadly expanded and modified retirement programs. It also included a variety of tax extenders.
- COVID-19 response legislation. Two landmark bills were enacted during March 2020 to respond to the pandemic and provide support to the economy. These included the Families First Coronavirus Response Act (P.L. 116-127) and the CARES Act (P.L. 116-136).
- Consolidated Appropriations Act, 2023 (P.L. 117-328). Included SECURE 2.0 Act, which further expended and modified retirement programs.
- Federal Disaster Tax Relief Act of 2023 (P.L. 118-148). Expanded tax deductions for certain disaster losses and excluded certain disaster-related reimbursements from income.
Similar efforts are likely in the new Congress, particularly if the TAS Act and tax extender legislation doesn’t get enacted during the lame-duck period. Additionally, disaster tax relief was last extended by the OBBBA and a number of retirement plan related proposals have been floating around Congress since Secure 2.0 was enacted in 2022. Given their strong bipartisan nature, such forms of legislation could still advance, irrespective of the relationship between Democrats in Congress and Trump.
Under divided government, it’s unlikely that any large tax policy changes will be enacted between now and early 2029. A unified Congress may still try to push other tax legislation before then. They key question is whether Democrats pass legislation that Trump is likely to veto or if Trump is willing to negotiate on these policies in a manner that leads to legislation being enacted. For example, the tax treatment of digital assets, tax policies on data centers and artificial intelligence, and the taxation of student athletes are all policy priorities for some that will garner some level of attention.
Another topic to monitor would be the many populist tax proposals that have been lurking for several years. Tax proposals involving increased income taxes on wealthy individuals, wealth taxes of various sorts, increased and expanded payroll and self-employment taxes at higher-income levels, and other similar policies have all been previously introduced. While these types of policies would almost certainly be vetoed by Trump, it’s likely that they will be considered by Congress. Monitoring such developments will provide insight into the views of Democratic leadership heading into the next election cycle.
The bottom line is that the tax laws and framework we have now are very likely to be the laws and framework that we will be working with until at least early 2029. While it’s conceivable that some tax legislation could move and be enacted between now and then, it’s safe to expect nothing sweeping to be enacted.
What else to watch in the new Congress?
Geopolitics and the macroeconomic environment (e.g., the impact of debt, trade policy, interest rates, and persistent inflation) will all continue to be priorities for both parties and will have an influence on the direction of tax policy. Government spending and the rising national debt are likely to receive much more attention in the years to come. While there has been a historical trend on both sides of the aisle to look past the debt when it comes to tax policy, that trend isn’t likely to continue indefinitely. This will put continued pressure on both parties to determine how to accomplish their priorities in a manner that doesn’t increase deficits or potentially reduces them. More immediately, current government funding expires on December 11, and the debt limit is likely to be limited in mid-2027. This will force some level of negotiations to occur with the key question being whether this results in broader policy negotiations or simply extending current policies without substantive changes.
Trade policy has largely been driven by the White House, especially as it relates to tariffs. A Democratic Congress isn’t going to enact broader tariff authorities requested by the president and may even pass policies restricting those authorities (even if they’re likely to be vetoed). Notably, the Supreme Court took action earlier this year to rein in the president’s authority on at least one form of tariffs. The end result when it comes to tariffs may be more stability because the president’s options are narrowing. However, the president still holds considerable sway over trade policy more generally even if wide-scale tariffs subside. Does that set the stage for a negotiation among Trump and Democratic leaders in Congress over trade and tariff policy, with incentives for domestic production? This is another area to monitor over the coming months and years.
Federal and state tax planning through 2028
The election results point in the direction of planning around the rules we have. Tax planning conversations in the coming months will focus less on transitions into new rules and more on getting the most out of them. This includes managing the interest expense limitation with elevated rates and taking advantage of accelerated capital recovery in the form of 100% bonus depreciation on personal property, immediate expensing of certain manufacturing related real property (QPP), and domestic research expenses. Businesses operating in an era of persistent inflationary pressures should also consider accounting method changes, such as a change to last-in, first-out (LIFO) inventory accounting and the cash method. Additional consideration should be given to implementing the continually evolving international tax rules and the many OBBBA changes that first took effect at the beginning of 2026.
Some key aspects of recent rules require more involved planning with longer runways. For businesses, this includes broader entity choice considerations given the increasing list of tax benefits that are more favorable to corporations or don’t exist at all in pass-through entities. But these decisions can’t be made in a vacuum and must take into consideration a number of tax and nontax factors which tend to have longer timelines to navigate. Further, those hoping to take advantage of the expanded exclusion under Section 1202 need to plan at least three years ahead before those benefits begin to phase in. Businesses looking to claim the 100% deduction for QPP will need to be mindful of the fact that construction must begin by the end of 2028 and must be completed and placed in service by the end of 2030.
On the other hand, planning around state taxes might take more action over the next two years. State tax policies were already shifting more quickly over the past year in response to OBBBA conformity. This resulted in a larger wave of state nonconformity than has occurred in the past and caused many states to revisit broader tax policies. This was fueled by balanced budget requirements that exist in most states, economic challenges that have varied across regions, and competition among states for economic development. The recent election also resulted in many states electing Democratic legislatures and governors. Some states also considered various ballot initiatives related to property taxes, “millionaires tax” proposals, and other similar tax proposals. State tax policy changes tend to move more quickly than federal tax policy changes. These factors may very well lead to more widespread changes to state tax policies over the next two years as compared to federal tax policies. The specific tax planning response to these types of changes will vary greatly but will start with maintaining awareness.
Where does tax policy go after the 2028 election cycle?
The 2028 election cycle is when the tax policy landscape will likely shift in a more sweeping way. The “no tax” provisions of the OBBBA (i.e., the deduction for tips, overtime, domestic car loan interest, and the deduction for seniors) expire at the end of 2028 and will be prominent focal points of campaigns alongside broader tax, government spending, Social Security and Medicare/Medicaid, and other economic policies.
You would have to go back to the 1980s to see a new president not have a unified government at the beginning of their first term. Does that indicate the potential return to unified government in early 2029? Even if that were true, will that involve Democratic or Republican control? Developments over the coming months and years will ultimately set the stage for that election outcome. This complicates long-term planning but is yet another reason to lean more deliberately into planning around the relative certainty we can expect to have in the next two years.
