Our December Tax Policy Review reflects on the key tax policy developments of 2025 and offers insights into what’s on the horizon for 2026.
2025: Major Tax Policy Milestones
The 2025 Tax Reform Bill
This year will be remembered as the year Republicans enacted their signature tax legislation, P.L. 119-21, commonly known as the “One Big Beautiful Bill Act.” The sweeping tax reform bill permanently extended most of the imminently expiring provisions in the Tax Cuts and Jobs Act (TCJA) of 2017 and enacted several novel tax policies. For an overview of the bill, see Tracking Tax Reform: A Closer Look at the Final 2025 Budget Reconciliation Bill.
Though P.L. 119-21 was primarily focused on tax reform, it also contained other elements of Republicans’ domestic policy agenda, including increased funding for national defense and immigration enforcement and reductions in Medicaid and SNAP benefits.
The tax reform bill also increased the debt limit by $5 trillion, preventing a potential default after six months of the government relying on “extraordinary measures” to meet federal obligations. However, the U.S. government couldn’t escape another credit downgrade — in May, Moody’s Ratings downgraded the United States’ credit rating in response to increasing government debt and rising interest payments over the last decade.
Over the last six months, Treasury and the Internal Revenue Service (IRS) have released preliminary guidance on certain provisions of the tax reform bill; however, many critical questions regarding implementation remain unanswered. For a high-level summary of guidance issued to date, see the Implementing Tax Reform section below.
Other Tax Legislation
In addition to the tax reform bill Congress passed several other notable bills, some with bipartisan support:
- The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (P. L. 119-27) provides a regulatory framework for payment stablecoins — digital assets whose value is pegged 1:1 to another asset, often fiat currencies like the dollar. The GENIUS Act was the U.S.’s first major cryptocurrency bill, which passed both chambers with bipartisan support.
- The Filing Relief for Natural Disasters Act (P.L. 119-29), which passed both chambers unanimously, enables the IRS to speed up relief for taxpayers impacted by natural disasters.
- In late November, the Internal Revenue Service Math and Taxpayer Help Act (P.L. 119-39) cleared both chambers without opposition and was signed into law. When notifying a taxpayer of a math or clerical error on their tax return, the law requires the IRS to provide, among other things, additional plain-language information on errors and next steps.
- The Disaster Related Extension of Deadlines Act (H.R. 1491) is headed to the president’s desk for signature this week. The bill allows taxpayers additional time to claim tax credits or refunds when their federal tax return deadlines have been extended due to natural disasters.
- Congress passed the Rescissions Act of 2025 (P.L. 119-28) with only Republican support. The bill clawed back approximately $9 billion of previously appropriated government funding. This bill and the overall recissions process, including threats of additional future recission legislation, continue to pose challenges in bipartisan appropriations negotiations.
Government Shutdown
In 2025, the federal government experienced a complete 43-day shutdown, the longest in U.S. history. The impasse centered primarily around the fate of the expiring Affordable Care Act (ACA) Premium Tax Credits (PTCs), an issue that remains unresolved.
The bipartisan deal that reopened the government on November 12, 2025, contained a “minibus” of three full-year appropriations bills and a continuing resolution that funded the federal agencies covered by the nine remaining appropriations bills through January 30, 2026. Congress will need to address funding once they return in January to avoid another government shutdown.
Internal Revenue Service Updates
The IRS had a turbulent 2025, with a staffing reduction of more than 27% from roughly 102,000 to 74,000 employees, seven acting commissioners cycling through, the unanticipated creation of a new CEO position, and nearly half the workforce furloughed during the government shutdown. In addition to navigating these operational challenges, the agency is tasked with implementing the sweeping 2025 tax reform bill. Consequently, processing times have increased across many IRS functions.
Economic Data
Last week, following the Federal Open Market Committee’s (FOMC’s) final meeting of the year, Chairman Jerome Powell described a “very unusual” U.S. economy — noting policymakers are dealing with a combination of tariff-driven goods inflation and a softening labor market.
Inflation
In April of 2025, inflation hit a recent low of 2.3%; since then, inflation has been steadily climbing to its most recent reading of 3.0% for the 12-month period ending September 2025.
The FOMC attributes part of the current inflation values to the impact of current trade policy. In his speech earlier this month, Powell stated, “It’s really tariffs that are causing most of the inflation overshoot,” and that FOMC believes the inflation rate without tariff-impacted goods is likely in the low 2% range. October and November inflation data have been delayed as a result of the government shutdown; the next reading is scheduled to be released later this week.
Employment
The FOMC’s recent federal funds rate reductions have been driven by the “significant downside risks” posed by the labor market. A chart of job gains through November 2025 is displayed below; however, the FOMC noted last week that it believes there may be an “overcount in the payroll job numbers” of approximately 60,000 a month, noting we may be in “a world where job creation is negative.”
|
Month |
Jobs Gained |
Unemployment |
|
January |
143,000 |
4.0% |
|
February |
151,000 |
4.1% |
|
March |
228,000 |
4.2% |
|
April |
177,000 |
4.2% |
|
May |
139,000 |
4.2% |
|
June |
147,000 |
4.1% |
|
July |
73,000 |
4.2% |
|
August |
22,000 |
4.3% |
|
September |
119,000 |
4.4% |
|
October* |
No Report |
|
|
November* |
64,000 |
4.6% |
|
*No report for October (due to shutdown). November jobs gained includes October & November. |
||
Federal Funds Rate
The FOMC has reduced the federal funds rate three times this year by a total of 75 basis points (0.75%). The December reduction was a narrower decision than most, with three of the 12 members voting for other outcomes (two for no change and one for a larger reduction).
|
Dates |
Federal Funds |
|
Jan 1 – Sept 17 |
4.25% – 4.50% |
|
Sept 18 – Oct 29 |
4.00% – 4.25% |
|
Oct 30 – Dec 10 |
3.75% – 4.00% |
|
Dec 11 – Dec 31 |
3.50% – 3.75% |
Global Tax Negotiations
During tax reform bill negotiations, Republicans agreed to drop the Section 899 retaliatory tax provisions in exchange for an agreement with fellow G7 members on global minimum taxes. The framework outline introduced a “side-by-side” approach that would exempt U.S. companies from the Organization for Economic Co-operation and Development (OECD)’s Pillar Two rules.
Despite encouraging reports from recent OECD negotiations on adopting a similar framework, Republicans remain anxious and are seeking an agreement before the end of the year. Calls to revive the Section 899 proposal should the OECD fail to adhere to the G7 agreement have increased in recent weeks.
Trade Policy
This year has ushered in sweeping changes to the United States’ approach to global trade policy. The Trump administration has increased duties primarily via two mechanisms: Section 232 tariffs and the International Emergency Economic Powers Act (IEEPA).
Section 232
These tariffs are aimed at protecting U.S. national security and can be implemented after a Department of Commerce investigation. Tariffs are assessed on specific products, but rates can vary by country. Since President Trump took office, the U.S. has implemented levies on a variety of products, including steel and aluminum, copper, car and truck imports, and timber and lumber.
Numerous investigations remain outstanding, which we discuss in more detail below.
International Emergency and Economic Powers Act
Earlier this year, the Trump administration used the emergency authority under IEEPA, declaring the U.S. trade deficit a national emergency, to impose broad tariffs on imports from most major trading partners.
Following an August decision by the U.S. Court of Appeals for the Federal Circuit that found Trump’s implementation of reciprocal tariffs exceeded his authority under IEEPA, the Supreme Court agreed to consolidate and review two cases — V.O.S. Selections, Inc. v. Trump and Learning Resources, Inc. v. Trump.
The Court agreed to consider the cases on an expedited schedule, with oral arguments taking place in early November. While a ruling is expected by June 2026, a decision could come sooner, possibly before the end of 2025 or in early 2026.
2026: Expectations for the Year Ahead
Control of Congress: 2026 Midterms
Control of the 120th Congress will be up for grabs on November 3, 2026, and the outcome of these elections will have a significant impact on the short-term future of tax policy. Republicans are hoping to hold on to their majorities in both chambers, while Democrats are looking to capitalize on their recent overperformance in the 2025 off-cycle elections.
Stay tuned for more comprehensive coverage of the midterm elections in early 2026.
Tax Legislation and Guidance
Enacting legislation during the second half of the 119th Congress could prove even more challenging than the first. With 2026 being an election year, Congress will have fewer days in session, the Republican majorities will remain razor-thin in both chambers, and many lawmakers will need to dedicate significant time to their campaigns.
Our tax policy team is closely watching developments in the areas highlighted below.
Government Funding
The deal to end the government shutdown was comprised of a “minibus” that contained three full-year appropriations bills and a continuing resolution (CR) that funded the agencies covered by the remaining nine appropriations bills through January 30, 2026.
After a particularly painful 43-day full government shutdown, we expect lawmakers will work together to keep the government open once they return to Capitol Hill in the new year, whether through individual or grouped appropriations bills, another CR, or some combination of the two.
- Affordable Care Act Premium Tax Credits: To date, lawmakers haven’t been able to reach a compromise to address the fate of the ACA PTCs or broader healthcare affordability. The recent failure of partisan proposals could clear the way for a compromise in 2026, ahead of the election cycle.
- Digital Asset Regulation and Taxation: As we discussed in the November 2025 Tax Policy Review, there is a chance for bipartisan digital asset legislation in 2026.
- Tax Administration Measures: The House Ways and Means Committee has advanced four notable tax administration measures: the Taxpayer Due Process Enhancement Act (H.R. 6506), the Taxpayer Notification and Privacy Act (H.R. 6495), the Fair and Accountable IRS Reviews Act (H.R. 5346), and the Tax Court Improvement Act (H.R. 5349). The latter two have also passed the full House with bipartisan support. We may see movement on these measures in early 2026.
- Tax Extenders and Gambling Taxation: As noted in the November 2025 Tax Policy Review, these priorities, which include provisions effective January 1, 2026, have been deferred to 2026. Because the anticipated changes are taxpayer-favorable, lawmakers believe they have the flexibility to implement them retroactively.
- Reconciliation 2.0: A second reconciliation bill remains a possibility in 2026. While several prominent policymakers, including Speaker Mike Johnson (R-LA), support a second measure, others have remained cool to the idea. When asked about the prospect of a second partisan bill, President Trump most recently said, “We don’t need it.” Still, Republicans may revisit the idea if they are unable to advance their priorities though regular order.
- Section 899: Republicans have held firm in stating that if an agreement for a side-by-side system that would exempt U.S. companies from most of the OECD’s Pillar Two rules is not reached, they intend to reintroduce the Section 899 retaliatory tax provision.
- Recissions Packages: The White House may continue to pursue recissions packages to claw back certain appropriated funds. Whether Congressional Republicans will support any additional recissions is unknown.
We anticipate additional guidance issued on the implementation of P.L. 119-21, along with further deregulation efforts, including the withdrawal of guidance that conflicts with the current administration’s priorities. The 2025-2026 Priority Guidance Plan (PGP) offers insights into the projects Treasury and the IRS will prioritize this year.
Internal Revenue Service Updates
We expect IRS staffing to remain slimmed down to near-current levels — approximately 74,000 employees — for the foreseeable future. Accordingly, increased processing times are likely to persist in 2026.
Funding for the IRS for the remainder of the fiscal year has not been finalized. Senate, House, and White House proposals vary widely, with the latter two requesting over $2 billion in cuts from current funding levels.
|
Current |
Senate |
House |
White House |
|
|
Enforcement |
$5.4 billion |
$5.4 billion |
$3 billion |
$3.6 billion |
|
Taxpayer Services |
$2.8 billion |
$3.2 billion |
$2.8 billion |
$3.6 billion |
|
Technology and Operations |
$4.2 billion |
$3.2 billion |
$3.7 billion |
$2.6 billion |
Economic Outlook
While it’s impossible to predict future economic conditions, two trusted sources of data have released projections in recent months: The Congressional Budget Office’s Current View of the Economy from 2025 to 2028 and the Federal Reserve Board and FOMC’s Economic Projections from December.
Over the next three years (2026 to 2028), both reports predict decreasing inflation from 2.4% in 2026, down to 2.0% in 2028, with unemployment rates between 4.2% and 4.4%. The federal funds rate is currently projected to stay above 3% over the next few years; the dot plot from the most recent FOMC report shows a median expectation of just one interest rate cut next year.
Federal Reserve Chairman Jerome Powell’s term will end in May of 2026. President Trump is expected to announce a successor shortly; Director of the National Economic Council, Kevin Hassett, seems to be the current front-runner. Hassett is more sympathetic to Trump’s calls for a swift reduction in the federal funds rate; however, even if installed, he may have trouble building consensus for this approach among the FOMC voting members.
It's important to note these economic projections shift frequently with changing data input and should not be replied upon. Significant unforeseen events can dramatically alter outcomes.
Trade Policy
We anticipate continued volatility in the United States’ approach to global trade policy in 2026. In particular, we are watching the Section 232 investigations, as well as changes to the IEEPA emergency powers for tariffs.
Section 232
There are several active Section 232 investigations open, which may result in new tariffs. Products range from personal protective equipment to critical minerals to robotics and industrial machinery. Once an investigation is initiated, the Department of Commerce has 270 days to complete its work and report findings, after which the president has 90 days to decide whether to take action. Accordingly, all investigations launched in 2025 should conclude sometime in 2026.
International Emergency and Economic Powers Act (IEEPA)
The pending Supreme Court decision, discussed above, will determine whether the Trump administration can continue to use the emergency powers under IEEPA to impose tariffs.
Even if the Supreme Court overturns the use of IEEPA for the implementation of tariffs, we don’t expect a fundamental change to Trump’s global trade strategy. Rather, we expect the administration will pursue an expansion of tariffs using other authorities including an expansion of Section 232 and 301 tariffs and the possible use of Section 122, 201 or 338.
If the Court invalidates the IEEPA tariffs, it’s extremely unlikely the decision will result in immediate refunds. Whether and how retroactive refunds, if allowed, would be processed is likely to be remanded down to the Court of International Trade.
Implementing Tax Reform
Treasury and the IRS have issued guidance on several key elements of the 2025 tax reform bill, with a focus on retroactive provisions:
- Research and Experimental (R&E) Expenditures: IRS Rev. Proc. 2025-28, which provides guidance on the implementation of the changes to the treatment of R&E expenditures under Section 174A.
- Tipped and Overtime Income: Treasury proposed regulation 110032-25 identifies eligible occupations and defines “qualified tips.” Transitional guidance was also issued by the IRS via two notices:
- Notice 2025-62 provides employers with penalty relief related to reporting requirements during the 2025 calendar year, and
- Notice 2025-69 provides guidance to individual taxpayers eligible for the tipped or overtime income tax deductions. Notably, this transitional guidance allows for tipped income from specified service trade or business (SSTBs) for the moment, despite the explicit exclusion included in the tax reform bill.
- Opportunity Zones (OZs): IRS Notice 2025-50 clarifies what is considered a “rural area” and provides a modified substantial improvement thresholds for qualified OZ property located in rural areas.
- Car Loan Interest Reporting: IRS Notice 2025-57 provides transitional guidance, easing reporting requirements for lenders for the 2025 taxable year.
- Trump Accounts: IRS Notice 2025-68 states Treasury’s intent to issue proposed regulations and answers “certain initial questions.” Comments on the notice will be accepted through February 20, 2026.
- Renewable Energy Credits: IRS Notice 2025-42 provides guidance on wind and solar tax credits.
- Scholarship Granting Organizations (SGOs): IRS Notice 2025-70 states Treasury’s intent to issue proposed regulations and requests written comments on SGOs, which will be accepted through December 31, 2026. IRS Rev. Proc. 2026-6 provides guidance on how states can make an election to be a “covered state.”
- Health Savings Accounts (HSAs): IRS Notice 2026-5 provides guidance on the expansion of HSA availability. Comments will be accepted through March 6, 2026.
- Foreign Guidance: IRS Notice 2025-72, Notice 2025-75, Notice 2025-77, and Notice 2025-78 state Treasury’s intent to issue proposed regulations on various foreign tax provisions enacted in the tax reform bill. Comments will be accepted through various dates in early 2026, per the notices.
- Remittance Transfers: The IRS outlines transitional guidance in Notice 2025-55, providing temporary deposit penalty relief for remittance transfers for the first three quarters of 2026.
- Form 1099-K: An updated set of IRS FAQs released in Fact Sheet 2025-08 provides guidance on the changes to the 1099-K reporting threshold.
Your Guide Forward
Cherry Bekaert’s Tax Policy group is committed to bringing you information on the latest tax developments and opportunities.
