Around the Tax World- September 7, 2022 - Think Outside the Tax Box

Check out what’s happening all around the world of tax!

Twice per month, we post our “Around the Tax World” feature. This highly curated, concisely written feature acts as your own personal aggregator of all the news happening in and around the world of tax. Your days of endless scrolling and combing the internet for the tax stories of the day ends now because we’re doing that work for you!

Around the Tax World is just one small feature included in a Think Outside the Tax Box subscription. Subscribe today and start enjoying our hundreds of exclusive articles, live webinars, Client Alerts, private Facebook page, and more!

World NEWS

The IRS accidentally made private data publicly accessible for about 120,000 taxpayers, according to a recent announcement. Business tax returns used by tax-exempt organizations were listed on IRS.gov and available for download for about a year. The confidential information released included taxpayer names and business contract information. Fortunately, sensitive data like social security numbers or income were not disclosed.

The UK’s newest prime minister promises major tax cuts and solutions for the energy crisis as a divisive political race comes to a close. Liz Truss from Britain’s Conservative party will succeed Boris Johnson as the country struggles through a recession and rising inflation. In her campaign for prime minister, Truss vowed to never introduce new taxes and focused on plans to reduce taxation for families dealing with the costs of child and elderly care, to put a pause on the green energy tax, and to cancel the corporation tax increase announced last year.

U.S. NEWS

President Biden’s student loan relief could be taxed in certain states

The recently-announced plan allows most borrowers with a federal student loan to receive up to $10,000 in loan forgiveness. Borrowers who received a Pell Grant—available specifically to low-income undergraduate students—can receive up to $20,000 in loan relief. More than 40 million Americans are expected to see their student debt reduced or eliminated completely.

However, in some states, forgiven debt is taxed as income, which means residents may owe taxes on the amount taken off their student loans. Depending on the state’s tax rates and each taxpayer’s income, deductions, and exemptions, this tax bill could amount to several hundred dollars. Fortunately, the American Rescue Plan of 2021 made student loan forgiveness federally tax-free through 2025, so debt relief will not trigger a federal tax bill.

The Tax Foundation estimates that five states may tax student loan forgiveness: Arkansas, Minnesota, Mississippi, North Carolina, and Wisconsin. Each of these states would have to amend their current laws to conform with the federal tax exemption. Several other states were originally on this list—including Idaho, Kentucky, New York, Pennsylvania, Virginia, and West Virginia—but have since made statements that they will not tax debt relief from Biden’s program.

Arkansas does not conform to the federal tax code, and since a formal decision has not been announced, student debt will likely be taxable without legislative action. Minnesota also did not opt to follow the American Rescue Plan’s tax exemption policy, but state leaders have recently indicated that a fix for loan forgiveness could be approved during the 2023 session or even a special session. Wisconsin’s administration similarly stated that a proposal to adjust the tax law would be introduced in the state budget next year.

In Mississippi, officials said they would need to do additional research and look more closely at state laws before deciding on the next steps. Loan forgiveness is also currently considered taxable income in North Carolina, but the state’s Department of Revenue is awaiting the final word from the General Assembly.

STATE NEWS

Idaho approves one-time tax rebates and introduces a new flat tax rate… for both individuals and corporations. The state is leveraging a $2 billion budget surplus to make major changes in taxation and education spending. One of the biggest changes is an ongoing $150 million tax cut through the creation of a 5.8% flat tax. This flat rate will replace the state’s four income tax brackets starting in 2023. Additionally, the first $2,500 in income will be tax-exempt for individual filers (or the first $5,000 for married couples filing jointly). The same flat rate will be applied for corporations, dropping down from the current rate of 6%.

The state legislature also approved $500 million in rebates for residents who filed 2020 and 2021 income tax returns. The minimum rebate is $300 for individuals and $600 for taxpayers filing jointly. Taxpayers will either receive that base amount or 10% of their income tax paid for 2020—whichever is greater.

Also included in the new legislation is the allocation of $410 million in annual sales tax revenue to K-12 public schools and post-secondary education. The current proposal puts $330 million toward K-12 and $80 million toward “in-demand occupations.”

West Virginia’s debates over tax reform heat up… as the governor and Senate president present opposing plans. According to the state’s Department of Revenue, tax money collected for August exceeded that month’s estimates by 32%, resulting in a $141.8 million surplus. Combined with a $92.4 million surplus in July, West Virginia’s legislators have unexpectedly large funds on their hands and are now looking to give tax relief back to residents.

However, political leaders are struggling to come to an agreement on the best approach. Governor Jim Justice put forth a proposal to use the state’s surplus tax revenue toward a 10% personal income tax cut across all six tax brackets. An alternative proposal by Senate Republicans would instead reduce personal income taxes only if consumer sales and use tax revenue increases by at least 5%.

Additionally, an amendment that could appear on the November ballot would give lawmakers the ability to reduce or eliminate certain categories of personal property taxes, including taxes on machinery and equipment, business inventory, and motor vehicles. Governor Justice has previously stated that he opposes the elimination of tangible personal property taxes, believing that only large or out-of-state businesses would benefit.

TAX PLANNING

Eco-conscious consumers could qualify for over $10,000 in tax credits and rebates under the Inflation Reduction Act. Taxpayers who purchase electric cars, high-efficiency appliances, or rooftop solar panels could receive thousands of dollars in tax benefits, though some of these may not be available until 2023 or 2024.

New electric vehicles can come with a tax credit of up to $7,500, while used vehicles can earn taxpayers up to $4,000. Both credits depend on the vehicle itself and the taxpayer’s household income. State and local governments may also provide their own incentives for purchasing electric vehicles. For new vehicles, the Inflation Reduction Act has several stipulations—for instance, the sourcing for the car battery’s minerals, the manufacturing and assembly of the battery components, and the final assembly of the car must all happen in North America.

Homeowners may qualify for the “nonbusiness energy property credit.” This 30% tax credit offers up to $1,200 per year to offset the costs of energy-efficient skylights, insulation, and exterior doors and windows. The cap rises to $2,000 for heat pumps, heat pump water heaters, and biomass stoves and boilers. The “residential clean energy credit” also offers a 30% tax credit for the installation of solar panels or other equipment that harnesses renewable energy.

With inflation on the rise, investors are looking to some lesser-known, tax-advantaged investment opportunities. Many investors are aware of the benefits of retirement funds like Roth IRAs or special savings accounts like HSAs and 529 education savings plans. Investors can also gain tax benefits through charitable donations and investments in economically distressed regions.

When the standard deduction was raised by the Tax Cuts and Jobs Act of 2017, many taxpayers no longer received tax benefits from their charitable contributions. One way to recover those benefits is through a donor-advised fund—a tax-advantaged account specifically used to make charitable donations. Investors can qualify for a tax deduction for contributions of cash, securities, and other assets to a donor-advised fund. Those assets can then be invested and grow tax-free until you are ready to disburse the funds to a qualifying charity.

Investors might also consider a qualified opportunity fund, which allows you to invest in businesses or real estate located in communities that have been deemed economically distressed by their state and the U.S. Treasury. One approach is to reinvest any capital gains into a qualified opportunity fund. This allows you to both defer your capital gains taxes and reduce your tax bill in the long run. Typically, the longer you hold onto the investment, the greater the tax benefits you will receive.

Lastly, the New Markets Tax Credit Program allows individuals and corporations to make equity investments in community development financial institutions and receive a federal tax credit. These institutions offer loans, investments, or financial counseling in specific low-income communities. The tax credit amounts to 39% of your original investment and is applied over the course of seven years.

Recent Highlights

Wondering what you missed in our last newsletter? Check out our latest exclusive articles here:

CURRENT EDITION

The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys

Dominique Molina, CPA MST CTS

Gather ’round, pardners! The Employee Retention Credit (ERC) has been the latest gold rush in the tax frontier, drawing business owners, tax deputies, and even a few sly outlaws. But as the dust settles, the IRS—our law keeping sheriff—is on the hunt for any who might’ve bent the rules. In this frontier of finance, knowing who’s who can keep you out of trouble as the IRS rounds up dubious claims.

Selected Techniques to Monetize Tax Attributes

Ted Stotzer

In the prior article “Tax Trends in M&A and What It Means for Your Clients,” we had discussed certain techniques to, e.g., maximize net operating loss (“NOL”) and interest expense deduction utilization in the context of M&A transactions. This article examines certain additional strategies to monetize expiring, latent, or otherwise disallowed tax attributes.

Do Those Tricks Really Work?

Peter J Reilly CPA

On the website for Axium Wealth, Charles Dombek tells us that: “Most CPAs are historians that tell their clients how much they make, how much they owe, when and where to file their taxes, and oftentimes how to write large checks at the last minute when you least expect.” When it comes to Axium, though: “We help clients recover dollars they unnecessarily pay in State and Federal income taxes.” Axium also helps clients diversify capital into off-market passive real estate and alternative investments. Before Axium, there was The Optimal-Financial Group LLC. Of course many of the readers of Think Outside The Tax Box are CPAs, or EAs or others who both help their clients be compliant and advise on ways to minimize their liability. When I was practicing I would call the things I might suggest my “bag of tricks.”