Around the Tax World- November 29, 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!

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World NEWS

The Supreme Court approved the disclosure of Trump’s tax records to Congress weeks after the former president petitioned against this. This decision means that the House Ways and Means Committee will receive the tax returns just before the House comes under Republican control in the new year. Trump’s legal counsel has argued that the request for his income tax records threatened the necessary separation of powers between the legislative and executive branches. Currently, federal law requires that the IRS and Treasury Department provide tax returns when approved congressional committees request them.

Tech giant Meta received personal financial information through several popular tax prep software sites… including H&R Block, TaxAct, and TaxSlayer. Meta, best known as the parent company to Facebook, gained access to names, email addresses, and income and refund data through its pixel—a piece of code that allows web developers to track user activity. This information share violates Meta’s policies, and the company affirmed that its system is set up to conceal sensitive data. Similarly, TaxAct was found to have sent similar financial information to Google through its analytics tool, though without names attached to the data.

U.S. NEWS

Congress receives renewed pressure to revive the expanded child tax credit

In the wake of the recent election, lawmakers are now entering a “lame-duck session”—a final opportunity to pass legislation before the next Congress is seated in the new year. During this session, the current Congress plans to discuss the possibility of corporate tax breaks. At the same time, a number of Democrats are advocating for the reinstatement of the monthly refundable child tax credit and the expanded earned income tax credit. These lawmakers argue that with soaring inflation these measures are necessary to help families afford basic necessities.

The increased child tax credit of 2021 provided eligible children with monthly checks of up to $300. With the expiration of this expanded credit, an estimated 19 million children will receive either less than the full amount or no credit at all. The major changes to this credit that taxpayers will see include:

The maximum amount available is $2,000 per child (instead of $3,000 per child under age 18 and $3,600 per child age 6 and under).
Children who are age 17 no longer qualify.
The credit is based on income rather than number of children.
Earned income requirements now apply—the credit phases in once a family earns at least $2,500, and a family can only receive up to $1,500 if the tax credit due to them is greater than their income tax liability.

Analysts predict that a return to the 2021 version of the child tax credit is unlikely. The one-year expansion cost about $100 million, and given the other proposals on the table for 2022, lawmakers are unlikely to allocate this much of the budget to the child tax credit. The question is which of the expanded provisions will Democrats push for?

A recent report by the Center on Budget and Policy Priorities suggests that making the full $2,000 credit available to families whose parents are unemployed or who earn too little to file a tax return would significantly reduce child poverty. The report estimates that without the expanded child tax credit and similar legislation aimed at lower-income families the child poverty rate would currently be around 8.1% instead of its current record low of 5.2%.

STATE NEWS

The governor of Virginia announces plans to pursue tax cuts in the 2023 budget… despite murmurings of a possible recession. This marks a change from Governor Glenn Youngkin’s campaign push for eliminating the state income tax. The governor assured Virginians that any tax cuts would not result in financial vulnerability for the state.

Though the state’s corporate and financial experts agreed that an economic slowdown was likely, Virginia’s rising reserve funds provide some reassurance. By the end of 2023, state reserves are expected to exceed $4 billion or about 15% of the general fund. Additionally, Virginia ended its last fiscal year with $3.2 billion in surplus revenue. These numbers have provided fuel for lawmakers to move forward with their plans.

This October, tax revenue in Virginia is up 3% compared with the same period last year. This rise is particularly encouraging since the state recently dispersed taxpayer rebates and saw an increase in the standard deduction for personal income taxes. Without these factors, the revenue increase would have been as high as 10.3%.

So far, Governor Youngkin has met resistance in his attempts to suspend the gasoline tax and to eliminate a local 1% grocery tax—although lawmakers agreed to remove the state 1.5% grocery tax. Youngkin is expected to propose $397 million in tax cuts, including a reduction in the corporate tax rate.

Wisconsin’s lawmakers plan to leverage record-high revenue to make permanent tax cuts… such as eliminating a business tax and lowering the income tax rate. The state is expecting to bring in $6.6 billion in surplus revenue. Republican leaders have voiced their plans to collaborate with Democratic Governor Tony Evers on possible tax cuts since the party does not have enough votes to override a veto.

Wisconsin’s current income tax rates range from 3.54% to 7.65%, but conservative lawmakers have advocated for moving toward a flat income tax rate. The highest rate applies to single taxpayers who earn at least $280,950 (or joint filers earning at least $374,600). Those who oppose an income tax cut have expressed concern that this will mainly benefit the state’s highest earners. Democratic leaders have indicated they may be willing to support tax cuts aimed at generating funds for education, pollution reduction, and roadway improvements.

Both the governor and Republican leaders arrived on the same page about eliminating a property tax paid by businesses. The replacement proposal would repeal the personal property tax and use the $200 million set aside to offset the tax to boost revenue for local governments that have been underfunded.

TAX PLANNING

Special tax rules will apply in 2023 for income received through third-party payment platforms. Businesses who receive payments through apps like Venmo and PayPal should receive a 1099-K for these transactions if they total more than $600 within a single tax year. The same applies to business done on platforms like Etsy or Airbnb. Business transactions are defined as payments for goods or services, including tips.

Previously, 1099-Ks would only be issued if the taxpayer engaged in over 200 business transactions that year, totaling over $20,000. The expected increase in 1099-Ks next year will substantially increase the workload for the IRS—and for businesses. Analysts say that some businesses who only had to issue a few thousand 1099-Ks under the previous rules may have to issue a few hundred thousand in 2023. In addition, recipients of 1099-Ks will have to calculate what portion of the amount reported is taxable and what portion could be deductible under the rules for business expenses. Examples of deductible charges include fees paid to the payment platform or a credit issued to the business.

Taxpayers should note that the new rules do not apply to transactions made through Zelle, since Zelle does not function as a third-party platform but rather connects the payer’s bank account directly to the receiver’s bank account. If a business-to-business payment is made through Zelle, the payer must provide the recipient with a 1099-NEC for non-employee compensation or a 1099-MISC for other expenses.

How do taxpayers determine if they will receive a “marriage penalty” or “marriage bonus”? Some couples planning to wed before the end of 2022 might be able to save on taxes if they postpone their nuptials until 2023. However, this does not apply in every situation—so how can you know whether adjusting your wedding date could result in financial savings?

Despite changes to the tax code in 2017 that provided relief to married couples, many taxpayers find that tax provisions for married couples are not simply twice the amount for single taxpayers. For high-income couples in particular, the penalty can be high, especially if each person has similar large amounts of income. Filing status is one thing to consider if you are looking for tax savings. Couples may benefit from selecting “married filing separately” if one spouse’s income is significantly lower or one is eligible for large deductions based on unique circumstances, such as medical expenses.

Married couples should also look out for these possible penalties:

Earned income tax credit: The income limit for married couples filing jointly is typically only slightly higher than the limit for single filers.
Net capital losses: Both single and joint filers are limited to deducting up to $3,000 of qualifying losses.
SALT deduction: The maximum state and local tax deduction allowed is $10,000 for both single and joint filers.
Social security: Benefits are not taxed for single taxpayers earning under $25,000 or married taxpayers earning under $32,000.

In the cases above, married couples might consider filing separately if that allows one or both spouses to deduct a loss or claim a benefit they would not qualify for when filing jointly.

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.”