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
A coalition of over 200 millionaires are advocating for increased taxes on the rich… as the U.S. recently hit its debt ceiling of $31.4 trillion. The millionaires’ group—which includes Mark Ruffalo and Abigail Disney—issued a message to those attending Davos, the annual meeting of the World Economic Forum. The group released a signed letter that calls for a new 2% tax for those with net wealth of $5 million or more, a 3% tax for those with $50 million or more, and a 5% tax for those with $1 billion or more.
California’s 2023 tax deadline has been adjusted for more residents… due to the severe storming and flooding throughout the region. Though the standard tax filing deadline this year is April 18th, storm victims now have until May 15th to file both individual and business tax returns and to make any required payments. The areas receiving this extension include Los Angeles, San Diego, Orange, Riverside, Sacramento, and San Francisco counties and any other regions designated by FEMA.
U.S. NEWS
The IRS has announced key dates and recommendations for the 2023 tax season
The agency announced that it will begin accepting this year’s tax returns on January 23rd. Due to the 2023 calendar, taxpayers will have until April 18th to file. The IRS has unfortunately made headlines in recent years for its backlog of millions of unprocessed returns. Given the over 168 million individual tax returns expected in 2023, the agency has taken decisive steps to improve its service. For instance, since funding was approved through the Inflation Reduction Act, the IRS has been able to hire 5,000 new telephone representatives and other staff to assist taxpayers.
To expedite the processing of tax returns, the IRS encourages taxpayers to take several simple steps:
First, gather all the information you need before filing your tax return. This can include Social Security numbers, Individual Taxpayer Identification Numbers, Adoption Taxpayer Identification Numbers, and this year’s Identity Protection Personal Identification Numbers. Advance preparation will help ensure your return is complete and accurate. Errors and omissions can result in processing and refund delays and even the need to file an amended return.
Second, review your tax situation to see if you qualify for any tax credits, such as the Earned Income Tax Credit (EITC). The IRS has designated January 27th as Earned Income Tax Credit Awareness Day—a date to educate taxpayers on the EITC and its benefits for low- and moderate-income families.
Third, remember that most income is taxable, and make sure you have accounted for any unemployment checks, interest received, or income earned through gig work or digital assets. Reporting your correct income is key to avoiding delays. For questions on what counts as income, visit IRS.gov.
Lastly, consider filing electronically and requesting direct deposit for your refund. Taxpayers can use a bank account, prepaid debit card, or mobile app and will need to provide routing and account numbers with their return. In spite of recent processing delays, most taxpayers should receive their refund within 21 days if they file electronically and select direct deposit.
If you need an extension to file your return, you can request to extend the deadline to Monday, October 16, 2023.
STATE NEWS
The West Virginia House recently passed an income tax cut bill… onto the Senate that would move the state further toward eliminating its income tax. The legislation would lower personal income tax by 30% the first year, retroactive to January 2023. The tax would then decrease by 10% each of the following two years. By the end of these three years, all five of West Virginia’s tax brackets would be cut in half. The new tax rates would land at 1.5% for those making $9,999 or less per year and 3.25% for those making $60,000 or more annually.
If the tax bill passes, state revenue will decrease by over $100 million each year and would return an estimated $1.229 billion to taxpayers by 2025. West Virginia currently has a budget surplus of hundreds of millions of dollars, largely due to high energy prices and correspondingly high severance tax revenue, which applies to materials severed from the ground. Some Republican legislators have raised concerns about the state’s future financial stability and have anticipated that the Senate is unlikely to pass the bill.
The governor of Texas advocated for school vouchers and property tax cuts… as part of his inaugural address this month. Governor Greg Abbott put forth his plans in advance of the upcoming legislative session where state lawmakers will determine how to allocate their $33 billion budget surplus.
The governor has expressed his intention to use excess revenue toward “the largest property tax cut in the history of the state of Texas.” One proposal from the Senate is to increase the homestead exemption from $40,000 to $70,000. This exemption minimizes property taxes for homeowners and protects the home from creditors should the homeowner pass away or declare bankruptcy. Lieutenant Governor Dan Patrick also suggested a sizable increase in the exemption for business property—from $2,500 to $100,000.
Also on the table is a proposal to create a school voucher system that would enable more parents to send their children to private schools and to extend the ban on teaching critical race theory—which currently applies to K-12 classrooms—to also include state colleges.
TAX PLANNING
At least a third of taxpayers are in need of timely refund checks in 2023. One recent estimate suggested that 30% of Americans are dependent on their tax refund to make ends meet. However, millions of taxpayers have experienced delays in receiving their checks during the pandemic. Even now, the IRS is working through a backlog of 10 million returns from last year’s filing season. Regardless, the IRS still estimates that 9 out of 10 refunds are issued within the standard 21 days.
To avoid delays, the IRS suggests skipping paper returns, which employees have to manually enter into their computer systems. Unfortunately, some taxpayers will still have to file a paper return if the IRS does not provide an electronic version of a needed tax form. In 2022, 13 million people filed paper returns, down from 17 million in 2019.
The agency also recommends exact reporting—loosely estimating your income or other data is likely to get flagged. One example is mortgage interest: instead of guessing an approximate amount, consult the tax form sent by your lender. Likewise, wait until you have all your tax forms to file. Some employers may not send out W-2s until January 31st. Forms for partnerships like LLCs may not arrive until after March 15, which is their mailing deadline.
States are seeking new ways to tax digital advertising taxes. Maryland is currently leading the charge on these changes, introducing the nation’s first tax on digital advertising gross revenue. Businesses with at least $100 million in global annual revenue would be taxed between 2.5% and 10%. This legislation was first passed right before the pandemic, then was vetoed by the governor, next was revived by the state legislature, and most recently was struck down by a circuit court judge as unconstitutional.
Meanwhile, other state and local governments across the U.S. have watched Maryland’s progress closely as they weigh their own approach to taxing digital advertising. Maryland’s tax was overruled on the grounds that it was discriminatory, selectively applied, and violated the Internet Tax Freedom Act (ITFA). Similar legislation has appeared—and been successfully challenged—in other states. A Cincinnati tax on billboard sales was ruled as violating the First Amendment. Connecticut, Indiana, Massachusetts, Montana, New York, Texas, Washington, and West Virginia each introduced digital advertising tax bills in 2021, but none have approved a new tax as of yet.
Recent Highlights
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CURRENT EDITION
The Wild West of Employee Retention Credits (ERC): Outlaws, Deputies, and Cowboys
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
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?
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.”
