Around the tax world - Think Outside the Tax Box

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World NEWS

The UK abandons a plan to cut taxes for the nation’s highest income earners… after the proposal led the British pound to plummet. New Prime Minister Liz Truss gave up her plan to remove the top tier of income tax as residents raised an outcry against the government. Despite this retreat, the new administration intends to move ahead with other aspects of their plan, including a reduction to the basic income tax rate next year.

President Joe Biden’s son, Hunter, may be officially charged with tax crimes… and falsifying information in order to purchase a gun. Since 2018, Hunter Biden has been under investigation by the FBI on issues related to his overseas businesses, and now the US Attorney in Delaware will make the decision on whether to file charges based on recent findings. Congressional Republicans have also stated their plans to investigate Hunter Biden in the House of Representatives if they are able to secure a majority in this year’s elections.

U.S. NEWS

Two-thirds of US states have implemented tax cuts this year as a result of booming state revenue

Missouri’s recent income tax cuts bring the total to 33 states that have introduced tax relief in 2022 alone. These tax measures vary from one-time rebates to permanent income tax rate reductions, but most stem from sizable budget surpluses. After the economic decline from the COVID-19 pandemic in 2020, the economy recovered unexpectedly quickly thanks to billions of dollars in government aid and the subsequent boost in consumer spending. As a result, both fiscal years 2021 and 2022 were marked by massive state tax collections, and many states reported record-high revenue.

Normally, tax cuts and spending on government programs and services have to compete for a place in the budget, but many states currently have the funding to accommodate both. In Republican-led states, permanent tax changes have been more common—in the 14 states that have passed income tax rate cuts, all but one have Republican-controlled legislatures (the exception is New York). One-time rebates are more popular in Democratic-led states—out of the 15 states that have issued these checks, 10 are led by Democratic governors and legislatures.

Additionally, some states have provided more targeted tax benefits focused on families, retirees, or reducing the impact of inflation by cutting taxes on food and gasoline.

States with politically-divided governments have mostly struggled to agree on tax packages. Minnesota and Wisconsin have seen stalled legislation, and even some Republican-led states like Montana, Oklahoma, and West Virginia have failed to pass proposed tax breaks.

Meanwhile, Missouri’s tax cut is being touted as the largest in the state’s history, set to cost the state over $760 million a year. The new legislation will reduce the top individual income tax rate to 4.95% (from 5.3%) and make the first $1,000 in income tax-exempt. If state revenue continues to grow, additional tax cuts will be implemented over time, ultimately reducing the tax rate to 4.5%. The governor has also approved a rural incentives bill that leverages tax credits to promote the use of biofuels in the agricultural industry.

STATE NEWS

Seeking to compensate for declining gas taxes, Virginia launched a pay-by-mile program… as an alternative to a fixed fee for electric and fuel-efficient vehicles. The “Mileage Choice” program has wooed over 7,000 Virginians who have opted to pay a fee for each mile they drive rather than pay the state’s annual highway use fee for electric vehicles.

Back in 2019, Virginia legislators recognized the need for a new income source as gas tax revenue declined even though drivers were logging just as many miles as ever. This posed a problem for the state’s transportation budget, which relied on gas tax revenue to build and maintain roads. Since EV drivers were paying less in gas taxes than other drivers, the state introduced a flat fee on electric vehicles and vehicles with a fuel efficiency of over 25 miles per gallon.

However, many EV owners objected to the seeming disincentive to drive an environmentally-friendly vehicle. Virginia’s alternative pay-per-mile program seeks to provide a cost-savings option to these drivers, particularly those who drive less than the average amount (estimated at 11,600 miles per year). Similar programs already existed in Oregon and Utah, and other states have conducted pilots.

With the Biden administration introducing more incentives for purchasing an electric vehicle, the federal government and other states are exploring similar programs to ensure funds will be available for the nation’s roads and other infrastructure needs.

About 23 million California residents are slated to receive tax refund checks… of up to $1,050 each. The Golden State recently launched the largest stimulus program in the state’s history. Also known as the Middle Class Tax Refund, these refunds are intended to help residents pay for living expenses in the face of inflation. The program receives its funding from California’s impressive $97.5 billion budget surplus.

To qualify for a tax refund, Californians must have resided in the state for six months or more in the 2020 tax year and be a current resident. They must also have filed a 2020 tax return by the extended October 15, 2021 deadline and must not be claimed as a dependent on someone else’s tax return.

The amount that residents receive will depend on their income and the number of dependents. The highest available amount is $1,050, which will go to married couples with at least one dependent and who earn $150,000 or less in annual income. Qualifying single taxpayers will receive between $200 to $700. Payments are gradually phased out at higher income levels, and individuals earning over $250,000 and couples earning over $500,000 do not qualify for the refund.

An online tool is available to estimate your payment amount. Payments will be received either by direct deposit or via debit cards that will be issued via mail.

TAX PLANNING

Taxpayers rushing to make the 2022 tax extension deadline on October 17th should watch out for three common mistakes. Skipping key forms, failing to include all income, and omitting write-off details are frequently-made errors that could result in IRS processing delays. Some of the often-missed forms are those related to investment income: 1099-B for capital gains and losses or 1099-DIV for dividends and distributions. Investors sometimes make the mistake of assuming that if they did not receive a physical payment from an investment, then it is not taxable.

Taxpayers might also overlook Form 8606 for nondeductible IRA contributions. This form is needed to verify contributions for a Roth conversion—when a traditional individual retirement account is converted to a Roth IRA. This conversion allows the account holder to bypass the income limits for a Roth IRA and allows your savings to grow tax-free. However, if you do not provide proof of your original IRA deposits, you could be taxed on the same income twice.

Lastly, taxpayers who make qualified charitable distributions (QCDs) need to ensure these donations are documented correctly. Form 1099-R for retirement plan distributions may not distinguish between a QCD and other distributions. This can pose a problem since regular distributions are considered taxable income, while QCDs are not.

Parents may still be able to claim a $3,600 child tax credit by November 15th. The 2021 child tax credit provided an increased benefit of $3,600 for children ages 5 and under and $3,000 for children ages 6 through 17. Families who qualified but missed out on a payment can still file to receive the funds.

An online tool called GetCTC.org allows parents and caregivers to submit their information. This may include Americans with little to no income who are not required to file a tax return. The enhanced 2021 credit is fully refundable, which means that even those who did not file a return or did not owe money on their taxes can benefit. The same tool can also be used to claim the third stimulus payment check of $1,400 per person.

The deadline to use the GetCTC.org tool is November 15th, but the child tax credit can still be claimed for up to three years after the initial due date. However, the process does become much less convenient. While the tool will take most families only 15 minutes to use, the alternative process will involve filing individual income tax returns for the years in question and completing Schedule 8812, which applies to Credits for Qualifying Children and Other Dependents.

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