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
Prosecutors in the Trump Organization trial claim that the former president sanctioned tax fraud within the company. The Assistant Manhattan District Attorney cited evidence that Trump was aware his executives were skirting personal income taxes on company perks. Former CFO Allen Weisselberg previously testified that Trump agreed to cover his grandchildren’s private school bill. The defense has countered that Weisselberg acted independently and in his own interests by subtracting these costs from his payroll records.
Disney World’s reinstated CEO Bob Iger seeks to reclaim the special tax status… that formerly allowed the Florida theme park to tax itself to fund water, power, firefighting, and similar services. These allowances were revoked after Disney’s former chief executive, Bob Chapek, came into conflict with conservative lawmakers over the “Don’t Say Gay” bill. Iger is now seeking a new compromise to allow Disney to reclaim self-governing privileges for its 25,000-acre property.
U.S. NEWS
Taxpayers may see a much smaller tax refund from their 2022 returns
Experts are predicting a wave of “refund shock” as recent changes to tax law will likely mean higher tax bills for many Americans. Many of the special measures introduced early in the pandemic have begun to expire. These were largely responsible for last year’s unusually high refunds. In 2021, the average refund check was over $3,000—over 15% higher than the average in 2019.
After receiving a boost from the American Rescue Plan of 2021, both the child tax credit and the child and dependent care tax credit have been reduced for 2022. Though a number of Democratic lawmakers advocated for extending certain credits—the enhanced child tax credit in particular—these efforts were blocked by dissenters within their party and Republican lawmakers.
Similarly, the charitable deduction will be harder to claim. In 2021 single filers were allowed to claim up to $300 in cash donations (or $600 for married couples filing jointly) regardless of whether they itemized their deductions. In 2022, filers will not qualify unless they itemize their deductions and the total exceeds the standard deduction. Typically, about 9% of taxpayers itemize their taxes while the other 91% take the standard deduction.
Additionally, the increased attention to third-party platform payments will affect some taxpayers’ returns. Those who receive compensation through Venmo, PayPal, or similar apps will receive a Form 1099-K to assist in reporting this income. Previously, taxpayers would not receive a 1099-K unless they engaged in over 200 transactions totaling over $20,000. In 2022, the threshold has been significantly lowered to only $600 in compensation for even a single transaction. This does not apply to personal payments—only to transactions where you make a profit.
Tax experts recommend that taxpayers take advantage of education credits, earned income credits, or child/dependent care credits to offset the increase. Another option is to increase your tax withholding or transfer additional money into your 401(k) to reduce your overall income. Lastly, if you are a homeowner, you can explore the possibility of home improvements that may qualify for clean energy tax benefits.
STATE NEWS
Texas’ tax relief plans may negatively impact public schools… which rely on a property tax and sales tax for their state funding. Most states also have a state income tax that funnels revenue toward education, but the system in Texas is not set up this way. As Republican legislators seek to move forward with plans to reduce property taxes, educators are now concerned this may result in financial instability for their schools.
One tax proposal would eliminate the property tax that funds public schools and instead increase the state sales tax to 12%. However, if sales revenue dips, school leaders worry they will find themselves underfunded, especially if a recession does occur.
Texas’ current system bases fund allocation on daily attendance, which is another item of contention. Some have argued that this practice means that schools with higher needs can end up with much fewer resources. These potential changes will be addressed in the next legislative session scheduled for early 2023.
West Virginia tax revenue comes in at over $480 million… almost 31% more than the estimate given by the Department of Revenue. As a result, the state is now sitting on a $112.7 million surplus. As of November, year-to-date tax revenue is at 38% more than its estimate, totaling an impressive $2.5 billion. West Virginia will begin the new year with a $687.5 million surplus.
This surge in revenue can partly be attributed to the severance tax on coal, oil, and natural gas as demand for fossil fuels rose. Severance tax collections for the month of November alone exceeded the estimate by a whopping 368%. Year-to-date severance tax revenue was 443.8% higher than expected. The consumer sales and use tax also saw a $85.8 million surplus for the year.
The only tax that did not exceed expectations was the personal income tax. West Virginia Governor Jim Justice has previously proposed cutting personal income tax rates with a long-term plan to phase it out completely. Justice is expected to propose a 10% cut across all income tax brackets in the new year.
TAX PLANNING
E-Commerce platforms petition to increase the business transaction threshold under the new tax reporting rules. These companies, including Uber and eBay, are finding support from both Democratic and Republican legislators. In 2021, new legislation was introduced requiring companies that employ contract workers to provide 1099-K forms to help these gig workers accurately report their earnings. Starting in 2022, taxpayers with more than $600 in business transactions would have to report that income, regardless of the number of transactions.
Lobbyists are hoping to stop the implementation of this new rule in the current lame-duck session. Advocates for this law argue that gig workers were previously at greater risk of being audited and getting hit with back taxes they were not expecting to pay, since they were not receiving income tax forms unless their transactions exceeded $20,000 over at least 200 transactions. Republican opponents to the new third-party transaction rules are pushing to return to these higher thresholds, while some Democrats are instead suggesting a $5,000 minimum. Only 30% of those earning income through third-party platforms made more than $5,000 in 2016, according to a 2020 report.
Sales tax varies widely by state, introducing complications for small businesses
On top of the many tasks, they juggle from week-to-week, small business owners need to acquaint themselves with the specific sales tax rules in their state. The particulars can be very different in each region, from the rate to the due date to what is considered taxable. For instance, certain states tax both the product and service a business provides, while other states will only tax the products. New business owners may also be unaware that basic client fees—say the design fees charged by an interior designer—are subject to sales tax. Some states also tax real estate construction if the changes don’t amount to capital improvement (changes that increase the value of a property).
The law levies sales tax on the buyer of a product or service, which means customers are technically liable. The vendor must charge the tax and remit it to the IRS—which typically means they will slightly increase the price paid by the customer. In most states, sales tax is due every month, although if your sales fall below a certain threshold, you may only have to file quarterly or yearly. Taxes are due in the month immediately following the month when the sales occurred and can usually be remitted through your state’s website.
Recent Highlights
Wondering what you missed in our last newsletter? Check out our latest exclusive articles here:
NOT A MEMBER YET?
SUBSCRIBE TO GET ALL OF OUR
GREAT ARTICLES AND RESOURCES!
CURRENT EDITION
The Ultimate Business Upgrade: Turning Your Partnership into an S Corp Without the Tax Bite
Looking to cut down on self-employment taxes on your partnership income? Converting your partnership into an S corporation might be the answer. If you currently run your business as a partnership or an LLC taxed as a partnership, you’re probably familiar with the sting of self-employment taxes. Unlike shareholder-employees of an S corporation, who only pay Social Security and Medicare taxes on their salaries, partners typically get hit with self-employment taxes on their entire share of the business’s net income. That can add up fast. By transitioning to an S corporation, you can restructure how you take your income—splitting it between salary and profit distributions. The big advantage? Those profit distributions are not subject to self-employment tax, potentially saving you thousands each year. So, if reducing your tax burden sounds appealing, let’s break down how a tax-free Section 351 incorporation works and what you need to know before making the move.
IRS and DOJ Enforcement Against Tax Professionals: Trends, Cases, and Lessons
In recent years, the IRS Criminal Investigation (CI) division and the Department of Justice (DOJ) have aggressively pursued tax professionals involved in fraud or other tax-related crimes. Certified tax planners, preparers, accountants, and attorneys who engage in misconduct are facing serious legal consequences. This article reviews notable prosecutions from roughly the past five years, highlighting enforcement trends and the types of fraud authorities have targeted. We then distill 10 key lessons from these cases – each supported by real-world examples and case citations – demonstrating how broad enforcement has impacted tax professionals. Finally, we conclude with a comprehensive list of dos and don’ts to help tax practitioners stay on the right side of the law and avoid the pitfalls that landed others in trouble.
How to Overcome the Fear of Delivering Bad News to Clients
We’ve all been there. Breaking bad news is one of the hardest parts of being a tax professional. But avoiding these conversations only makes things worse.
The good news? There are ways to make this process easier. With the right approach, you can turn these tough conversations into opportunities to build trust, strengthen your reputation, and reinforce your expertise.
