Check out what’s happening all around the world of tax!
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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
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CURRENT EDITION
Divorce and Taxes
“Timalyn, Alyssa and I filed for divorce, and we will finalize everything before Thanksgiving. Does this change things for our taxes?”
“No! Can we wait until January 1?” were my initial thoughts. But then I realized that if this news blindsided me, the seemingly happy couple was probably also scrambling for answers. They were looking to me to be calm during an upcoming storm.
To give you some context, I had helped this family lower their back taxes by $16,000 and get a payment plan that worked well with their cash flow. Then, by implementing a few strategies they had just saved an extra $20,000 on their last tax return. We were planning on saving them even more money in upcoming years.
Then, that is when it happened. Divorce.
I never saw this happening, so I never prepared for it. But if it happened to me, it will happen to you. Clients divorce.
Some of the things we are going over today may seem obvious to you. But remember what is obvious to us as tax experts is not obvious to our clients, especially if they are going through a life-changing event such as divorce.
Here are four things you need to inform your client about when it comes to their divorce and taxes…
Facts, Circumstances, and Forever Stamps
The price of a forever stamp increased from $0.58 to $0.63 on January 1, 2023. A tax pro posted this fact as a public service announcement on Facebook. Of course, tax pros being tax pros, someone chimed in, “Do I have to recognize a capital gain upon disposition of my forever stamp?” And of course, someone (me) felt obliged to answer, “It depends.” A direct message followed this bit of tax drollery on Twitter that says, “In theory, if I’m holding stamps as an investment, they would be a capital asset.” And so it begins…
Crypto Charitable Deduction Compliance – Mission Impossible?
Reilly’s Fourth Law of Tax: “Execution isn’t everything, but it’s a lot” might be amended when it comes to charitable deduction of property, because there you have an area where execution is almost everything. It is also an area that dramatically illustrates the Seventh Law: “Read the instructions.”
In January, we received guidance from the IRS on the reporting requirements for charitable contributions of crypto currency . If you have followed IRS guidance on crypto and know something about charitable donation reporting requirements, the result shouldn’t surprise you , but maybe it will.
The most disturbing part of the story is that the IRS may be asking for something we can’t provide…