Around the tax world - 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!

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

A proposed levy on Disneyland tickets fails to move ahead as local lawmakers respond to the rise in admission prices. The measure would have introduced a 2% gate tax for both Disneyland and the Honda Center in Anaheim, California. The petition to put the tax before voters on the November ballot was ultimately opposed by city council members. The gate tax would have generated $55 to $82 million per year for the city while adding a $2.08 to $3.28 charge to each theme park ticket.

 A winning lottery ticket could come with a $100 million tax bill out of the current Mega Millions jackpot of $630 million. Most lottery winners opt for the cash-now option, instead of an annuity of 30 payments over 29 years, which reduces the amount of money received by about half—in this case, a $359.7 million payout. On a federal level, 24% of that sum would be withheld right away, and if you had no reduction in income, another 13% would be owed to the IRS. Even for lottery winners living in regions with no state taxes, total winnings would be reduced by at least $133 million.

U.S. NEWS

Debate brews over Democratic lawmakers’ proposal for the IRS to launch a free tax filing service

A group of 23 congressional Democrats, including Senator Elizabeth Warren of Massachusetts, are introducing a bill pushing the IRS to offer a free online filing service with a “return-free option” that would allow eligible taxpayers to use a pre-populated filing. However, some tax professionals are speaking out against the plan, saying that the already stretched-thin agency is unlikely to have the administrative capacity to handle such an undertaking.

The Tax Filing Simplification Act is intended to save Americans time and money—on average, taxpayers spend $240 and 13 hours each year on their returns. In addition to the creation of a new filing service, taxpayers would also have access to a pre-populated return with the refund or tax owed calculated for them. One paper by the National Bureau of Economic Research estimated that nearly half of all individual income tax returns could be automated using information the IRS already has.

The program that is currently available, IRS Free File, is provided through a partnership with a nonprofit coalition of tax software companies known as the Free File Alliance. Nearly 70% of US taxpayers are eligible to use this service, but according to a government report, only 3% of this population used Free File for their 2020 taxes.

The main concern surrounding the Tax Filing Simplification Act is that the IRS has been overburdened for the past several years as a result of pandemic-related complications. Some financial professionals believe the agency could better serve Americans by focusing on eliminating their current backlog. An estimate from June 2022 stated that the IRS still has around 11 million individual returns that remain unprocessed.

Tax experts cite a number of pitfalls that could come with the “return-free” option, since an auto-generation system may not be able to accurately identify available tax breaks. Examples include skipping or incorrectly calculating the earned income tax credit, child tax credit, child and dependent care credit, or other nuanced benefits—taxpayers could easily miss out on the full amounts they are entitled to without realizing it. Errors are especially likely for returns with a large number of itemized deductions.

However, some tax professionals are hopeful about this type of legislation, saying that taxpayers whose taxes are simple enough to benefit from a pre-populated return would be wasting time and money seeking the advice and services of a professional.

STATE NEWS

A watchdog group in Utah is speaking out about the use of the state’s surplus revenue… which amounted to about $1.4 billion as of July 2022. The group known as the Utah Taxpayers Association is advocating for tax cuts—as many other states with hefty funds have seen. Utah residents are anticipating increased property taxes and other local taxes due to nationwide inflation, which has already caused stress on American wallets.

One particular target is income tax cuts, a measure that has tended to receive pushback from educational and lower-income advocacy groups. The concern is that reduced state revenue will mean that social services will not receive adequate funding. Given this year’s surplus, the watchdog group argues that tax cuts can be enacted without impacting state initiatives.

State lawmakers are expected to come to their 2023 session with a number of proposals focused on income tax reductions, elimination of the grocery sales tax, and property tax changes. That last item in particular has become an area of concern as 90 different taxing entities in Utah intend to increase property taxes this year.

Indiana lawmakers are seeking to replace the governor’s taxpayer refund proposal… with a bill that would suspend sales tax on residential utilities for six months. Governor Eric Holcomb’s initiative would offer $225 inflation relief checks to state residents, but Senate Republicans have another idea in mind. In response to rising prices, the new Senate proposal would temporarily lift the 7% sales tax on electricity, water, gas, internet, and telephone bills. This move could save households across Indiana a cumulative $260 million.

Indiana has already introduced a $125 “Automatic Taxpayer Refund” as a way to funnel the state’s surplus back to the taxpayers. While some are suggesting that one-time checks are not the best way to allocate these funds, others are calling for an even larger second relief check of as much as $400 per person.

In addition to the utilities tax measure, the new bill proposes a cap on sales tax for gasoline and a suspension of the increase of gas tax and special fuel tax. If the measures pass, both would be in effect through June 2023.

TAX PLANNING

For higher-income taxpayers, Social Security taxes could increase due to the rising wage ceiling. For most employees, half of the Social Security tax (or 6.2% of your wages) is automatically withheld from your paycheck. The other half (another 6.2%) is paid by employers. Those who are self-employed must pay the full 12.4% tax themselves.

Social Security tax also has a “wage ceiling,” which differs year by year depending on… inflation. Once an employee earns above the wage ceiling amount, no additional taxes are withheld or contributed by the employer for Social Security. For 2022, the wage ceiling is $147,000, which means that the most a person can pay in Social Security tax is $18,228 (12.4% of $147,000).

However, the wage ceiling is projected to increase in 2023 to $155,100. In 2024, that number is expected to rise to $165,300. The actual increases could end up being even higher depending on inflation. Estimates also indicate that monthly Social Security benefits for current retirees could rise by 10.5% in 2023 or by about $175 per payment, and yet many are concerned that this will not be enough to meet seniors’ living costs, especially rising health care expenses.

Roth IRAs can provide tax savings for retirement portfolios affected by dips in the stock market. Converting traditional retirement account assets to a Roth IRA gives you more control over the timing and amount of taxation on these funds. When you make the transfer, you will pay ordinary income tax rates on the amount converted, but after that, your assets will not be taxed again regardless of how much they grow, which can prove lucrative over the long run.

Financial experts suggest that retirement account holders make the conversion when the market is down, since your assets are currently worth less and therefore you will pay less in taxes. On the other hand, when the market goes back up, your assets will be sitting in that Roth IRA and growing tax-free.

Investors should also consider that taxes may rise in the future as laws change, so paying taxes now may be the more strategic move. Notably, the Tax Cuts and Jobs Act may expire in 2025, which would mean that tax rates would return to their 2017 levels: the 12% tax rate will rise to 15%, the 22% rate will return to 25%, and the 24% rate will go up to 28%.

Recent Highlights

  • NOT A MEMBER YET?

    SUBSCRIBE TO GET ALL OF OUR
    GREAT ARTICLES AND RESOURCES!

  • Scroll to Top
    error: Alert: Content is protected !!