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WORLD NEWS
The IRS has extended this year’s tax deadline for state disaster areas… impacted by recent tornadoes and storms. Taxpayers who live in or have business located in Cross, Lonoke, and Pulaski counties in Arkansas now have until July 31st to file their federal tax returns and make any payments. Due to previous natural disasters, including tornadoes, landslides, mudslides, and severe storms, the tax deadline had already been extended for residents of certain counties in Alabama, California, Georgia, Mississippi, and New York. To determine whether you are a designated disaster area, check your eligibility on the Tax Relief in Disaster Situations section of the IRS website.
A recent study revealed U.S. cities where homeowners pay the least in property taxes… according to data from 2019 to 2021, published by LendingTree. Homeowners in the South had the lowest property tax payments with residents of Birmingham, Alabama; New Orleans, Louisiana; and Memphis, Tennessee paying less than $2,000 annually on average. Conversely, the highest property taxes were levied on residents of New York City, San Francisco, and San Jose, California, which average over $7,000 annually. Across the nation, property taxes rose an average of 3.6% on single family homes in 2022.
U.S. NEWS
The IRS releases its list of 2023 “Dirty Dozen” tax scams
Throughout March of this year, the IRS has been unveiling its updated list of common tax scams to watch out for during filing season, also known as the “Dirty Dozen.” These scams put taxpayers at risk of losing both money and sensitive personal information. Scammers often access this data by asking taxpayers to share sensitive information over the phone, email, or social media. Here is a quick overview of this year’s list:
- Employee Retention Credit Claims: Scammers use radio and internet ads to promote large ERC refunds to taxpayers who are not eligible for the credit.
- Phishing and Smishing: Scammers send emails or text messages pretending to be the IRS or a related organization and claiming to either offer a benefit (like a tax refund) or warn about impending consequences (like suggesting the taxpayer will face criminal charges).
- Online Account Setup: Scammers pretend to be a third-party service that helps taxpayers set up an online account with the IRS.
- Fake Fuel Tax Credit Claims: Third parties persuade taxpayers to claim this credit intended for off-highway business and farming use, though many taxpayers will not qualify.
- Fake Charities: Scammers even have the audacity to set up fake charities, especially after major disasters, as taxpayers look to make donations and gain tax benefits.
- “Ghost” Tax Return Preparers: These unscrupulous tax preparers will decline to sign your returns or include their IRS Preparer Tax Identification Number (PTIN).
- Bad Social Media Advice: Misguided tax tips abound on social media platforms, such as this scam involving W-2s.
- Spearphishing and Cybersecurity for Tax Professionals: Targeting phishing emails may look like a tax preparation application or communication from a familiar platform.
- Offer in Compromise Mills: This program helps taxpayers who cannot afford to fully pay their tax bills to settle their debts. Scammers collect excessive fees claiming they can help settle tax debt on your behalf.
- High-Income Filer Scams: Scammers suggest inappropriate tax strategies—in particular, Charitable Remainder Annuity Trusts (CRATs) and monetized installment sales.
- False Tax Avoidance Strategies: Scammers suggest using micro-captive insurance arrangements and syndicated conservation easements in inappropriate ways.
- International Schemes: Scammers convince taxpayers to place their assets in offshore accounts and structures. Meanwhile, the IRS continues to crack down on attempts to hide digital assets, such as cryptocurrency, in international accounts.
STATE NEWS
Chicago’s recently-elected mayor proposed $800 million in new taxes… to go toward anti-violence programs, mental health services, and other social spending. Mayor-elect Brandon Johnson’s campaign tax proposal included a new real estate transfer tax and a new tax on aviation fuel at the airports— however, both of these changes would require state or federal approval. Johnson has also spoken about a $4-per-employee tax on large companies that have at least half of their operations in Chicago.
Another city-level proposal is to increase Chicago’s hotel-motel tax and introduce a $100 million user fee on North Michigan Avenue and the neighboring commercial district. Before the COVID-19 pandemic, the hospitality and tourism industry was the city’s top private employer. Johnson also put forth a financial transaction tax amounting to 1 or $2 tax per securities-trading contract. Analysts predict this measure would not generate much revenue since companies could easily execute their trades outside of Chicago instead.
Some version of a tax increase will be needed to generate revenue for Johnson’s proposed public spending plan. Opponents express concerns that Johnson’s new taxes would only put more pressure on businesses during a financially fragile time as Chicago expects to reach a $474 million deficit next year and is $34 billion short in its pension funds.
Alabama legislators propose two tax cut bills… funded by the state’s record budget surplus. The House Ways and Means Education Committee approved a measure to adjust the state’s lowest and highest tax brackets, resulting in $82 million in income tax cuts. The first bill seeks to eliminate the 2% tax levied on workers’ first $500 of taxable income (or $1,000 of taxable income for married couples filing jointly). The second bill gradually reduces the 5% state income tax rate until it lands at 4.95% in 2027. State income tax is currently collected on any taxable income over $3,000 for single taxpayers and $6,000 for taxpayers who are married and file jointly.
In light of Alabama’s unexpectedly high tax revenue, legislators have looked at other tax cuts, such as eliminating the 4% sales tax on food. In past years, lawmakers have hesitated to remove this levy because the funds provide over $600 million per year toward the state’s education budget.
Other proposals for the surplus budget have included providing $500 million in taxpayer rebates or expanding the state’s Medicaid program—Alabama is one of only 11 states that did not expand health care coverage for low-income residents under the Affordable Care Act.
TAX PLANNING
Social Security benefits may be taxed due to the 2022 cost-of-living adjustment. In recent years, retirees did not have to factor in the cost-of-living adjustment (COLA), which was only increased by 1.6% and 1.3% in 2019 and 2020, respectively. However, in 2021, the COLA rose dramatically to 5.9%, and in 2022, it rose even more to 8.7%, which may result in more benefits being taxed in the next filing season.
How does the COLA impact Social Security taxation? Up to 85% of Social Security income can be taxed based on a government-set formula called “combined” income:
combined income = adjusted gross income + non-taxable interest + half of Social Security benefits
Taxpayers with combined incomes of more than $34,000 (or more than $44,000 for married filing jointly) see the highest taxes on 85% of their benefits. Unfortunately, these income thresholds have not been adjusted for inflation since Social Security benefits were first taxed in 1984. So if the COLA increases, Social Security benefit checks will also increase—but so will retirees’ potential tax bills.
To offset increased taxation, experts recommend withholding more federal income taxes from your benefits. Fill out IRS Form W-4V and request to withhold at least 10% or even 12%. Another strategy is to withdraw money from other sources, such as traditional IRAs or 401(k), so you can delay claiming Social Security benefits.
Taxpayers earning over $100,000 may pocket much less after cost-of-living adjustments and common taxpayer errors. Recent trends in remote and hybrid work show that more high-earners are moving to lower-tax states. Yet these taxpayers also need to focus on lowering their taxable income and pay attention to how major life changes may impact their taxes.
Experts also recommend looking out for these common errors:
- Failing to max out retirement accounts, especially if matching contributions from employers are available.
- Overlooking savings accounts for health expenses (HSAs) and college costs (529s). HSAs have triple tax benefits—funds go into the account before taxes, grow tax-deferred, and come out tax-free when used for qualified medical expenses. 529 contributions are tax deductible in some states.
- Neglecting to take deductions for charitable donations or your home-office.
- Failing to keep records to substantiate any deductions and credits you claimed.
- Ignoring phase-outs for certain deductions and tax breaks where taxpayers earning over $100,000 may no longer be eligible.
- Misreporting after setting up a “backdoor” IRA—filers may fail to report the IRA contribution and the conversion or report the conversion as taxable.
- Misunderstanding how your bonus is taxed, which depends on whether your company issues your bonus as part of your regular salary or separately.
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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.”
