At Around the Tax World, you can find out all about what’s going on in the wonderful, worldwide world of tax. Every month, we’ll feature a few mini-articles on what’s been going on in the world when it comes to tax, and fully available for viewing even if you don’t have a subscription.
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WORLD NEWS
President Joe Biden proposes increased taxes on the wealthy to fund Medicare… to help stabilize the popular insurance program for the next 25 years. The president’s plan would increase the Medicare tax rate from 3.8% to 5% for Americans earning over $400,000 per year. Estimates suggest that this change would generate as much as $117 billion over the next decade to fund healthcare for people older than 65. Over 65 million Americans currently rely on Medicare, but without changes to its funding structure, the program will likely only be able to offer 90% of current benefits by 2028.
A new tech platform focuses on helping companies benefit from the climate tax credits… introduced by the Inflation Reduction Act. An emerging startup called Crux aims to help companies coordinate selling these credits by creating a centralized marketplace. The transactions in question involve one company earning the credit through “clean” business activities—building electric vehicle infrastructure, wind power, solar power, nuclear power, clean hydrogen, and other means of reducing greenhouse gas emissions—and then selling the credit to another company for less than its value to get cash instead. The hope is to bring greater transparency and access for smaller developers to this area.
U.S. NEWS
The Biden administration released new rules limiting which electric vehicles are eligible for tax credits
The current EV tax credits were introduced as part of the Inflation Reduction Act, which aims to incentivize automakers to use US-made batteries and locally-processed raw materials. China is currently the primary source of the world’s automotive batteries and critical minerals. The Biden administration has had to balance the competing priorities of encouraging Americans to buy clean vehicles while also bringing more factories for automobiles, batteries, and battery minerals to the US and its free-trade partners. Automakers are now racing to make adjustments that enable more of their vehicles to qualify and therefore gain a competitive advantage as more consumers consider electric vehicles.
The $7500 tax credit has been a huge draw for new car buyers, but the new requirements, which take effect on April 18th, mean that only a handful of vehicles will qualify for the full credit. Car batteries are the key factor in determining if a vehicle is eligible—50% of the components must be made in North America, and 40% of the minerals used must come from the US or countries that have trade agreements with the US. The percentages required will slowly rise year-by-year until the minerals requirement reaches 80% in 2027 and the components requirement reaches 100% in 2029.
Though the full list of qualifying vehicles will not be available for several more weeks, automakers have already begun to issue statements to consumers. Tesla stated that one of its most popular electric cars, the Model 3 sedan, will no longer be eligible for the full credit since its battery is manufactured in China. On the other hand, General Motors is promoting three electric vehicles that will qualify for the full credit: the Cadillac Lyriq, Chevrolet Equinox, and Chevrolet Blazer.
The new guidelines list 21 countries that have free trade agreements on critical minerals: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore. Japan originally failed to make the list, but leaders ultimately negotiated a limited trade deal that covers the critical minerals. The Biden administration is also weighing striking a similar deal with the European Union.
STATE NEWS
Massachusetts advances a $1.1 billion tax package… that includes a reduced short-term capital gains rate. The bill would also introduce a $600 child and dependent tax credit that had been abandoned last year. Additionally, the bill would amend a tax cap law that triggered $3 billion in taxpayer refunds in 2022. Estimates suggest that the tax relief package will cost the state $654 million in 2024, eventually rising to $1.1 billion by 2026.
Other measures aim at drawing multi-state companies into Massachusetts by establishing a “single sales factor” apportionment. When companies sell goods or services in multiple states, each state requires that company to pay state tax on a portion of its profits. Most states use the company’s total property, payroll, and sales in their state to calculate the tax due, but this new measure would mean that Massachusetts would look only at the business’ sales to determine its tax bill. Legislators who support this change anticipate this will bring more profitable businesses into Massachusetts.
The IRS has notified Georgia residents that they may have unclaimed tax refunds… for tax year 2019. The agency estimates that around 48,000 Georgians failed to receive a total of $46.2 million in tax refunds. On average, this would come out to about $826 per taxpayer. Georgians who do not submit their 2019 tax return by the final deadline also stand to lose out on the Earned Income Tax Credit, which could be worth as much as $6,557.
According to federal guidelines, taxpayers have three years to file a return and claim any refunds—otherwise, that money is funneled to the US Treasury. Since the tax return deadline for 2019 was extended due to the COVID-19 pandemic, taxpayers now have until July 17, 2023, to claim old refunds. Taxpayers will also need to have filed their returns for 2020 and 2021 before receiving their belated 2019 refund.
Georgia ranks ninth in the nation for the number of residents and total money unclaimed. Overall, the IRS reports that almost 1.5 million Americans have unclaimed tax refunds for 2019 and almost $1.5 billion in refunds remain inaccessible because people have not yet filed their 2019 returns.
TAX PLANNING
Early filers may need to file an amended tax return if they reported certain 2022 state refunds as taxable income. On February 10th of this year, the IRS released tax guidelines for special payments made by 21 different states in 2022. The IRS determined that most of these payments did not need to be reported and therefore were not subject to federal taxation. Taxpayers in these 16 states were exempted from reporting state refunds: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania, and Rhode Island.
Supplemental Energy Relief Payments received by Alaska residents were also deemed tax-exempt, and taxpayers in Georgia, Massachusetts, South Carolina, and Virginia who meet certain requirements were also deemed eligible for tax-free refunds.
Taxpayers who filed their returns before February 10th and meet one of the requirements listed above should consider filing an amended return. If the original 2022 return was filed electronically, taxpayers can also file their amended return electronically and can select direct deposit for any refunds due. Both electronic and paper returns can be tracked using the IRS’ Where’s My Amended Return? online tool.
Taxpayers may have several options if they cannot complete this year’s tax return by the April 18th deadline. Taxpayers should note that even if they request an extension they will still need to pay any taxes owed by the original due date. If you fail to file a return by the original due date without, you will have to pay a failure to file penalty of 5% of your unpaid tax bill each month, up to 25% of your total bill. On top of this, you will also have to pay interest on the unpaid amount. The late payment penalty is 0.5% of your tax bill each month, also capped at 25%, not including interest.
First, an installment agreement allows taxpayers to set up monthly payments rather than paying their entire tax bill in one lump sum. If you owe no more than $50,000 after factoring in tax, penalties, and interest, you can set up an installment plan online in about five minutes.
Second, an offer in compromise is available to taxpayers who can demonstrate that they have encountered financial hardship that would make it particularly difficult to pay their entire tax bill. In these rare cases, the IRS may agree to reduce your balance significantly.
Lastly, taxpayers who are deemed unable to pay their current tax debt could qualify for the “currently not collectible” status. The IRS does not waive the debt, but it will put a moratorium on any collections, though you may still accrue penalties and interest. In this scenario, the IRS can reallocate future tax refunds to cover your previous tax bill.
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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.”
