Around the Tax World - February 8, 2024 - Think Outside the Tax Box

Around the Tax World – February 8, 2024

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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In The Headlines

What's New In The Tax World?

To file or not to file? With new proposed tax breaks coming up fast, the IRS urges taxpayers to move ahead with their tax returns

A $79 billion tax cut package was recently passed by the House of Representatives, leading taxpayers to wonder when is the wisest time to file this year’s tax returns. This bipartisan bill includes the Democrat-backed child tax credit and three Republican-favored tax breaks for businesses. The child tax credit in particular could impact filings this season—but the IRS reminds taxpayers that they will not receive refunds for this credit or the earned income tax credit until February 27th at the earliest, and waiting on Congress will only contribute to delays. IRS Commissioner Danny Werfel adds that the agency is experienced in dealing with retroactive tax law changes. If the bill passes and this impacts tax returns, the IRS will automatically process any updates as long as your original tax return is accurate. 

Though the bill passed with a final vote of 357-70 in the House, its fate in the Senate remains uncertain. One possible obstacle facing the tax package is the absence of a change to the $10,000 state and local taxes (SALT) cap. Republicans have been advocating to raise the cap and allow property owners and consumers higher tax deductions when they itemize on their tax returns. Residents of high-tax states, such as California, New Jersey, and New York, are especially impacted by the $10,000 limit set in 2017 by the Tax Cuts and Jobs Act. 

The current tax bill includes $33 billion to make more of the child tax credit refundable. This would allow more low-income families to access the credit or receive a larger payment. Currently, up to $1,500 of the credit is refundable per qualifying child. The new legislation would expand this amount to $1,800 for 2023 tax returns, then $1,900 for 2024, and finally reaching $2,000 in 2025. Estimates suggest that families would see an average tax cut of $680 this year. On the business side, the tax package features immediate deductions for purchases of new equipment and machinery, deductions for research and development (R&D) expenses, and expanded interest expensing. 

State-By-State Updates

  • A Connecticut task force tries to bid farewell to the state’s car tax. State residents have long complained about paying property taxes on their vehicles. However, even after forming a task force to come up with alternatives, the state has not yet found a viable way to make up for the $1 billion in revenue that the tax brings in. Currently, Connecticut’s motor vehicle tax is determined by the mill rate of each municipality. If an area has fewer hospitals, universities, and other taxable properties, that area will typically have a higher car tax. The task force recently presented a proposal to cap the mill rate for commercial vehicles but did not provide enough data for the General Assembly to make a decision.
  • Colorado could quadruple its property taxes for short-term rentals. The sponsors of this new bill are aiming to close tax loopholes for places renting rooms or beds. For instance, certain hotels have attempted to dodge higher tax rates by filing as a residence rather than a large company. The proposed bill would base tax rates on how many days a rental would be used, which could increase taxes for some properties from 6.7% to 27%. Property taxes in Colorado funds key services such as local school districts or emergency services, depending on each county’s needs. 
  • New York lawmakers continue the quest to update the federal state and local tax (SALT) laws. The Empire State’s high taxes have motivated the state’s representatives to persistently advocate for more tax breaks on a national level. New York currently has the highest state income tax at 10.9% and an estimated 15.9% of net product going to state and local taxes—referring to goods and services produced in the state. One recent proposal was put forward by New York Representative Mike Lawler: the Marriage Penalty Elimination Act would increase the SALT deduction from $10,000 to $20,000 for married couples filing jointly. 
  • Tennessee is struggling to gauge the success of its broadband sales tax exemption. This $31 million tax break was passed in 2022 as part of an effort to expand broadband internet access in the state, especially to underserved communities. Tennessee received $650 million from the federal government to enable this expansion. However, some local lawmakers have expressed concern that the tax exemption simply allows large internet providers to improve their existing networks in metropolitan areas. The Tennessee Advisory Commission on Intergovernmental Relations recently confirmed this oversight—since there were no reporting requirements for broadband companies, there is no way to determine the effectiveness of the tax exemption. 

Tax Planning Tips

With TJCA tax provisions soon to expire, 2024 will be a crucial year for tax planning. A number of tax changes introduced in the Tax Cuts and Jobs Act will expire in 2025, meaning that this may be the last year to determine if you can benefit from them. For instance, the qualified business income (QBI) deduction allows pass-through entities to deduct up to 20% of this type of income. If you are an owner in a partnership, limited liability company, S corporation, or sole proprietorship, now is the time to see if you can leverage these tax savings. 

Another key tax break relates to estate and gift taxes. After 2025, the gift and estate tax exemptions will fall from $12.92 million to $5 million. This means that any amount you transfer as a gift or inheritance above $5 million will be subject to a 40% tax. Any taxpayers currently involved in estate planning should factor in this upcoming deadline. 

Could taxpayers see a larger tax refund this year? The new IRS brackets may help with that. Many taxpayers found themselves with an unexpectedly small tax refund or unexpectedly high tax bill in 2023, due in part to a number of pandemic-era benefits ending. This year, analysts expect that many Americans will receive 10% more in their refunds. The reason? Due to recent inflation, the IRS has raised tax brackets by 7.1% and increased the standard deduction. This is a higher percentage than the average earnings increase—the median worker saw only a 5.5% boost in 2023

In an average year, many workers’ tax refunds are higher than a typical paycheck, so many households rely on this inflow of cash to pay off debt or increase their savings. Taxpayers who took advantage of the expanded home energy tax credits or Earned Income Tax Credit are likely to see a higher refund, while taxpayers who took on more side gigs last year or receive Social Security benefits could see a lower tax refund



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