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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Check out what’s happening all around the world of tax!
In The Headlines
- Universal Pictures ousts Disney from its throne in 2023, coming in as the highest-grossing studio at the box office. Universal collected major power-ups with blockbusters like The Super Mario Bros. Movie, summer smash Oppenheimer, and horror flick M3GAN. These films helped the company gross $4.907 billion in worldwide ticket sales. This is the first year since 2015 that Disney was not in the top spot for box office revenue. Still, Disney was no slouch in 2023. The studio collected $4.827 billion for hits such as Guardians of the Galaxy Vol. 3, Indiana Jones and the Dial of Destiny, and The Little Mermaid.
- COVID vaccine maker Moderna saw its stock prices soar by almost 14% to the highest level in over three months. This surprise performance comes after a major slump in 2023 when shares dropped by almost 45%. Last year’s performance was linked to the fact that the company’s only commercially available product is its COVID shot. However, Moderna is aiming to bring five new products to market by 2026, leading brokerage Oppenheimer to upgrade the stock to “outperform.” The new offerings include a vaccine for RSV, a flu shot, a combination flu-COVID vaccine, and even an experimental cancer vaccine.
- If freedom and passion are your top motivators, you might have the makings of an entrepreneur. According to a study by Cox Business, the appeal of becoming your own boss ranked as the number one reason small business owners started their company. In second place was a desire to create something from the ground up. Almost two-thirds of respondents named one of these two reasons as their main motivator. Conversely, only 8% of respondents named money as their reason for becoming an entrepreneur. Small business owners also show a high level of dedication to their enterprises—about 43% said they have never considered closing their business.
What's New In The Tax World?
Cutting state tax rates: What was hot in 2023 may not be in 2024
Over the past three years, a majority of U.S. states collected more tax revenue than expected. This led to a trend of tax cuts on everything from income to property to gasoline. Some tax reductions were permanent, while others came in the form of one-time rebates or temporary tax holidays. For instance, California offered a rebate of $200 to $1,050 per resident depending on annual income, while Delaware took the approach of a flat $300 rebate for every adult taxpayer.
The Tax Foundation observed that the era since the start of the COVID-19 pandemic marked the biggest wave of individual income tax rate reductions in the history of state income tax. A whopping 48 states offered some form of tax relief, excluding only Alaska and Nevada. Notably, Alaska and Nevada do not levy an individual income tax, and Alaska also has no state sales tax. Some of this updated legislation kicked in this year—17 states saw individual or corporate income tax cuts take effect on January 1st, 2024.
However, as 2024 legislative sessions begin, many states are seeing dips in revenue. Without the help of federal pandemic-related aid, the time of teeming state coffers may be ending. For instance, California is looking ahead at a possible budget deficit of $68 billion—a state record that would empty its reserves. This comes on the heels of a year when California enjoyed a $100 billion surplus that broke the revenue record. Arizona, Maryland, and Minnesota are among the other states that are projecting potential revenue shortfalls in 2024.
Some analysts expect that by next year most state budgets will be back to their usual revenue. Whether this is mainly a result of tax rebates and reductions is uncertain, but this new era will likely mean the end of widespread tax cuts—for now. The one exception may be property taxes. Rising property valuations are prompting states like Colorado, Kansas, and Wyoming to introduce new legislation aimed at property tax relief. Iowa, Nebraska, Montana, North Dakota, and West Virginia already introduced property tax cuts in the first half of 2023.
State-By-State Updates
- Georgians may have more money in their pockets in 2024 from reduced state income taxes. As of January 1st, the state’s flat tax rate dropped from 5.75% to 5.49%. This decrease could save a family earning $75,000 about $650. Governor Brian Kemp plans to advocate for an even lower rate of 5.39%, which could be approved by the state legislature as early as this month. However, some legislators worry that now is not the time to accelerate tax cuts, since tax collections have been slowing down since last year. If no changes are made to the current law, Georgia’s income tax rate will continue to drop year-by-year, reaching 4.99% by 2029.
- Kansas falls short of its tax revenue projections, collecting just over $1 billion. The gap amounts to about $36.9 million. Overall, the state collected $17.1 million more than expected from income taxes but $39.3 million less than anticipated from corporate taxes. Analysts say this disparity isn’t surprising—personal earnings in Kansas grew at one of the highest rates in the U.S. in 2023. At the same time, Kansas just hit its next scheduled reduction to the state’s grocery sales tax. The tax fell to 2% as of January 1st and is on schedule to be eliminated entirely at the start of 2025.
- For Nebraska, property tax relief may mean a higher state sales tax. Governor Jim Pillen is proposing increasing the sales tax from 5.5 cents to 7.5 cents, amounting to a 36% increase. This would make Nebraska’s sales tax the highest in the nation, leaping over California, which stands at 7.25%. Groceries would continue to be tax-exempt, but most other consumer items would be affected. The sales tax hike is the core of the governor’s plan to reduce state property tax collections from $5 billion to $3 billion per year. This idea comes after several failed efforts to decrease local property taxes as property valuations continue to skyrocket.
- North Dakota homeowners can get $500 knocked off their property tax bill in 2024. The state’s unexpected revenue surplus is spilling over into residents’ pocketbooks—at least for next year. To be eligible for the discount, you must own a home in North Dakota and live there for the majority of the year. Residents who own a home but are currently residing in a rehabilitation center or nursing home for health reasons can still apply as long as they are not renting their home to someone else. This benefit is part of a larger tax cut package that includes an expanded tax credit for elderly and disabled homeowners who make $70,000 or less per year. North Dakota also introduced subsidies for low-income renters, disabled veterans, and farm residences.
Tax Planning Tips
Another day, another EV tax credit update—and it’s a big one. Electric vehicle tax credits were at the center of news stories all throughout 2023 as the federal government gradually introduced more and more guidance on which vehicles qualify for the $7,500 tax credit. At the start of 2024, the IRS updated the rules again, and only 13 electric vehicles now qualify for either a full or partial tax credit.
Models that are still eligible for the full $7,500 include the Ford F-150 Lightning pickup, the Chrysler Pacifica plug-in hybrid minivan, and certain versions of the Tesla Model 3, Model Y, and Model X. The determining factor is where certain parts, especially the battery and its components, were sourced and manufactured. If these parts were made in China, the vehicle may no longer be eligible for a tax credit.
What if you purchased a vehicle in 2023 but it wasn’t delivered until 2024? The IRS makes a determination based on when the vehicle was “placed into service.” In other words, if you did not physically possess the vehicle until 2024, unfortunately, the automobile will be subject to the new rules.
To see if the electric or plug-in hybrid vehicle you purchased or are planning to purchase will be eligible, you can enter the VIN (vehicle identification number) on the IRS website.
Parents can prepare for tax season by reading up on the 2023 child tax credit. If you were the parent or guardian of a child in 2023, you may be eligible for a tax credit of up to $2,000 per child. Additionally, up to $1,600 of that amount may be refundable—this means that if the amount you qualify for is less than your tax bill, you will be paid the difference in cash. The credit available is also dependent on income. If you earn over $200,000 filing single or $400,000 filing jointly, you will receive only a partial child tax credit.
Who qualifies for this tax break? The child must be under 17 years of age, and they must have a valid Social Security number to qualify and must be a U.S. citizen, national, or resident. The child must also be a relative by blood or marriage or an eligible foster child. Nieces, nephews, and grandchildren can qualify, and so can stepchildren or stepbrothers and stepsisters.
For you to count as the primary parent or guardian, the child must have lived with you for more than half of the tax year, and they must be officially claimed as a dependent on your tax return. For older children, the child cannot provide more than half of their own financial support during the tax year.
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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.”
