Around the Tax World - January 25, 2024 - Think Outside the Tax Box

Around the Tax World – January 25, 2024

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In The Headlines

What's New In The Tax World?

2024 may be the Year of the Tax Break—from the expanded child tax credit to business benefits

Congress recently announced a $78 billion bipartisan tax deal that could mean tax savings for individuals and businesses alike. After months of negotiations between Republican and Democratic leaders, the proposal is ready to be finalized and sent to Congress for approval. The passing of this deal would be a rare bipartisan victory for a strongly-divided Congress, according to political analysts

A centerpiece of this legislation will be the expansion of the child tax credit, a key issue for Democrats. The refundable portion of the credit would increase from $1,600 per child to $1,800 starting in tax year 2023. This amount would continue rising year-by-year to $1,900 in 2024 and $2,000 in 2025. Parents would also be allowed to use previous years’ income to calculate their credit if it would be beneficial. The Center on Budget and Policy Priorities estimated that this boost could lift 400,000 children out of poverty in its first year. According to the CBPP, over 80% of the 19 million children in families with low incomes would benefit from the expanded credit. 

The new legislation also reflects the Republican priority of providing tax relief to businesses, strengthening Main Street, and creating more jobs. This includes reactivating certain measures from the 2017 Tax Cuts and Jobs Act that recently expired. Business tax breaks include expensing research and development (R&D) costs, an expansion of small-business expensing overall, an interest deduction, and an extension of bonus depreciation, which allows businesses to immediately deduct the cost of newly-purchased assets.

The bipartisan backers of the deal hope it will be signed into law in time for tax filing season, which kicks off on January 29th. A major obstacle is the fact that Congress has been preoccupied with a potential government shutdown and completing its funding process. The agreement’s authors have yet to write the official text and have not indicated if it will be presented as a standalone bill or be attached to a government funding measure.

State-By-State Updates

  • The Kansas Legislature is stepping on the gas when it comes to income and sales tax reform. A major feature of the new tax package is a flat income tax rate of 5.25%. However, Governor Laura Kelly previously stated that she would veto any legislation with a single-rate income tax. In addition to leveling the tax rate, the proposal exempts $6,150 from taxable income for taxpayers filing single and $12,300 for married couples filing jointly. Other changes include an increase to the personal exemption allowance, elimination of the income tax on Social Security benefits, and an exemption for the first $100,000 in state property taxes for all Kansas homeowners.
  • Minnesota introduced a trifecta of tax changes that impact this tax filing season. Last year, the state passed a $3 billion plan aimed at providing tax relief for low-to-middle income families and senior citizens. The plan featured three key measures:
    • A one-time rebate for Minnesotans earning under $75,000 per year (or $150,000 for married couples filing jointly). Rebates amounted to $260 per taxpayer, plus an additional $260 per dependent for up to three dependents. 
    • A child tax credit of $1,750 per child. The credit begins to phase out for families making more than $35,000 per year. 
    • Eliminating taxes on Social Security benefits for retired individuals making up to $78,000 per year (or couples making up to $100,000). 
  • Missouri tackles the problem of affordable child care by introducing three new tax credits
    • The “Child Care Contribution Tax Credit” allows child care providers to claim up to 75% of taxpayer donations made to the provider. 
    • The “Employer Provided Child Care Assistance Tax Credit” applies to employers who offer their employees child care options. These employers can receive a credit of up to 30% of the costs they incur. 
    • The “Child Care Providers Tax Credit” applies to child care providers with three or more employees. These providers can claim a tax credit equal to their employee withholding tax and a second tax credit of up to 30% of their capital expenditures. 
  • The U.S. Supreme Court will not evaluate Washington’s state capital gains tax—for now. Washington introduced this tax in 2021, which levies 7% of profits from the sale or exchange of stocks, bonds, and other investments or tangible assets over $250,000. In 2022, the case of Quinn v. Washington was first filed, hoping to invalidate the capital gains tax as unconstitutional. The plaintiffs argued that it is effectively an income tax—and Washington state does not have an income tax. After lower courts ruled in favor of the state, the lawsuit was escalated to the Supreme Court who opted not to hear the case. Supporters of the tax lauded this as a victory for students and educators, since the first $500 million in revenue is earmarked for education. 

Tax Planning Tips

The latest industry boom is in selling energy tax credits—a market worth up to $9 billion. The Biden administration’s Inflation Reduction Act included new climate laws intended to reduce the nation’s reliance on fossil fuels. To encourage companies to invest in “going green,” the government now offers tax breaks for renewable energy projects, such as building solar plants or wind farms. Some of these tax credits are tradable, which spurred on new moneymaking endeavors: mainly, companies selling unused energy tax credit to the highest bidder. 

Guidance for these trades was introduced in June 2023. The hope in making credits tradable was that energy projects could wean themselves from relying on big banks and find alternative forms of financing. In the six months since then, trades amounted to between $7 billion and $9 billion, according to data platform Crux. This is about one third of the estimated $20 billion in tax equity that is typically raised each year for climate-friendly projects. Crux reported that buyers paid an average of 92-94 cents on the dollar for energy tax credits. 

The 2024 tax season faces a new obstacle: a full government shutdown. Each year Congress faces two major deadlines for reaching a deal on the annual appropriation bills or passing a short-term funding measure to keep operations going. If Congress fails to do either, this will result in a pause in nonessential operations, which could affect taxpayers attempting to file their returns. This year, Congress narrowly made the January 19th deadline and passed a bill to fund the federal government through early March.

If a government shutdown were to happen during tax season, how would this impact taxpayers? Fortunately, the law allows the IRS to continue performing certain activities even if a pause in funding occurs. However, the IRS still warned that a shutdown could disrupt the filing process for many taxpayers, causing delays in refunds and making it more difficult to reach an IRS representative for help.

Given the recent cycle of coming dangerously close to a government shutdown, the American Institute of Certified Public Accountants sent a letter of concern to the Treasury Secretary and the IRS Commissioner. The group outlined their top concerns, including how the agency would handle IRS phone service, taxpayer assistance centers, refund delays, paper correspondence, and automated notices.



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