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WORLD NEWS
Alaska is making plans to tax online car sharing platform Turo… in an effort to change how ecommerce is regulated in the state. The Alaskan government has argued that transactions made through Turo’s website should be subject to the state’s 10% vehicle rental tax. However, Turo has argued that since it does not own its own fleet of cars that the tax should not apply. The issue has come forward because the majority of online car rentals in Alaska now occur through Turo’s platform, which allows users to advertise and rent cars. Since Turo handles transactions itself and pays car owners directly, the company currently has no way of collecting taxes from the renters.
Tesla and Panasonic could receive $1.8 billion through tax credits… created by the Inflation Reduction Act. Production credits are awarded based on the number of batteries and electric vehicles that a company manufactured in the U.S. or other approved countries. These credits can apply to mining, processing raw materials, and making the actual battery components. The income from these credits will allow Tesla to lower its sales price over the next two years, which could further increase the urgency for other automakers like GM, Ford, and Chrysler to ramp up their EV options.
U.S. NEWS
Cities in Tennessee, Texas, and Oklahoma rank as the most tax-friendly for high-income earners
Taxpayers who make $250,000 or more per year rank in the top 7% of U.S. households, but how far that dollar stretches depends on the cities where they live. A study done by SmartAsset compared the after-tax income—adjusted for cost of living—for 76 different U.S. cities. While taxpayers earning $250,000 per year pay an average of 34% in taxes, taxpayers who make $100,000 pay closer to 29% in taxes. On the whole, cities with no state income tax provided the most take-home pay to those earning $250,000 per year, and in 21 cities, they saw a lower tax rate than those earning $100,000.
The top city where $250,000 goes the farthest is Memphis, Tennessee. In Memphis, those earning $250,000 per year will take home an after-tax income of about $175,558. Tennessee has no state income tax, which means that this salary range is taxed at a rate of 29.77%. Rounding out the top five cities are El Paso, Texas; Oklahoma City, Oklahoma; Corpus Christi, Texas; and Lubbock, Texas.
On the opposite end of the spectrum, the five cities where the real value of a $250,000 salary is lowest are New York, New York; Honolulu, Hawaii; San Francisco, California; Los Angeles, California; and Long Beach, California. Portland, Oregon also places steep levies on high income taxpayers. This city has the highest tax increase between those earning $100,000 to those earning $250,000—the tax rate jumps from 7.47% to a whopping 41%.
The study used data from the Council for Community and Economic Research to calculate the cost of living in each city. Cost of living includes the price of groceries, housing, transportation, utilities, and other commonly used goods and services.
Rather than relocate, which may not be practical for many taxpayers, experts advise that six-figure earners apply tax planning strategies to lower their liability. For instance, making the maximum allowed contributions to a 401(k) retirement plan can lower your taxable income by $22,500 in 2023. Similarly, if you have a high deductible health insurance plan, you may be eligible for a health savings account (HSA). In 2023, you can make tax-deductible contributions of up to $3,850 to your HSA, reducing your taxable income.
STATE NEWS
New Jersey debates expanding property tax relief for seniors… as the deadline for a new state budget draws near. Property tax bills have been averaging around $9,500 in the Garden State, and Governor Phil Murphy has been discussing continuing the “Senior Freeze” program. This program remits reimbursement checks to offset property tax increases for eligible seniors.
Meanwhile, other state legislators have been putting together a different proposal that aims to cut property taxes in half for seniors starting in 2025. With all 120 legislative seats on the ballot in this November’s election, representatives have even more incentive to address this and other taxpayer concerns.
As of this spring, New Jersey is spending $3 billion per year to help seniors and other taxpayers with exceptionally high property taxes. About $2 billion of that total goes toward a program called “Anchor,” which provides homeowners with up to $1,500 in benefits and renters with up to $450 in benefits. The actual amount available varies depending on the taxpayer’s income. In its first year, the Anchor program provided aid to about 540,000 seniors and people with disabilities.
California legislators are weighing a proposal to tax short-term rentals… in an effort to increase state funding for affordable housing. This 15% tax would apply to rooms and homes that are rented out for 30 days or less at time, likely through popular companies like Airbnb and Vrbo. The new levy could generate as much as $150 million per year toward low and middle-income housing projects.
Vacation rentals have increased across California since the COVID-19 pandemic, sparking debates over whether state residents are being priced out of certain neighborhoods as a result. The state has already enacted bans, permit caps, and other restrictions as a result. Research completed in 2020 about the impact of home-sharing on housing and rent prices showed that the average neighborhood saw an annual increase of $9 in monthly rent and $1,800 in home prices in connection with short-term rentals.
Opponents of the proposed tax have expressed concern that the tax would give an unfair advantage to hotels over privately-owned rental homes. These short-term rental operators worry that they will be forced to reduce their rates to stay competitive, making it difficult to stay afloat in an already challenging economy.
TAX PLANNING
Taxpayers who withdrew IRA funds during COVID-19 are running out of time to claim a tax refund. Under the CARES Act of 2020, taxpayers were allowed to use funds from individual retirement accounts and employer-sponsored 401(k) plans to deal with financial emergencies brought about by the pandemic. These coronavirus-related distributions (CRDs) came with certain tax benefits. First, the usual 10% tax penalty for early retirement withdrawals was waived. Secondly, taxpayers could receive a refund for any income taxes paid on their withdrawals if they repaid all or part of their CRD within three years. This would essentially make the CRD a kind of tax-free loan.
Since the clock on those three years for repayment began the day the funds were received, many taxpayers are coming up on their deadlines now. Estimates say that hundreds of thousands of Americans took advantage of this provision, but few people have repaid their distributions. Data provided by the Vanguard Group showed that about 6% of retirement account holders took a CRD in 2020, but less than 1% had repaid the funds by the end of 2021.
To claim a tax refund on a CRD, taxpayers need to file an amended tax return. The IRS also allowed taxpayers to spread out the tax liability resulting from a CRD across the past three years—if they did so, they would now need to file an amended tax return for each year that they reported the distribution as income.
President Biden’s tax reform plans may be sunk by the recent debt ceiling deal. The recent deal suspended the country’s $31.4 trillion debt ceiling until the start of 2025. As part of the compromise, discretionary spending would be capped for 2024 and funds previously intended to boost IRS initiatives would be cut. The deal also contains no tax rate changes, possibly blocking Biden’s last chance to fulfill his campaign promises to increase taxes on America’s wealthiest and on major corporations.
Major changes to the tax code are now unlikely to be revisited until the end of 2025 when the provisions of the 2017 Tax Cuts and Jobs Act (TCJA) expire. As the 2024 presidential election season draws closer, tax policy continues to be a key issue. According to recent polls, a majority of Americans on both the left and the right support policies like tax increases for the highest income earners (65% in favor), increasing IRS audits for the wealthy (64% in favor), and increasing the federal minimum wage (63% in favor).
Congressional Democrats and Republicans are expected to offer differing proposals for addressing the federal deficit—liberals are likely to advocate a plan similar to Build Back Better with its focus on the corporate and capital gains tax rates, while conservatives are expected to push to make the TCJA’s individual tax cuts permanent.
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