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WORLD NEWS
Tax experts step up to refute social media claims that income taxes are not legally required… as a misleading video has been circulating on platforms like TikTok, Facebook, and Instagram. The video claims to interview a tax lawyer, a tax advisor, and a former IRS agent who say that Americans are not obligated by law to pay income taxes. The Internal Revenue Service has since spoken to news outlets confirming that Title 26 of the U.S. Code requires individuals to pay income taxes. The IRS has even created a website to address common claims like these, none of which have been successfully argued in a court of law.
Tax revenue in the District of Columbia is projected to drop by more than $400 million… in upcoming years, potentially as a result of workers leaving downtown offices empty in favor of remote work. The District’s Chief Financial Officer Glen Lee estimated that commercial real estate revenue for 2024 to 2026 will likely see a $464 million shortfall. Consequently, city officials anticipate that a plan to provide free Metrobus service to residents will be cut as only 45% to 50% of workers are commuting into a corporate office mid-week.
U.S. NEWS
The federal government is opting not to tax one-time state-level payments to residents
Over 20 state governments have remitted one-time checks to their residents, funded by a combination of federal stimulus money and surprising economic growth in the wake of the COVID-19 pandemic. Some analysts worry this could lead to financial trouble for the country as the decision will cost the federal government an estimated $4 billion in revenue. The missing cash will especially be felt in a season where the U.S. is wrestling with the realities of a growing federal deficit and questions around the nation’s debt limit.
This is not the only instance where the U.S. government has opted to forego tax collection this year. Last December, the IRS decided to delay a new requirement for users of apps like Venmo and Cash App to report transactions over $600 on their tax returns. This requirement was projected to bring in $1 billion in tax revenue annually. The postponement comes after a period of intense lobbying and accusations that President Biden was breaking his campaign promise not to raise taxes on people making less than $400,000.
The decision not to tax state rebates also means that taxpayers will have more spending money at a time when the Federal Reserve is trying to reduce consumer spending to curb inflation. Recent reports show that consumer spending increased this January. Nevertheless, many experts have stated that the IRS made the right call, since the federal government did not tax their own stimulus checks and delays on the decision were already causing confusion in an already complex and backlogged filing season. Some analysts also note that taxing state payments could have had an especially negative impact on lower-income households, both by reducing their cash-in-pocket and affecting their eligibility for benefits like food stamps and Medicaid by increasing their overall taxable income.
However, taxpayers should note that certain state payments do come with reporting requirements. Alaska residents who received a one-time energy relief payment do not need to report this on their tax returns, but they will need to report the regular dividend the state sends to residents. Taxpayers in Georgia, Massachusetts, South Carolina, and Virginia do not need to report state payments if they take the standard deduction but do if they itemize.
STATE NEWS
The Michigan Senate eliminates a plan to remit $180 checks to residents… as a revised tax plan was sent to Governor Whitmer without the relief checks. The plan to issue $180 payments to taxpayers would have cost the state $800 million. However, these payments would also reduce the general fund enough to prevent revenue levels from triggering an income tax rate change—according to a 2015 law, if state revenue exceeds a certain amount, Michigan’s income tax rate would drop from 4.25% to 4.05%. This rollback is now likely to take effect and will reduce Michigan’s income tax revenue. Republican and Democratic legislators have been divided as to whether the income tax rate rollback or one-time relief checks would be more beneficial to taxpayers amid high inflation.
Included in the tax package is a measure that reduces taxes on certain retirement income and increases the state Earned Income Tax Credit (EITC) from 6% of the federal credit to 30%. The retirement tax changes are expected to save taxpayers about $515 million a year by allowing retirees to deduct more of their income. The EITC increase is expected to benefit 700,000 households and reduce individual income tax revenue by about $385 million per year.
Pennsylvania House Republicans released a package of tax relief bills… in advance of the governor’s budget announcement. A group of sixteen legislators backed some or all of the 10 bills proposed.
The first bill is a permanent sales and use tax exemption aimed at saving families money on items like books, cribs, sports equipment, strollers, and toys. The second is a sales and use tax holiday focused on home improvement and school supplies. A similar bill (Tax Relief Bill 4) would exclude pet food from sales and use tax.
Next, Tax Relief Bill 3 and 5 focus on utilities by proposing a permanent exclusion from the gross receipts tax for residential electric consumers and a permanent exclusion from the sales and use tax and gross receipts tax for cell phone bills in Pennsylvania.
Tax Relief Bill 6 would increase funding for the homestead and farmstead exclusion in Pennsylvania by funneling gaming revenue toward that exclusion. Tax Relief Bill 7 suggests broader tax cuts by reducing the state personal income tax rate from 3.07% to 2.99%.
Another sales and use tax exclusion would be provided to volunteer EMS and Fire Company members under Tax Relief Bill 8 for any protective equipment used while performing their duties. Lastly, Tax Relief Bill 9 reduces the Inheritance Tax for Lineal Descendants and siblings to match the general Pennsylvania personal income tax rate, and Tax Relief Bill 10 increases the state Child and Dependent Care Tax Credit to match the federal credit.
TAX PLANNING
Taxpayers looking to boost this year’s tax refund could benefit from claiming a dependent—if they are eligible. Claiming a dependent can qualify you for more tax deductions and credits, as does filing as a head of household. How do you know if you are eligible to claim someone as a dependent?
First, a dependent must either be a qualifying child or a qualifying relative. This could include a child, stepchild, foster child, sibling, niece/nephew, or parent. People who are not your relatives may also qualify if they live with you for the whole year. Typically, if you provide more than half of someone’s financial support during the tax year, you can claim them as a dependent. The IRS also outlines certain restrictions regarding age for children (generally under age 19) or income for other relatives (less than $4,440 in gross income).
Taxpayers should also note that spouses, household employees, and most foreign residents cannot be claimed as dependents. You also typically cannot claim someone as a dependent if they are married and file a joint tax return. Lastly, if you do claim someone as a dependent, that same person cannot claim their own tax dependent, and they cannot be listed as a dependent on another taxpayer’s return.
Additional guidelines for qualified dependents can be found under IRS Publication 501, Table 5.
The federal tax deadline has been extended for disaster areas in Alabama, California, and Georgia. Previously, most of California and parts of Alabama and Georgia had received an extended deadline of May 15, but this has been further extended to October 16 for both individual and business tax returns and payments. Eligible locations and start dates for FEMA disaster declarations can be found on the IRS’ Tax Relief in Disaster Situations page.
Certain groups may see additional benefits from this extended deadline. For instance, eligible taxpayers will have until October 16 to make their 2022 contributions to any individual retirement accounts (IRA) and health savings accounts (HSA). Any farmers who would normally file their returns by March 1st—rather than making estimated tax payments—will now have until October 16 to file their returns and pay any tax due.
Similarly, estimated tax payments for the fourth quarter of 2022 will no longer be due on January 17, 2023. Instead, taxpayers can skip this payment deadline and include that amount with their 2022 return filed on or before October 16. The same is true for 2023 estimated tax payments that would normally be due on April 18, June 15 and September 15 and for quarterly payroll and excise tax returns that would normally be due on January 31, April 30, and July 31.
The IRS will automatically extend the filing deadline for any taxpayer with an IRS address of record located in a disaster area. Additionally, any taxpayer who has necessary tax records located in the disaster area can request assistance from the IRS for an extended deadline.
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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.”
