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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WORLD NEWS
A group of U.S. Senators push the IRS to take action against AI-generated tax scams… in a letter sent to the IRS Commissioner. The Senators highlighted the dangers of AI technology, such as ChatGPT, being leveraged to create persuasive scams aimed at gaining financial information from taxpayers and tax professionals. Whereas in the past these scams could be identified by spelling and grammatical errors or inaccurate references to the tax code, deep fakes and chatbots have the potential to eliminate these tells. The written request advocates for increased education to protect taxpayers and tax professionals and additional measures taken to analyze the impact of these scams.
An Ohio Senator may have violated the state’s rules on property tax credits… according to public records. Reportedly, Senator Sherrod Brown claimed an owner-occupancy tax credit for several years at two properties in different counties, though the law does not permit taxpayers to receive the credit on multiple properties. Additionally, records show that Brown has missed the tax payment deadline for his Cleveland home at least seven times since 2013. Brown’s campaign has replied that the Senator has repaid the county for the second property tax credit and has also paid the late penalty. These issues have come to public attention as the Senator prepares for his reelection campaign for 2024.
U.S. NEWS
New York and California tax revenue took a hit during COVID-19 as high-income earners moved to low-tax states
From 2020 through 2021, these two states lost about $92 billion, according to a new IRS report. This is more than three times as much as their combined losses in 2019—before the onset of the pandemic. New York State lost $25 billion due to residents relocating in 2021, on top of another $20 billion in losses in 2020. Similarly, California lost $18 billion in 2020 and another $29 billion in 2021.
The trend of high-earners moving to low-state taxes did not begin with the COVID-19 era, but the exodus gained significant momentum in 2020 as pandemic conditions led to an uptick in remote working and the number of white-collar jobs increased in the “Sun Belt”—the southernmost range of states stretching from California in the West to Florida in the East. Data on income migration in 2022 and 2023 is not yet available, but analysts anticipate that the losses have likely slowed.
The largest population growth occurred in Florida, which gained 128,000 new households in 2021 and over $39 billion in income. This added to the already substantial $28 billion gained in 2020. Of these new residents, about one-third came from New York, bringing in $10 billion in income. California, Illinois, and New Jersey also took a big hit—in 2021 alone, each state lost over $4 billion in income to Florida. Texas also saw big gains with $11 billion in income added, largely from Californians relocating to the Lone Star State and bringing $5 billion with them. Rounding out the top five “winners” are Nevada, North Carolina, and Arizona—combined, these states gained about $14 billion.
The impact of this shift can be seen in job creation statistics. Florida now has more total jobs than New York—the first time this has happened since the Bureau of Labor Statistics began tracking this data in 1982. Notably, the average income for households that transitioned out of New York in 2021 was $130,000 and for those moving to Florida specifically, the average was $223,245. This equates to a 64% increase in income loss for New York compared to losses between 2019 and 2020.
Interestingly, at the same time, the number of millionaires living in New York and California is still at all-time highs. This is causing some legislators to weigh the possibility of raising taxes on the wealthy to offset revenue decline in future years.
STATE NEWS
The Minnesota Senate passed a $4 billion tax bill… that must now be reconciled with proposals made by the state House and Governor Tim Walz. Dubbed the largest tax-cut package in Minnesota’s history, the bill provides one-time rebates for taxpayers and a Social Security tax cut.
Rebate checks would amount to $279 for single taxpayers and $558 for married couples filing jointly. To qualify, single taxpayers must earn no more than $75,000 per year, and couples must earn no more than $150,000 combined. Taxpayers with children can also receive an additional $56 per child for up to three children.
The bill also features a $1.24 billion Social Security tax cut, which would mean that 76% of recipients would not have to pay taxes on their Social Security checks. State Republicans have advocated for the complete elimination of the Social Security income tax.
Additionally, the bill offers a tax credit of $620 per child for families earning up to $80,000 and allocates $325 million to public safety funding and over $900 million to offset childcare costs.
Colorado legislators introduce a property tax relief plan… as property values—and therefore taxes—have been rising dramatically in the state. County assessors in the Denver Metro area expect property taxes to rise 35% to 45% next year. Other parts of the state may see an even bigger increase of 60% to 70%, providing the state with over $3.5 billion in revenue. In light of these gargantuan increases, Governor Jared Polis and other Democratic lawmakers have assembled a proposal to reduce projected tax increases by 60% for the average homeowner. The bill aims to stabilize property taxes over the course of the next decade.
The proposed legislation addresses these issues in three ways:
- lowering the taxable value of residential properties by $40,000 a year
- lowering the state assessment rate from 6.976% to 6.7%
- limiting the increase in property taxes for local governments at the rate of inflation (except for school districts)
If the bill passes, the tax on a property valued at $600,000 would drop from over $1,000 to $400 next year. To compensate for the tax revenue lost, the bill redirects funds for taxpayer refunds toward school funding and other affected programs.
TAX PLANNING
The deadline is approaching for the 1.5 million taxpayers with an unclaimed 2019 tax refund to file their return. July 17th is the last day to file a 2019 tax return and receive any payments due. According to the IRS, these unclaimed refunds are worth a total of $1.5 billion, with an average of $893 per check.
The IRS allows taxpayers three years to claim a refund for an unfiled return. After that point, the funds belong to the U.S. Treasury. Normally, that final deadline would coincide with the federal tax filing deadline, but recently, the deadlines have been extended due to the COVID-19 pandemic. 2019 tax returns were due in the spring of 2020, around the beginning of the lockdown in the U.S.
Lower-income earners in particular, such as students and part-time workers, who accidentally skipped the filing, still have the chance to receive that potential income boost. Many of these taxpayers may be eligible for the earned income tax credit, which provides a tax break even if you do not owe money on your taxes. Taxpayers who may be overwhelmed by the idea of recollecting their 2019 records may be able to access older tax documents through their IRS online account or by reaching out to past employers or loan service providers.
The Biden administration proposes a 30% tax on the electricity used for cryptocurrency mining. Dubbed the Digital Asset Mining Energy (DAME) excise tax, this levy is intended to ensure that crypto-mining companies are taking on financial responsibility for their contribution to high energy prices and environmental impact. A recent report by the New York Times estimated that the 34 large-scale, U.S. Bitcoin miners use the same amount of electricity as three million ordinary households. This new legislation appears in the White House’s proposed budget for fiscal year 2024. If the proposal is passed, the excise tax will be phased in over the course of three years, starting with a 10% tax in the first year, 20% in the second year, and 30% from the third year onwards. The Biden administration argues that the environmental pollution generated disproportionately impacts low-income neighborhoods and communities of color by raising electricity prices in certain regions and causing service interruptions. Opponents of the plan contend that other industries, such as steel manufacturing, also use massive amounts of electricity without incurring an extra tax.
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CURRENT EDITION
Staying Afloat in Tax Seas: Understanding the IRS’s Moratorium on ERC
Question: Should I even bother assisting my clients with filing new ERC claims?
Answer: In light of the IRS’s recent moratorium on processing new Employee Retention Credit (ERC) claims and the introduction of a withdrawal option for certain employers, it’s understandable that you might be wondering whether to assist your clients with filing new claims. The answer, like a well-prepared tax return, is nuanced and deserves a detailed examination.
Time for Year-End Tax Planning
This year is far from over for tax planning – for some moves, you have even longer – but now’s the time to start looking and acting on your tax tactics given your circumstances and the 2023 you’ve had so far. What you do or don’t do now could save or cost you next April.
An Alphabet Soup of Confusion: LLCs, BOI, and UPL
By now I hope that all tax professionals have heard of the FinCEN requirement for certain entities to report beneficial ownership information starting in 2024. The requirement is causing confusion because tax and accounting professionals feel that this could be an opportunity to either add value to an existing engagement, could be a new revenue stream, or could be a huge potential for liability. What follows is a brief review of the law and the requirements, an analysis of the main issues, and some recommendations for practitioners wondering how to help their clients while limiting their professional liability.