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
- Ryan Gosling is the most popular celebrity—among internet scammers, according to cybersecurity software company McAfee. McAfee recently published its Hacker Celebrity Hot List, which compiles the famous names that are most often used to create risky sites linking to malware. The Barbie movie star tops this year’s list, followed by Emily Blunt, Elon Musk, and Bad Bunny. Cybercriminals have used Gosling’s name to trick internet users by offering film downloads containing hidden malware. Hackers can then steal personal data from these unsuspecting users.
- Not everything celebrities touch turns to gold. Case in point: Jay-Z, Blake Lively, and Natalie Portman. Though many celebrity business ventures see success, news outlet Stacker looked into star-powered companies that failed within the first three years. Jay-Z may be a billionaire, but his attempt at opening a chain of boutique hotels fell flat. J Hotels never made it to opening day due to problems with a partnering investment firm. Blake Lively also struggled to keep her lifestyle website Preserve afloat and shut it down after only a year. Natalie Portman similarly made it just a year with her vegan footwear line, Té Casan.
- Benedict Cumberbatch, Sophie Turner, and Anderson Cooper’s business manager will be honored at Variety’s Business Managers Elite Breakfast. Dubbed a “money therapist” by her clientele, Carrie Malcolm runs her own firm CRM Management under the umbrella of industry giant NKSFB. Part of Malcolm’s role is to educate her clients on charitable giving, often through setting up donor-advised funds. Malcolm herself serves on the board of a number of nonprofits, including the Alex Fund, New York Women’s Foundation, Atlantic Foundation, Eyebeam Center for Art & Technology, and Living Arts International.
What's New In The Tax World?
U.S. lawmakers continue to push for changes to the tax rules on EV credits and cryptocurrency taxation
Electric vehicle credits and cryptocurrency taxation have been recurring topics of conversation since new tax rules were introduced and found to be lacking in clarity. In 2022, the Inflation Reduction Act enacted major changes to qualifications for the electric vehicle tax credit—-one of which is that the battery components in that vehicle cannot be manufactured or assembled by a “foreign entity of concern.” According to other legislation, this list likely includes entities that are owned, controlled, or governed by China, Russia, Iran, or North Korea.
Recently, Senator Joe Manchin, who is also chair of the Senate Energy Committee, advocated that the Treasury impose the strictest possible standards to prevent these nations from finding loopholes. Manchin raised concerns after hearing reports that Chinese battery companies are actively seeking ways to take advantage of these tax credits, which were created to reduce U.S. dependence on foreign supply chains. One major question is whether batteries manufactured using Chinese technology can qualify for these tax credits. Ford Motor Company paused its plans to build a $3.5 billion battery plant in Michigan until the question around foreign technology is resolved. The rule around foreign entities is set to kick in starting in 2024 for completed batteries and at the start of 2025 for critical mineral components.
Meanwhile, a bipartisan Congressional group is urging the Treasury to revise its proposed rules for taxing digital assets. In August, a cryptocurrency tax rule was proposed that would require “brokers of digital assets” to report sales and exchanges in the same way that other securities brokers must do. The bipartisan group has protested that the tax reporting requirement is not clear enough and could put unnecessary financial strain on the cryptocurrency industry. A major concern is that the definition of a digital asset “broker” is too broad and would currently include many wallet providers, payment processors, and decentralized finance (DeFi) entities who might not fit traditional definitions of a “broker.”
Currently, brokers would be required to start reporting sales and exchanges that occur in 2025. If the proposal goes forward, these brokers would have to provide Form 1099-DA to taxpayers to help them determine if they owe taxes for capital gains connected to digital assets or if they can deduct any losses.
State-By-State Updates
- Overtime just got more exciting in Alabama, which has officially eliminated state taxes on overtime pay. Starting January 1st, 2024, hours worked beyond 40 hours per week will be tax-free for all full-time hourly employees. This change amounts to a 5% pay raise for hourly workers, which is the current percentage rate for state income tax. The bill estimates that this tax cut will reduce state revenue by $45 million annually. These funds typically go toward Alabama’s education budget, but House Minority Leader Anthony Daniels—who sponsored the bill—said that dip would be partly offset by sales tax when taxpayers spend the money they are getting back.
- Massachusetts’ new “millionaire’s tax” will send 25,000 students to college. The tax will be levied on state residents with an annual income of over $1 million, collecting an additional 4% on every dollar earned above that threshold. This additional revenue is expected to add $62 million annually to the MASSGrant Plus program, which covers tuition, fees, books, and supplies for Pell Grant-eligible students. Most Pell Grant awardees have family incomes below $40,000. Funds from the millionaire’s tax will also go toward free lunch for public school students and repair work on bridges and mass transportation.
- Did you forget to cash your rebate check from the state of Minnesota? It may have expired. The Minnesota Department of Revenue recently announced that about 150,000 one-time payments are now void from sitting uncashed for over 60 days. New checks will be issued at the end of November and in early December. The state reminds taxpayers that these new checks will also be valid for 60 days before they expire. Minnesotans earning up to $75,000 for single filers and $150,000 for married couples filing jointly are eligible for these rebates.
- Rejected: Mississippi’s governor pushes for a higher revenue estimate, hoping to pave the way for future tax cuts. Governor Tate Reeves refused to approve a proposed revenue estimate of about $7.5 billion, saying that experts had quoted him a number that was about $117 million higher. The governor hopes to gain support for income tax cuts in 2024, which would likely be bolstered by higher revenue projections. In 2023, Reeves expressed support for total elimination of the state income tax, but related proposals failed to pass. As it stands, Mississippi is already set to reduce individual income tax over the course of four years—the state’s largest tax cut ever.
Tax Planning Tips
Service members can opt into a new tax benefit—the Dependent Care Flexible Spending Account (DCFSA). Federal Benefits Open Season is running now through December 11th, so eligible service members can look into the tax-free DCFSA today. This new opportunity is available to active-component service members and Active Guard Reserve members on Title 10 orders. The executive director for the DCFSA initiative estimates that 400,000 service members have dependents who are eligible for this program. This includes families with children under age 13 or another tax dependent, including spouses or relatives who are incapable of self-care.
Those who are eligible can opt to have money automatically deducted from their paychecks and deposited into this account, up to $5,000 per year. These are pre-tax dollars, allowing military families to report less taxable income and enjoy a lower tax liability. DCFSA funds can be used toward most dependent care services, including preschool, summer day camp, before/after-school programs, and child or adult daycare.
Delayed tax payments are helping shrink the U.S. federal budget deficit this fall. In October, the U.S. Treasury reported that the national deficit went down by almost a quarter compared to this time last year—$67 billion compared to $88 billion. The spike in federal revenue is mostly a result of deferred tax payments from disaster areas across the country. Several states, including California, were granted extended tax filing deadlines due to natural disasters. Last month, revenue reached a record $403 billion, which amounts to a 27% increase. This encompassed a 70% increase in individual non-withholding taxes and a 170% increase in corporate tax receipts.
Taking a step in the opposite direction, the financial company Moody’s recently announced a lower U.S. credit rating outlook. The change was likely connected to data showing the annual total deficit at $1.7 trillion for fiscal year 2023, which ended on September 30th. This is the highest number seen outside of the COVID-19 pandemic era. The ratings agency downgraded its outlook from “stable” to “negative” in part because of the large federal deficit and increase in the cost of debt. Interest costs have risen 5.25 percentage points since March 2022 when the Federal Reserve began ramping up its efforts to reduce inflation.
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CURRENT EDITION
IRC Section 121 Exclusion: Nuances That Make a Big Difference
With the sale of a client’s primary residence, many tax professionals are familiar with the Section 121 exclusion, which allows taxpayers to exclude up to $500,000 ($250,000 for single – $500,000 for married filing jointly) on capital gains for the sale. Often, the only criteria mentioned is that the taxpayer must have owned and occupied the home for two of the most recent five years. However, this barely scratches the surface of Section 121; there’s much more money-saving potential in this portion of the tax code.
Exploring the Final 1099-DA (Digital Asset) Regulations
One of the IRS’ favorite ways to entertain itself is to release new and important guidance at 5 pm on a Friday. They self-award bonus points if it is the Friday before a holiday. They hit “publish” and immediately shut down the office before anyone can react. When it comes to digital asset guidance, I speculate they also have access to my vacation calendar to release it at the most inconvenient time possible. Last summer, they released the temporary regulations on 1099 crypto reporting while I was on vacation in South Africa. This year, at 4:45 pm on the Friday before the 4th of July, they released the final regulations. I then had to spend the rest of the summer dodging my editors at TOTTB because this article was really harshing on my vacation plans.
Advising Clients About Prenups
To have and to hold and happily ever after is a nice dream, but into every married life a little reality about money must fall. Enter the prenuptial agreement, aka the prenup. This contract between prospective spouses clarifies the rights and obligations of the parties during their marriage – and during the sometimes-ugly aftermath should they separate, divorce, annul the marriage, or die. Prenups can help couples set financial expectations for the marriage, including whether they’ll have a joint bank account and file taxes together, among many other matters.
Given the sensitive nature of these conversations, it’s important to know how to advise on such an important document. What do your clients need to know?
