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
- The Hollywood writers strike has ended, but the actors aren’t back just yet. Movie and television writers stayed on the picket line for almost five months, advocating for increased compensation, length of employment, size of writing staffs, and control of artificial intelligence. The Writers Guild of America recently reached an agreement with Hollywood’s biggest studios, production companies, and streaming services, putting an end to their strike. However, the Screen Actors Guild is still in negotiations and has announced they may expand their strike to include performers who provide voiceover and stunts for video games.
- Headed to Iceland? Save yourself some króna by planning a trip before 2024. The popular tourist destination recently approved a higher tax for tourists in an effort to protect its environment. In 2022 alone, Iceland saw over 1.7 million overnight visitors looking to enjoy Iceland’s hot springs, black sand beaches, and other natural attractions. A similar tax was in place before the pandemic and is now being reintroduced to cover hotel patrons and cruise ship passengers. The tax will kick in next year as the country works toward its goal of becoming carbon neutral by 2040.
- Could your dream home be Sofía Vergara’s old house? If not, give Ray Romano’s or Rashida Jones’ place a try. These are just a few of the celebrities currently looking to sell or rent their impressive residences. Sofía Vergara recently reduced the price on her Beverly Hills estate from $19.6 million to $15.9 million. If you would rather have a different former sitcom star as a landlord, Ray Romano is renting his Malibu beach house for $175,000 per month, while Rashida Jones’ West Hollywood cottage is a comparative bargain at $11,000 per month.
What's New In The Tax World?
An IRS contractor has been charged with leaking tax information belonging to Donald Trump and thousands of other wealthy taxpayers
Charles Edward Littlejohn, who contracted for the IRS from 2017 to 2021, has been accused of passing stolen tax returns on to two news outlets. Investigators have indicated that the stolen tax information dated back more than 15 years. Also in question is how the agency allowed a contractor access to sensitive taxpayer information. Littlejohn faces five years in prison if he is convicted.
The indictment did not name the news organizations who received the stolen data. However, sources connected to the case have speculated that the likeliest candidates are The New York Times and ProPublica. A well-known article published by The Times reported that Donald Trump paid only $750 in federal income taxes in 2016, the year that he won the presidential election. The article also reported that Trump paid no income taxes in 10 out of the 15 previous years. Trump’s tax information had been sought for years by the House Ways and Means Committee who called his business practices into question. Similarly, ProPublica published a report on the 25 richest Americans in 2021 stating that billionaires like Jeff Bezos, Michael Bloomberg, and Elon Musk paid little to no federal income taxes between 2014 and 2018.
The Littlejohn case comes at a time when the IRS has been ramping up its efforts to improve data security for several years. The Taxpayer First Act, enacted in 2019, included a multi-year “Modernization Plan” to strengthen cybersecurity protections and educate taxpayers. The IRS has also been holding annual Security Summit meetings and introducing written resources to make data security easier for tax professionals.
However, the IRS has continued to face criticism for not taking enough action to make taxpayer data secure. A new report from the Government Accountability Office (GAO) states that since 2010 the IRS has failed to implement 77 of its recommendations for stronger data security. GAO also observed that a third of the agency’s 14,000 contractors had not completed a training course on protecting taxpayer records.
State-By-State Updates
- Arizona cities are encouraging new housing developments by offering major tax breaks. The state allows its cities to offer a number of tax incentives to attract property developers to their community. One example is the Government Property Lease Excise Tax (GPLET), which allows developers to buy a property, deed it to the city, and thus avoid paying property taxes—though they still have to pay a much-lower excise tax. Opponents of these tax incentives argue that the loss of tax revenue negatively affects the community and school districts in particular.
- California is doubling its tax on guns and ammunition, bringing the state tax up to 11%. This is on top of the federal government’s tax of 10-11%, depending on the type of gun. The tax would not apply to police officers or businesses with sales of less than $5,000 over any three-month period. Tax revenue will go toward gun violence prevention programs and security upgrades at public schools. The Golden State is simultaneously enacting a ban against carrying firearms in most public places, including public parks and playgrounds, amusement parks, churches, banks, and “any other privately owned commercial establishment that is open to the public.”
- Iowa residents may see a property tax bump to raise money for the state’s major public transit system. DART (the Des Moines Area Regional Transit Authority) has seen an increase in both its operating expenses and the number of weekly riders. To keep all systems going, the Des Moines metropolitan area may increase property taxes by $1.16 to $7.99, depending on where the residence is located. Without the extra revenue, DART will have to reduce bus services by about 50% and eliminate many routes that currently go to the suburbs.
- Minnesota shoppers will see a 1% sales tax hike when making purchases in the Twin Cities. This puts the total sales tax in both Minneapolis and St. Paul at around 9%. The tax increase is intended to provide funding for affordable housing and transportation. The 1% bump will impact purchases made in the seven-county metro area, which includes Anoka, Carver, Dakota, Hennepin, Scott, Ramsey, and Washington counties. Groceries, clothing, and prescription drugs will continue to be tax-exempt. The state will also see a new 50 cent fee for retail deliveries of $100 or above, excluding restaurant deliveries.
Tax Planning Tips
Can TikTok be your tax advisor? Tax professionals are warning about the dangers of misinformation on social media. A recent Forbes Advisor survey revealed that nearly 80% of millennials and Gen Zers have used social media for finance tips. Tax advisors note that when they begin to hear the same question posed by multiple clients, that’s a sign that another TikTok trend is taking off.
This introduces potential problems in light of the recent rise in tax scams. One example is the rise in “ERC mills,” which attempt to profit off of taxpayers by claiming they can help them secure the Employee Retention Credit. Taxpayers who don’t actually qualify for the credit may find themselves scrambling to pay back taxes owed or even facing an audit. Social media influencers have unfortunately also been part of this ERC mania. Other misleading social media posts have encouraged taxpayers to form an LLC (limited liability corporation) so they can deduct personal expenses from their taxes or hire their children and deduct the wages.
While tax experts note that many of these videos convey some truth, the oversimplification can be dangerous to taxpayers who might try to use these tax breaks without looking into the actual requirements and regulations behind them.
The IRS is on the hunt for tax preparers and high-income earners who are evading tax law. The agency has become aware of an increase in “unscrupulous” tax preparers making questionable claims on tax returns and exposing their clients to audits. These scammers may try to charge taxpayers higher rates by seeming to save their clients more money—but in reality, they are underreporting income or fraudulently claiming tax breaks like the small business tax credit or the employee retention credit. Research suggests that lower-income taxpayers, people of color, or people with limited English proficiency are disproportionately targeted by unscrupulous tax preparers.
The second group the IRS will be cracking down on is high-income earners who may be underpaying on their taxes. The agency’s goal is to improve their ability to flag suspicious elements on tax returns from high earners, business partnerships, and large corporations. Currently, one of the most common audit triggers is claiming the Earned Income Tax Credit, which is only available to low- to moderate-income filers.
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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?
