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
- Barbie’s box office debut is expected to rake in as much as $500 million worldwide on its opening weekend alone. Mattel’s stock prices have already leapt up by 18% over the past month. This is partly because of increased demand for Barbie dolls and themed merchandise, which triggers licensing fees. Fashion retailers are also jumping on the bandwagon with Gap and Forever 21 releasing Barbie apparel lines.
- What do high-rolling DJs and fashion moguls have in common? Both conspired to hide over $100 million from the IRS. Clients of international tax adviser Frank Butselaar allegedly used offshore entities to hide income that should have been reported on a U.S. tax return. Butselaar was charged with seven years of tax fraud. He now faces five years in prison for conspiring against the U.S. and another fifteen years for five counts of helping file false tax returns.
- The Powerball jackpot has jumped to $900 million, but ticket buyers can say goodbye to a quarter of it. Though the official prize is the third-largest amount in Powerball’s history, 24% of the winnings will be withheld by the IRS. If you opt to receive the prize money as one lump sum, this can also bump you up to a higher income tax bracket—which means you’re paying more federal and state taxes overall. Tax experts advise choosing the 30-year annual payments to give you more options for tax planning.
What's New In The Tax World?
As universities see an end to affirmative action, they may also see the beginning of higher taxes
A number of universities are ramping up their lobbying efforts to get rid of the 1.4% tax on university endowments. Introduced as part of the 2017 Tax Cuts and Jobs Act, the tax only applies to endowments that are worth more than $500,000 per student. Schools in this category include Princeton, Yale, and Harvard, which tops the list with its $50.1 billion endowment this year.
What does this have to do with affirmative action? The recent U.S. Supreme Court case that ruled against race-based admissions policies is drawing attention to other university practices, such as legacy admissions. In the past, lawmakers have put forward proposals to increase this endowment tax and use the funds for low-income students. Now with the pushback against the affirmative action ruling, these proposals are expected to get renewed attention from both sides of the political aisle. One Republican representative has already made plans to reintroduce a bill that would up the tax to a whopping 10%.
Unlike many of the 2017 tax laws, the endowment tax is not scheduled to end in 2025. However, like the other 2017 measures, Congress will be revisiting what makes sense to keep, alter, or nix entirely in the current economic and political climate. Some lawmakers have spoken in favor of a proposal that phases out the tax if more of the endowment is allocated toward financial aid for low-income students.
On a state level, Massachusetts has already responded to the Supreme Court ruling by writing a bill that would tax colleges that show favoritism to alumni and donors. Funds from this tax would go to community colleges. Other variations on this idea suggest allocating funds to historically Black colleges or low-income students, while other legislation has proposed banning legacy admissions altogether.
In light of recent scandals involving bribes and cheating to get students into elite schools, a similar bill focuses on ending tax breaks for donations made to influence admissions decisions. This bill would require universities to have an official policy that prohibits admissions staff from factoring in family members’ donations or ability to donate to the school in the future.
State-By-State Updates
- As Californians cut back on smoking, early childhood programs may see their funding plummet. Taxes on cigarettes and other tobacco products have financed the state’s early childhood services for 25 years. In recent years, the First 5 California programs have had to reduce their budgets and programming as a result of lower tobacco sales. This funding setup was originally meant to be temporary, and lawmakers are already hatching plans to replace the revenue with higher taxes on alcohol, marijuana, or sugary beverages.
- As estimated tax bills start to cause panic, Montana communities are hosting meetings to address residents’ concerns. In Lincoln County, for example, residential property values have increased by an average of 59%. The Department of Revenue is taking steps to better educate taxpayers on how these valuations are calculated and how that impacts taxes. Without changes to legislation, taxes in the state will go up—recent estimates suggest that the current property tax rate of 1.35% would have to be cut down to 0.94% to keep tax bills from increasing.
- Tennessee’s Greene County joins the growing list of regions increasing on property taxes. County commissioners hiked the tax rate by 30% for areas outside of Greenville. Officials referenced ongoing inflation and the need to pay state employees as reasons for higher taxation. Greene County joins Johnson City, Jonesborough, Greeneville, and Unicoi County as the local Tennessee governments that have taken steps toward raising property taxes, with most tax rates seeing a 25 to 30 cent increase.
- Texas is on the verge of approving a $18 billion tax relief package that includes lower property tax rates. Some locals have worried about how these tax cuts could affect funding for the state’s public schools, since property taxes make up most of that fund. Texas lawmakers have responded by setting aside state money for school districts, an unusual move for the Lone Star State. Schools will receive $12.3 billion from the state with future funds to come from sales and franchise taxes.
Tax Planning Tips
Over 800,000 student loan borrowers will be eligible for loan forgiveness—but how will this impact their tax bill? In the wake of the Supreme Court decision to override the Biden administration’s loan forgiveness plan, a new but less extensive plan has already been put forward. The new plan is expected to erase $39 billion in debt for borrowers who were on income-driven repayment plans.
This type of repayment plan is supposed to cancel any remaining debt after the borrower has made 20 or 25 years’ worth of payments (depending on the details of their loan). The Biden administration’s new plan fixes previous errors in calculating who has met that 20- or 25-year benchmark and qualifies for forgiveness.
The question savvy taxpayers are asking is whether there are any tax strings attached to this new loan forgiveness. In the past, borrowers whose debt was forgiven through income-driven repayment plans would be hit with a significant tax bill. Fortunately, under the American Rescue Plan of 2021, student loan forgiveness will be tax-free on a federal level through 2025. However, taxpayers should note that they could still see a state tax bill depending on where they live.
What are 401(k) catch-up contributions, and can they still help you reduce your taxes?
At the end of 2022, the IRS announced great news for avid savers: the limit for 401(k) contributions was increased from $2,000 to $22,500. This adjustment was made to help with the impact of ongoing high inflation and rising cost-of-living.
On top of this, 401(k) participants who are over age 50 can contribute another $7,500 through what’s known as “catch-up contributions.” Essentially, this is a way for taxpayers to make up for younger years when they might not have set aside as much money for retirement.
However, changes to these tax rules are coming in 2024. Starting next year, taxpayers who earn over $145,000 will have any catch-up contributions diverted into after-tax Roth IRA accounts. How will this change taxpayers’ potential tax bill? Retirement account holders will now pay taxes on these catch-up contributions while they are still working and therefore likely in a higher tax bracket than when they are retired.
However, these new tax rules do not apply to IRAs. So those looking to build their nest egg can consider contributing more to Roth IRA accounts. Though you will pay taxes upfront, you can enjoy tax-free growth and withdrawals in the future.
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CURRENT EDITION
A Compendium Of Year End Tax Tips
As summer turns to fall, the leaves turn and houses start being decorated, the air becomes crisper and the internet fills with year-end tax tip pieces. I call them tip sheets. I just love reading tip sheets, but I’m retired from active practice. Somebody who doesn’t have time on their hands might look at two or three and figure they have seen it all and didn’t learn anything they didn’t know already. I’m here to tell you that if you keep hunting, you might find some gems. But better than that, I will share what I have found in the event you don’t have the time or inclination to look at another twenty or thirty tip sheets.
CTA on Pause! What Tax Pros Need to Know About the Nationwide Injunction and BOI Reporting
On December 3, 2024, a U.S. District Court judge issued a nationwide preliminary injunction prohibiting FinCEN from enforcing the Corporate Transparency Act (CTA) and its associated Reporting Rule. This injunction halts the January 1, 2025, deadline for Beneficial Ownership Information (BOI) reporting, leaving many tax professionals and business entities questioning their compliance obligations. However, this pause is temporary. The government has already filed an appeal, and the injunction could be modified or overturned at any time. FinCEN has acknowledged that reporting companies are not currently required to file BOI reports but may do so voluntarily.
How to Help Your Clients Lower Their Student Loan Payments
There are roughly 42.7 million federal student loan borrowers as of Q4 2024, creating an opportunity to provide additional insight to your clients beyond tax preparation. By leveraging certain tax and repayment strategies, you can help your clients reduce their tax liability and lower their student loan payments in one strategic swoop. Here’s how.
