Child Tax Credit Changes

The IRS's tax filing season is upon us. The agency started accepting individual tax returns for 2022 on January 23. And the filing deadline for most individual returns is April 18. As you get ready to prepare your return, or alternatively, gather your records to provide to us or other paid preparer, you'll want to keep in mind the tax changes that applied for 2022…and how they should be reported on your return. One of the most significant changes for 2022 was to the child tax credit, which is claimed by tens of millions of parents every year.

The bigger and better child tax credit that applied for the 2021 tax year is gone. The enhancements that Congress made to the child credit in the 2021 stimulus law were temporary, applying only for 2021. They all expired on December 31, 2021, including the monthly payments, higher credit amount, letting 17-year-olds qualify and full refundability. Democratic lawmakers had hoped to get these expansions extended through 2022 and beyond, touting the impact that a higher and fully refundable child tax credit would have on reducing child poverty in the United States. But they were unable to make a deal with congressional Republicans before Congress adjourned at the end of 2022. So, the rules for taking the child credit revert back to those that were in place for 2020.

This is all enough to make your head spin. But don't worry – we have answers to a lot of the questions parents are asking about the 2022 child credit, including how to report the credit on their 2022 return. Here are some of the questions we received and their answers.

Question: What changes were made to the child tax credit for 2021?

Answer: The American Rescue Plan Act of 2021 temporarily expanded the child tax credit for 2021 only. First, the law allowed 17-year-old children to qualify for the credit. Second, it increased the credit to $3,000 per child ($3,600 per child under age 6) for many families. Third, it made the credit fully refundable for families who lived in the U.S. for more than six months during 2021 and removed the $2,500 earnings floor. Fourth, it required half of the credit to be paid in advance by having the IRS send monthly payments to families from July 2021 to December 2021.

Question: What changes were made to the child tax credit for 2022?

Answer: All of the 2021 expansions are gone, with the rules reverting back to those that were in place for filing 2020 returns. For 2022, the child tax credit is $2,000 per kid under the age of 17 claimed as a dependent on your return. The child has to be related to you and generally live with you for at least six months during the year. He or she also must be a citizen, national or resident alien of the United States and have a Social Security number. You have to put the child's name, date of birth and SSN on your tax return, too.

The credit begins to phase out if your 2022 modified adjusted gross income (AGI) exceeds $400,000 on a joint return or $200,000 on a single or head-of-household return. Once you reach the $400,000 or $200,000 modified AGI threshold, the credit amount is reduced by $50 for each $1,000 (or fraction thereof) of AGI over the applicable threshold amount. Modified AGI is the AGI shown on Line 11 of your 2022 Form 1040, plus the foreign earned income exclusion, foreign housing exclusion, and amounts excluded from gross income because they were received from sources in Puerto Rico or American Samoa.

The credit is no longer fully refundable, either. Instead, only up to $1,500 of the child credit is refundable for some lower-income individuals with children. And you must have at least $2,500 of earned income to even qualify for this partial refund.

Question: Can all families claim the $2,000 per-child tax credit on 2022 returns?

Answer: No, not all families with children get the $2,000 per-child tax credit for 2022, but most do. The tax break begins to phase out at modified AGIs of $400,000 on joint returns and $200,000 on single or head-of-household returns. The amount of the credit is reduced by $50 for each $1,000 (or fraction thereof) of modified AGI over the applicable threshold amount.

For example, if a married couple has one child who is 10 years old, files a joint return, and has a modified AGI of $425,000 for 2022, they don't get the full $2,000 child credit. Instead, since their modified AGI is $25,000 above the phase-out threshold for joint filers ($400,000), their credit is reduced by $1,250 ($50 x 25) – resulting in a final 2022 child credit of $750.

Question: What does it mean that the child tax credit is no longer fully refundable for 2022?

Answer: For the 2021 tax year, the expanded child tax credit was fully refundable for families who live in the United States for more than one half of the year. This meant that people who qualified for the child tax credit received the full credit as a refund, even if they had no tax liability. This has changed. For 2022, certain low-income people can only get up to $1,500 per child as a refund, instead of the full $2,000 child credit, if their child credit exceeds the taxes they otherwise owe. Also, for 2022, partial refundability only applies to families with at least $2,500 of earned income, meaning parents have to be employed at least part-time or otherwise have earnings.

Please email us your question below.

Happy Holidays

This year has been filled with so many blessings. We wrap up 2022 with so much gratitude and appreciation for our clients. May this season bring you happiness and joy. We are excited about the future and look forward to serving you in the coming year.

Happy Holidays,

Brian, Genie, Ericka, Luz, Danielle, Baha, Linda, Tatiana, Penny, Diana, Fahmo, Jyotika, and Karen

Electric Vehicle Purchase in 2023

Thinking of buying an electric vehicle in 2023?

Take note of the changes to the EV tax credit that are included in the Inflation Reduction Act, which was signed by President Biden in Aug. Most changes apply for 2023 and later. The revamped credit is slated to go through 2032.

The maximum tax break remains $7,500. But the factors for figuring the credit are new.

• To be eligible for the full $7,500 credit, EVs put in use after 2022 must meet a critical minerals requirement and a battery component rule. If only one factor is met, then the credit is capped at $3,750. Under the critical mineral rule, a percentage of the battery’s minerals must be extracted or processed in the U.S. or in a country with a free-trade pact with the U.S. The battery component rule requires a percentage of the battery’s components to be manufactured or assembled in North America.

• The vehicle’s battery must have a capacity of at least seven kilowatt-hours. And final assembly of the vehicle must take place in North America. This rule applies for EVs placed in service after Aug. 16, 2022. The Dept. of Energy has a list of EVs that meet this requirement on its website. And there’s an online tool where you can input a vehicle identification number to see if the EV is credit-eligible.

• The manufacturer sales threshold limit is going away. Under pre-2023 rules, some popular car brands don’t qualify for the credit because it starts to phase out for vehicles manufactured by a car company that has sold over 200,000 EVs in the U.S. These include Teslas and vehicle models from General Motors and Toyota. This limitation has been removed for electric vehicles purchased in 2023 and later.

• But two new rules could prevent taxpayers from claiming the tax break: Some high-cost EVs don’t qualify. The manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs and pickup trucks.

• There’s an income limit. Modified adjusted gross income can’t exceed $300,000 for joint return filers, $225,000 for heads of household and $150,000 for single filers.

• Used EVs qualify for a smaller credit, equal to the lesser of $4,000 or 30% of sales price, provided the EV is at least two years old and purchased from a dealer. There is also an income limitation. The buyer’s modified AGI can’t exceed $150,000 for joint filers, $112,500 for heads of household and $75,000 for single filers.

• One big change begins in 2024: The option for the buyer to monetize the credit by transferring it to the dealer at the time of purchase, thus lowering the amount that the buyer pays for the car. This allows buyers to take immediate advantage of the tax credit instead of waiting for the next year, when they file their tax returns.

Many changes from the newly named clean vehicle credit are complex… And are in need of IRS guidance. The Service is asking stakeholders to provide recommendations on what they want to see addressed in future rules.

Tax Questions

Summer’s almost over. School is beginning. Vacations are winding down. Pools are closing. And we’re getting lots of questions on taxes. 

Is forgiven student debt taxable? No… 

At least through 2025. As a general rule, debt cancellation income is taxable. But a 2021 law provides that most student loans forgiven from 2021 through 2025 are tax-free. President Biden’s plan to forgive up to $10,000 in student loans ($20,000 for Pell Grant recipients) for single filers with incomes below $125,000…$250,000 for others…is tax-free. Watch out for state taxes. Though many states follow federal law, some don’t. 

What is the income threshold based on for Biden’s student debt forgiveness? 

Likely adjusted gross income from your 2020 or 2021 federal tax return. For borrowers claimed as a dependent on their parents’ federal income tax return, we expect the income threshold will be based on the AGI shown on the parents’ 1040. 

Will Congress revive the charitable write-off for non-itemizers? Perhaps… 

But it’s too soon to know. On 2020 and 2021 returns, people who gave cash to charity and didn’t file Schedule A could deduct up to $300 of their donations ($600 for joint filers for 2021) on page 1 of the 1040. This easing was temporary, aimed to stimulate COVID-related donations, and it expired at the end of last year. If lawmakers do address this, it will be at year-end, with other extenders. 

Will Congress retroactively delay a narrowing of the R&D tax break? 

Odds are good, but timing is uncertain. Before 2022, companies could choose to fully expense their research & development costs in the year they incurred them. The 2017 tax law changed this rule for amounts paid or incurred in taxable years beginning after Dec. 31, 2021. Starting this year, firms must amortize their R&D costs over five years…or over 15 years for research that is conducted outside the U.S. Businesses lobbied lawmakers hard to include relief in the Inflation Reduction Act, but to no avail. Firms now hope Congress will grant them a year-end holiday wish. 

Note this rule for employers who claimed the employee retention tax credit…

the refundable payroll tax break that ended after Sept. 30, 2021, and was available to businesses financially hurt by the pandemic that kept paying wages to employees: The credit reduces the wages-paid deduction on the firm’s income tax return. What happens if a firm receives ERTC funds after filing its income tax return? This is a very common situation, given the fact that IRS had a whole bunch of Forms 941-X claiming payroll tax refunds for ERTCs from prior calendar quarters. IRS’s processing delays of these forms create a quandary for employers who paid wages in 2021, filed the 941-X in 2021 and got ERTC refunds this year. These businesses must reduce their deduction for wages paid on their 2021 income tax returns by the ERTC credit amount. If they have already filed for 2021, they’ll have to amend.

Tax Changes

Despite all of the political headwinds… 

Democrats passed a spending and tax plan. The Inflation Reduction Act is a slim version of what President Biden and Democratic lawmakers wanted, but in their eyes, it was this or nothing. Let’s take a deep dive into the tax changes. 

Start with the health premium tax credit…

The Obamacare subsidy available to eligible individuals who purchase health coverage through an exchange. Most people choose to have the credit paid in advance to the insurance firm to lower their monthly premiums. Prior to 2021, the credit was available to people with household incomes that range from 100% to 400% of the poverty level, who met other rules. Last year’s stimulus law expanded the credit for 2021 and 2022 by letting some people with incomes over 400% of the poverty line get credits and upping the credit amount.  The enhancements to the health premium credit now go through 2025. Democrats wanted the expansions made permanent, but that was too costly. 

The break for adding solar panels and the like to your home is extended through 2034.

Individuals get a tax credit for installing an alternative energy system that relies on a renewable energy source, such as solar, wind, geothermal or fuel cell technology. The cost of wind turbines, solar panels, solar electric equipment, and solar-power water heaters is eligible for the credit, whether they are installed in a primary residence or vacation home. Starting in 2023, the credit is expanded to cover battery storage technology that is installed in your residence. The credit equals 30% of the cost of the equipment and installation for 2022 through 2032. It falls to 26% in 2033, 22% in 2034 and ends after 2034. 

The credit for adding energy-efficient improvements to your main home is back.

For 2022, the credit applies to 10% of the cost of certain types of insulation, plus external windows, doors and skylights. The credit also includes 100% of the cost of electric heat pumps and water heaters, some central air-conditioning systems and similar energy-saving investments. There is a lifetime credit limitation of $500. And the credit is capped for many items: No more than $150 for hot water boilers and furnaces, $200 for a window and $50 for a furnace circulating fan, for example. This credit originally expired at the end of last year, but Congress has now revived it. 

And the credit is bigger and better for 2023 through 2032.

First, the credit percentage increases to 30% of costs. Second, the $500 lifetime limit is replaced with a $1,200 annual limit. This annual limit is lowered to $600 in the aggregate for exterior windows and skylights and $500 for exterior doors, and for other items. The annual limit increases to $2,000 for a biomass stove or hot water boiler, or an electric or natural gas heat pump put in the home. And third, you can take a credit for up to $150 of the cost of a home energy audit. 

Buyers of electric vehicles get a revamped tax credit, starting in 2023. 

Presently, for new electric vehicles that are bought and placed into service in 2022, the federal income tax credit taken on the 1040 ranges from $2,500 to $7,500.  Some car brands don’t qualify for the credit because it starts to phase out for vehicles  manufactured by a car company that has sold over 200,000 plug-ins in the U.S. As of Aug. 17, final assembly of the vehicle must take place in North America. 

Many changes to the newly named clean vehicle credit take effect next year. 

The maximum break is still $7,500, but the components that make up the credit are different. The manufacturer’s suggested retail price can’t exceed $55,000 for sedans or $80,000 for vans, SUVs and pickup trucks. Fuel cell vehicles qualify. The credit is not available to taxpayers with modified adjusted gross incomes over $300,000 for joint filers, $225,000 for household heads, and $150,000 for others. The 200,000 plug-in-sales threshold limitation by manufacturers is removed. And buyers of certain used electric vehicles can get a credit equal to the lesser of $4,000 or 30% of the car’s sales price, provided the buyer’s modified AGI isn’t over $150,000 for joint filers, $112,500 for heads of household or $75,000 for all other filers. 

One big change begins in 2024:

The option for the buyer to monetize the credit by transferring it to the dealer at the time of purchase, thus lowering the amount that the buyer pays for the car. This allows buyers to take immediate advantage of the tax credit instead of waiting for the next year, when they file their tax returns. The clean vehicle credit is slated to last 10 more years and end after 2032. 

Natural Disasters

Summer is prime time for a natural disaster…

hurricane, tornado, widespread flooding, wildfire, etc. But know the tax laws and IRS can be of help if your home, business or belongings suffer damage from a federally declared disaster this year. 

You can deduct your losses to the extent…

you are not reimbursed by insurance. Your loss is equal to the smaller of the damaged property’s adjusted basis or decline in value, less any insurance proceeds that you receive or expect to receive in the future. Use Form 4684 to calculate and report disaster losses, and enter the FEMA disaster declaration number, found at www.fema.gov/disaster. 

Only itemizers can claim a deduction for damage to nonbusiness property. 

And two offsets apply: The loss that you calculate is first reduced by $100. The balance is deductible only to the extent it exceeds 10% of adjusted gross income. (More-generous rules apply for taking losses from disasters in 2018, 2019 and 2020.)  The rules for deducting casualty losses on business assets are more liberal. A business casualty loss needn’t be attributable to a federally declared disaster. The $100 and 10%-of-AGI offsets don’t apply. And non itemizers can write off losses. 

Computing the amount of loss to your home or belongings can be difficult. 

Luckily, IRS has multiple safe harbors to help you with this calculation. For example, one method lets a homeowner with casualty losses of $20,000 or less take the lesser of two repair estimates to determine the decrease in the home’s value. Another has a table to compute the replacement cost of personal belongings destroyed in the federally declared disaster. 

2022 disaster losses can be claimed on either your 2022 or 2021 tax return.

That’s because individuals can opt to take the loss on the return for the disaster year or the return for the year preceding the disaster. If you’ve already filed your 2021 1040, you can amend it to take the write-off by filing form 1040-X. Note that for this purpose, the due date for filing the amended return is six months after the normal filing date for 2022 returns. For 2022 disaster losses, this translates to Oct. 16, 2023. 

 Remember, IRS can be your friend if you are affected by a disaster. 

It has a designated number for disaster-related questions: 866-562-5227.  You can use the free Get Transcript online tool on IRS’s website to view and immediately print a transcript, which is a summary of key data on a tax return. Alternatively, call 800-908-9946 or mail Form 4506-T to order a transcript. People seeking copies of actual returns must request them by mail, using Form 4506. There is normally a $43 fee per return, and it can take the Service up to 75 days for processing. However, if you live in a federally declared disaster area, you can get the fee waived and the agency will expedite getting the return to you. And IRS gives disaster victims more time to file returns and pay taxes.

Inflation and Taxes

Rising inflation is mixed news for taxpayers. 

Many tax breaks will be higher in 2023. Others stay stagnant, as they have for years. Here’s how inflation can affect your tax bill. 

We’ll first discuss the good news for taxpayers. 

Income tax brackets will be wider in 2023 because they are annually indexed to inflation. Other tax breaks will also soar. Among them: Standard deductions. IRA payin caps. Income limits on EE and I savings bonds used for education. Lifetime estate-and-gift-tax exemption. Income levels for figuring whether long-term capital gains are taxed at 0%, 15% or 20%. And more. 

But taxpayers will really start to see the effects of a stealth 2017 tax hike… 

Using the Chained CPI-U to adjust federal tax items for inflation. Before 2018, annual inflation adjustments for the tax brackets and other write-offs were based on the Consumer Price Index for All Urban Consumers (CPI-U). Economists argued that the CPI-U tends to overstate actual inflation because the formula doesn’t account for how people change their spending patterns as prices rise. The economists claimed that the Chained CPI-U is a better inflation measure. As a result, the 2017 tax law permanently changed the inflation indexing from the CPI-U to the Chained CPI-U. 

Using the Chained CPI-U results in lower annual inflation adjustments… And, thus, smaller annual increases to tax breaks than the regular CPI-U. We forecast that the Chained CPI-U will rise about 8.2% for the 12-month period from Oct. 1, 2021, through Sept. 30, 2022, the fiscal year for indexing 2023 tax items. Compare this with our forecasted increase of 9% or so for the regular CPI-U for the same 12-month period. This makes a tax difference, with lasting effects. 

 Many tax breaks and income levels aren’t indexed to inflation each year. 

Let’s look at two of them. First, the taxation of Social Security benefits. For decades, the income thresholds at which Social Security benefits start getting taxed have stayed static at $25,000 for individuals and $32,000 for joint filers. These amounts don’t go up with inflation, despite the fact that Social Security benefits have gone up and people are generally earning more money than they did in the past. As a result, more cumulative Social Security benefits will be taxed this year than in 2021. A House bill would hike the $25,000 and $32,000 thresholds to $35,000 and $50,000. However, it would also have the 6.2% Social Security tax for employees and employers kick in again for workers with wages over $400,000, so it’s a no-go with Republicans. 

 Second, the home-sale exclusion. Since 1997, individuals who own and use a home as their main residence for at least two of the five years before the sale can exclude from taxable income up to $250,000 of the gain ($500,000 for joint filers). These figures might seem high, but they’ve never been adjusted for the appreciation in residential real estate during the 25 years this popular tax break has been in effect.

Business Taxes

Is the low corporate tax rate triggering more accumulated-earnings-tax audits? 

It appears to be the case, tax pros say, noticing an uptick in these exams. The 2017 tax reform law lowered the C corporation tax rate to 21%. This low rate, when compared with the 37% top individual rate, makes C corp status beneficial, especially for firms that retain earnings rather than pay dividends to their owners. 

The accumulated earnings tax is 20% of earnings accumulated in excess of the larger of $250,000 or accumulations needed for reasonable business needs, such as growth of the firm, debt retirement, shoring up the firm’s pension plan or covering the loss of a principal customer. The minimum accumulation for service corporations is $150,000. Firms with excess accumulated earnings and a history of not paying dividends, or paying small dividends, could face heat. 

Be sure to document the business purpose for accumulating earnings. Include a description of plans and decision-making processes in corporate minutes and budget forecasting documents, to the extent that significant funds are set aside. 

A charity’s officer who gives online seminars isn’t an independent contractor. He or she fully controls the courses and is the only teacher. This is the group’s sole activity. The organization issued the founder a 1099 and treated him as a contractor. He or she is a statutory employee because he is an officer and his services were the sole source of the group’s income (The Redi Foundation, TC Memo. 2022-34). 

Expenses incurred before beginning business aren’t deductible right away, the Tax Court says in the case of a corporate consultant who was a full-time employee and was also in the early stages of opening her own company. She networked and participated in speaking engagements to build up clientele and her brand, she worked with a firm to set up her website, and she reported $400 in gross receipts. But that’s not enough. Her initial research and solicitation of potential customers don’t rise to the level of carrying on a business (Harrison, TC Summ. Op. 2022-6). 

Post Tax Day Questions

We’re getting lots of tax questions lately, now that the April 18 tax return filing date has passed.  We’ll relay some queries…and our answers. 

Q: I’m planning a reverse mortgage on my home. Will I have to pay tax on the money I get?

A: No. The payments you get from a reverse mortgage are treated as nontaxable loan proceeds, not income. Also, you can’t deduct the interest you eventually pay because you’re not using the proceeds to buy, build or substantially improve the home securing the loan. 

Q: I tried to e-file my 1040, and IRS rejected it, saying that I have already filed.  What should I do?

A: You may very well be a victim of tax identity theft. Every year crooks using stolen Social Security numbers claim billions of dollars in fraudulent refunds. And that’s not counting the phony refunds that IRS blocks. You have two options to report the problem to the Revenue Service. Complete the online fillable IRS Form 14039, Identity Theft Affidavit, print it out and attach it to your paper return that you mail to the Service. Or submit the 14039 online at www.identitytheft.gov, a website maintained by the Federal Trade Commission, and separately mail your return to IRS. 

Q: I’ve had a Roth IRA since 2008. I just opened and funded a second Roth IRA. Do I have to wait five years to take a tax-free payout from the second Roth? 

A: No. The five-year rule determines whether payouts of earnings are tax-free. Generally speaking, distributions of earnings from Roth IRAs are tax-free if the owner is at least age 59½ at the time of the withdrawal and at least five tax years have passed since the owner first made a contribution into any Roth IRA. The five-year clock starts the first time money is deposited into any Roth IRA, through either a contribution or a conversion from a traditional IRA. The clock does not restart for latter Roth payins or for new Roth IRA accounts that are opened. Because you funded your first Roth in 2008, you needn’t wait five years to take money from the second Roth for the earnings to be tax-free, provided you are at least 59½. Note that it’s only the Roth earnings that the five-year rule applies to. Your Roth contributions can be withdrawn tax-free at any time. But keep in mind that you would owe the 10% early distribution penalty if you’re younger than 59½. 

Q: I own a business and am considering outsourcing the payroll tax duties. What steps can I take to protect myself from payroll agent misconduct? 

A: Most important, choose a trusted payroll service. The Revenue Service has a helpful chart that describes four types of third-party payroll firms…payroll service provider, reporting agent, certified professional employer organization and Section 3504 agent. Here are a couple of more things you can do. Make sure all correspondence from IRS about payroll taxes goes to your address, not to that of the payroll agent. Also, enroll in the Electronic Federal Tax Payment System to monitor deposits.

Tax Day

Today is April 18 Tax Day, which means it’s the deadline to file and pay taxes for most Americans. Here are some tips to get you to the finish line. If you need to file and extension the IRS has a quick and easy way to file on line. Filing electrically will get you your refund faster. Some post offices are open late for the last minute flier. Check your local post office for business hours on Tax Day.

Happy Tax Day from BJ Kane & Co.

Business Taxes

Businesses can save lots on taxes with first-year 100% bonus depreciation. Firms can deduct the full cost of new and used qualifying business assets, with lives of 20 years or less, that they buy and place in service during the year. The cost of a qualified film, television or live theatrical production is eligible, too. Purchase and place assets in service this year if you want the full tax break. Bonus depreciation isn’t as valuable after 2022. Unless Congress acts, the 100% write-off phases out 20% for each year after 2022, before expiring in 2027. 

There are lots of breaks for buyers of business vehicles under the tax laws. The annual depreciation caps for passenger autos rise sharply in 2022. If bonus depreciation is claimed, the first-year ceiling is $19,200 for new and used cars first put in service this year. The second- and third-year caps are $18,000 and $10,800. After that…$6,460. If no bonus depreciation is taken, the first-year cap is $11,200. Buyers of heavy SUVs used solely for business can write off the full cost, thanks to bonus depreciation. SUVs must have a gross weight rating over 6,000 pounds.  Also, up to 100% of the cost of a big pickup truck can be expensed. When expensing business assets, the amount expensed can’t exceed taxable income from the taxpayer’s business. Bonus depreciation does not have this limit. 

Leasing a vehicle to use in your business is more expensive tax-wise in 2022. If a car that is worth more than $56,000 is first leased for business during the year, the lessee must pay income tax each year on an amount spelled out in IRS tables. For example, on a three-year lease for a $75,000 car with a lease term starting in 2022, the income inclusion is $24 in 2022, $51 in 2023 and $77 in 2024 (Rev. Proc. 2022-17). Note that you don’t add the amounts to your income when filling out your tax return. Instead, you reduce the size of your deduction for the lease payments on the vehicle. 

Economy Check

Time for a fresh appraisal of the economy.

The war in Ukraine and Western sanctions on Russia have roiled commodities markets and supply chains. Inflation, already bad, has gotten worse. Can the U.S. weather these storms and stay out of recession?

US Economy

Let’s start with the bad news: Inflation. It’s going to get worse and last longer, chiefly due to higher prices of energy, grains, metals and other commodities Russia specializes in. We see CPI inflation peaking at 8.5% in March…the highest reading since 1981. Then, declining only slowly later in the year, ending 2022 at a still painful 6.5%. All the inflation ingredients… easy money, deficit spending, high consumer demand and supply chain problems…have come together to produce the worst bout of inflation in 40 years.

The Federal Reserve is pivoting to inflation, finally, after months of insisting it was temporary. This month brings the first in a series of rate hikes, likely each a quarter of a percentage point…a step toward getting prices under control, but not enough to really quell inflation quickly. Tightening faster would help with inflation, but at some point, that risks choking off GDP growth.

Look for the Fed to proceed cautiously, preferring inflation over a recession. Other threats loom overseas. The war, of course…as always with war, the outcome is highly uncertain. The U.S. is bent on keeping it contained to Ukraine, but there’s no certainty it won’t escalate. Direct conflict between the U.S. and Russia, the stuff of Cold War nightmares for 45 years, would surely weigh on the economy. Even without that scenario, the present war figures to sap European GDP growth.

Then there’s COVID-19 in China. While the pandemic wanes in the U.S., it is intensifying in China, prompting Chinese officials to order strict lockdowns in some big cities. That “zero COVID” approach could hamper commercial activity in the world’s second-largest economy (one reason for oil prices’ sudden drop). Set against these threats are some underlying U.S. economic strengths: The reopening of the economy after COVID, which spells a big increase in demand for all sorts of services, which make up the bulk of U.S. GDP. People want to get back to normal life, which means healthy spending on dining, travel, etc. A sizable savings cushion. Americans have $2.3 trillion more in savings than they likely would have if the pandemic hadn’t curbed much of their spending or prompted Congress to dole out stimulus checks. That cash adds to buying power, even as prices of virtually everything keep rising. Plenty of it will get spent this year. Perhaps most important, strong job growth, which is badly needed now. Add it all up and you get about 3% growth for the year…if no new crisis like a widening of the Ukraine war intervenes. After the past two years, that’s a big if.

Global Economy

Russia’s invasion of Ukraine is straining the global air freight industry. Up until recently, demand for goods shipped by air was robust,  while the sluggish recovery in commercial air travel kept jet fuel prices low. Now… Jet fuel costs have leaped along with crude oil and other petroleum products. Average prices spiked from about $2.30 per gallon before the invasion to $4.00. Plus, the conflict has complicated some key air freight routes, as Russia and its adversaries close their respective airspaces to each other’s planes. Now, the skies over Europe and much of North America are closed to Russian flights,  while most European and American planes can no longer fly over Russia, forcing carriers to seek alternative routes. Some routes, such as Helsinki to Tokyo, simply can’t be flown now. Per one estimate, 20%-25% of the air freight capacity between Europe and Asia has been taken off the market, further raising costs. That spells higher prices for everything from smartphones to video games, and any other product shipped by air...yet another source of inflationary pressure. 

Central banks appear likely to move forward with monetary tightening. But they may take a less aggressive approach in response to the conflict in Ukraine. The dilemma officials face: How to manage rapidly rising inflation without derailing the post-pandemic economic recovery. This task is more difficult now that geopolitical unrest has resulted in a huge run-up in global commodity prices, particularly energy prices, which may put large swaths of economic activity at risk. Inflation is now the main concern of central banks in advanced economies, including the U.S., but officials can’t avoid risks stemming from the Ukraine situation. 

Taxes and Tax Policy Take a Back Seat

Congress suddenly has a lot on its plate:

The Russian invasion of Ukraine. Senate confirmation of President Biden’s pick for the Supreme Court. Keeping the federal government open and funded. Gearing up for the Nov. midterm elections. And more. 

Taxes and tax policy will take a back seat. 

But that doesn’t mean nothing will get done. We’ll delve into tax items on Congress’s to-do list that might see action this year…and what won’t. 

• Take the Democrats’ Build Back Better plan. Biden and Capitol Hill Democrats are still in limbo when it comes to BBB and the proposed tax hikes and tax breaks that are included in the package. It has been torpedoed by infighting among Democrats, with Sen. Joe Manchin (WV) as the main naysayer and Sen. Kyrsten Sinema (AZ) also raising her objections.

• Party leaders want to salvage some of BBB. Don’t hold your breath.Chances are slim that a pared-down BBB could be raised from the ashes. 

• Temporarily suspending the federal gasoline tax is also a long shot. Some vulnerable Senate Dems want to halt the 18.4¢-per-gallon federal gas tax or the rest of 2022 in an effort to mitigate the cost of spiking gas prices at the pump. But other Democrats oppose it. Odds are better of gas tax holidays at the state level. 

• Retirement legislation could advance this year. In late 2019, lawmakers passed the SECURE Act to help participants in workplace retirement plans and IRA owners. Now there are multiple proposals that would go even further to encourage more individuals to save for retirement, give relief to people withdrawing funds during retirement and urge employers to offer retirement plans. 

• In this vein, keep an eye on a popular bipartisan House bill that passed in the House Ways & Means Com. unanimously last year, which is rare these days. The Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0, is sponsored by Rep. Richard Neal (D-MA) and Rep. Kevin Brady (R-TX), two of the lawmakers who spearheaded passage of the original 2019 SECURE Act.

• Among its many proposals: Indexing to inflation each year the $100,000 cap for qualified charitable distributions from traditional IRAs. Letting people ages 62 to 64 stash more money in 401(k)s. Raising the age for taking required minimum distributions incrementally to 75. Requiring employers to offer automatic enrollment in their 401(k)s with employee opt-out. Also, incentivizing small firms to adopt retirement plans. 

• There’s also bipartisan support to delay a narrowing of the R&D tax break. Before 2022, firms could choose to fully expense their research and development costs in the year they incurred them. The 2017 tax law changed this rule for amounts paid or incurred in taxable years beginning after Dec. 31, 2021. Starting this year, companies must amortize their R&D costs over five years…15 years for research conducted outside the U.S. Businesses have been lobbying lawmakers hard for relief.

Q & A

We’re getting lots of reader questions lately. Here are several queries…and our answers. 

Will the April 18 tax deadline be extended? 

We don’t think so, but it’s anyone’s guess. Some tax pros want IRS to extend this year’s due date for filing individual returns and paying income taxes, while other practitioners are adamantly opposed to it. IRS extended the filing season in 2020 and last year because of COVID-19. Two things that preparers can agree on if IRS does opt for a longer filing season: The agency must announce any decision early, and the additional time must apply to both filing returns and making tax payments. 

I use Venmo only to receive payments from friends and family members.  Will I get a Form 1099-K next year if I am paid $1,000 through the app? 

No, you shouldn’t. Starting in 2023, third-party payment settlement networks, such as PayPal and Venmo, must send Form 1099-K to payees who are paid over $600 in a year for goods or services, regardless of the number of transactions. (The reporting threshold for 2021 is higher…over $20,000 and 200 transactions.) The change in the rule means more people than ever will get 1099-K forms that they will use when filling out individual income tax returns for 2022 and later. The 1099-K reporting is for money received for goods or services, IRS says. Venmo says on its website that this doesn’t apply to friends-and-family payments. 

Are the monthly child tax credit payments that I received last year taxable? 

No. They are treated as advance payments of the 2021 child credit and must be reconciled with the actual credit you qualify for when filling out your 1040. 

I am thinking about donating an annuity contract to charity. Any tax issues? 

You’ll generally be treated as receiving taxable income equal to the difference between the annuity’s cash surrender value and your investment in the contract. Say you have a small variable annuity in which you invested $15,000 years ago, and it’s now worth $28,000. If you donate it to charity, you’ll have to report $13,000 of appreciation as additional income on your tax return in the year of the transfer. You will owe a 10% penalty on early distributions if you are under 59½. And you will get a charitable write-off if you itemize on Schedule A. The charitable deduction will equal the value of the annuity in most cases. 

Where does one find the updated required minimum distribution tables? 

We’re getting asked this a lot. Revised RMD tables for 2022 and beyond account for more-current individual mortality rates than the prior-year tables. Basing RMDs on longer life expectancies allows plan participants and IRA owners to take out smaller annual payouts, letting them keep money in their accounts longer. The new tables are in Appendix B of draft IRS Pub 590-B for 2021 returns.

Tax Filing Update

Filing Update

The 2022 tax filing season has barely begun. And IRS is already facing heat on many fronts. It has a backlog of unprocessed filings…From last year: 6 million 2020 Forms 1040, many of which were mailed in and requested refunds. 2.3 million amended returns filed on Form 1040-X. Plus millions more in business and payroll tax returns. Agency officials can’t even provide a time frame for when returns will be processed or refunds sent out. All they say is don’t file a second return or contact IRS. 

The Service isn’t timely responding to written correspondence from taxpayers or tax professionals who are representing their clients. Mailings continue to pile up or remain unanswered because of COVID and social distancing restrictions. IRS’s response time is dismal, far greater than its targeted 30- to 45-day goal. To make matters worse, it’s continuing to send out automated notices, sowing confusion among taxpayers. For example, some people who sent in documents in response to an IRS letter are getting erroneous notices from the agency, some of which even assess penalties for failure to timely respond. Other taxpayers who requested penalty abatement or other tax relief in writing now find themselves embroiled in IRS’s automated collection process, through no fault of their own. 

The Service is offering very narrow relief. It is suspending some notices, but only in cases in which it has credited taxpayers’ accounts for payments sent in but there is no record of a 2020 return being filed. IRS recognizes that these people likely filed paper 1040s by mail, and those filings have not yet been processed. But lawmakers, preparers and taxpayer advocacy groups want more. A coalition of tax preparer organizations is asking IRS to provide limited relief from the underpayment penalty, temporarily cease automated compliance actions, and put collection holds on accounts of taxpayers who request penalty relief, among other things. Approximately 200 House Democrats and Republicans echo these recommendations and are putting pressure on the Service to act fast. 

IRS is promoting online accounts for individuals. Here are some features: You can check to see if you owe back taxes, and the amount of interest and penalties. You can make a payment online and review the various payment plan options. You can view the stimulus check amount and the monthly child tax credit payments that IRS says you received, as well as the total estimated tax payments that you made. But new security measures for accessing the accounts are getting flak, especially the need for individuals to submit a driver’s license or other photo ID and to take a selfie with a smartphone or computer webcam. These procedures also apply to individual taxpayers who request an online installment agreement, use IRS’s Get Transcript web tool, or who seek an identity protection PIN. Opponents of the ID.me facial recognition technology say the process is invasive. The intense pushback is causing IRS to explore other ways to increase online security.

Filing Season

The 2022 tax filing season is here.

The IRS started accepting returns on Jan. 24. The due date for most individual returns is April 18. People and businesses in a number of federally declared disaster areas have until May 16 to file and pay taxes. Calendar-year regular corporations (C corps) must also file by April 18. The deadline for calendar-year S corporations and partnerships is March 15. 

E-file your return early to help protect yourself from tax-related identity theft. 

Thieves who use stolen taxpayer identification numbers on fraudulent returns to seek improper refunds typically file the phony returns early in the filing season so that the Service receives them before legitimate taxpayers file their returns. If you file early, your return will likely arrive at IRS before a fake return does. You may want to apply for an identity-protection PIN as extra protection from identity theft. The IP PIN is a six-digit number assigned by the Service to help verify a taxpayer’s identity on returns filed either on paper or electronically. To apply for an IP PIN, use the “Get an Identity Protection PIN” tool on IRS’s website. IP PINs are valid for one calendar year, so you can’t use the one you had last year. 

Want to electronically file your return but don’t want to pay for it? 

IRS has two options. The agency’s Free File program lets taxpayers with adjusted gross income of $73,000 or less use free commercial tax software to prepare and e-file returns. (Note some of the firms set lower AGI requirements.) The Service’s Free File Fillable Forms are for people with higher AGIs who are knowledgeable about the changes in the tax laws and who are comfortable preparing their own returns. Although this second program does math calculations, it won’t ask a set of questions to determine which forms you need to file. Go to www.irs.gov/freefile to access both Free File and Free File Fillable Forms. 

The fastest way to get a refund is to file early, file electronically… And request for the money to be deposited directly into your account. 

These steps are more important than ever. IRS, taxpayer advocacy groups and accounting organizations are already warning that this year’s filing season will be another nightmare, akin to last year. If you file a paper federal tax return or request your refund in the form of a paper check, there is a very good chance you could be waiting months before you see the money or even know that IRS has received or processed your return. This can be very frustrating for taxpayers. 

The best ways to cope with this year’s filing season: Have lots of patience. 

Know that if you call IRS with questions, you will likely be on hold for a long time, so put your phone on speaker and work on other things while you wait for a live person. Set up an online account on IRS’s website. Once you’ve gone through the steps to verify your identity, you can check whether you owe taxes for past years, verify any child tax credit advance payments or stimulus checks you got, and more. Be sure to keep any letters you get from IRS and give them to your preparer. If amounts on your return don’t match IRS’s records, your refund will be delayed. Also, triple-check all figures on your tax return before you file it. 

Everything Tax

AN EASING FOR PEOPLE WANTING TO SETTLE TAX DEBTS FOR LESS THAN WHAT THEY OWE.

Beginning with offers in compromise accepted by IRS after Oct. 31, 2021, the Service is no longer recouping a taxpayer’s refund for the calendar year in which an OIC agreement is reached to offset tax debts covered by that agreement. For example, assume IRS accepts a man’s offer to settle his 2017 and 2018 tax debts on Dec. 10, 2021. Under the new policy, IRS won’t grab the man’s 2021 refund, shown on his 2021 Form 1040 that he files next year, and apply it as a payment to his 2017 and 2018 tax liabilities, which are subject to the OIC agreement. 

THE TAX BURDEN ON HIGH-INCOMERS HAS GONE DOWN, ACCORDING TO IRS STATISTICS. 

The top 1% of individual filers paid 38.77% of all U.S. income taxes for 2019, the most recent year IRS has analyzed. That’s a drop from 2018’s figure of 40.08%. They reported 20.14% of total adjusted gross income, lower than the year before. Filers needed AGIs of at least $546,434 to earn their way into the top 1% category. The highest 5% paid 59.44% of total income tax and accounted for 35.93% of adjusted gross income. Each filer in this group had an AGI of $221,572 or more. The top 10%, those with AGIs of at least $154,589, bore 70.81% of the burden, while bringing in 47.30% of all individuals’ total adjusted gross income for the year. The bottom 50% of filers paid 3.06% of the total federal income tax take. Their share is so low because the figures don’t include Social Security tax payments and because many of them get substantial income tax relief through refundable credits. Filers in this bottom half of all individual taxpayers have AGIs below $44,269.

IN BUSINESS TAXES, THE STANDARD MILEAGE ALLOWANCE FOR BUSINESS DRIVING IS RISING FOR 2022. 

The rate will increase to 58.5¢ per mile, up two and a half cents from 2021. If you use the standard mileage rate, you must reduce the basis of the vehicle by the depreciation component…26¢ per mile. Keep a contemporaneous and detailed log of the miles you drive for business. Business vehicle write-offs are an IRS audit red flag. The rate for 2022 medical travel and military moves is 18¢ a mile, up 2¢. The rate for charitable driving will stay put at 14¢ a mile. It is fixed by law. You also can claim the cost of parking and tolls. But you can’t add the cost of fuel or repairs. Nor can you use the rates if you depreciated or expensed the car. Expenses incurred before business starts aren’t deductible right away. An engineer bought vacant land with the intent to eventually farm and develop it. Although he spent time and money working on the land, began constructing a barn, and even came up with a business plan, he never got past the preparatory stage. All his pre-opening costs must be capitalized (Antonyan, TC Memo. 2021-138).  Firms can elect to deduct up to $5,000 of their start-up costs in the first year that they actively engage in business, with the remainder amortized over 180 months. 

A SPOUSE’S FORGED SIGNATURE DOESN’T NEGATE THE FILING OF A VALID JOINT RETURN, THE TAX COURT SAYS.

The husband and his son controlled the family’s finances. The wife viewed her marriage as traditional and stayed out of all financial matters. Her son routinely forged her signature on tax returns. IRS audited the couple’s 1040 and nixed a large loss deduction from one of the husband’s pass-through businesses. The wife claimed she never signed the 1040, so the jointly filed return isn’t valid and she shouldn’t be held liable for the additional tax due on her husband’s income. Tacit consent is sufficient here. The failure of one spouse to actually sign doesn’t always negate the intent to file a joint return by the non-signing spouse if the non-signor otherwise acquiesces or tacitly approves the document’s filing. The Court decided the wife was aware of her tax obligations and never objected to filing jointly. She just chose not to engage in tax matters (Soni, TC Memo. 2021-137). 

CALLBACK TECHNOLOGY COULD BE COMING TO IRS’S PHONE LINES IN THE NEXT YEAR  OR SO.

This would allow callers to leave their phone numbers for an operator to call them back, instead of waiting on hold. The president’s executive order on improving federal customer service mandates that IRS make callbacks available. 

THE REVENUE SERVICE EXTENDS A TEMPORARY CORONAVIRUS-RELATED EASING: 

Allowing electronic signatures on 43 paper-filed forms for which e-filing is not available. These forms may be mailed in with digital signatures. The relief was set to expire on Dec. 31, 2021, but IRS chose to extend it through Oct. 31, 2023. Filers can use most technologies to provide electronic or digital signatures. 

IT’S NOT TOO SOON TO START THINKING ABOUT THIS YEAR’S TAX FILING SEASON. 

2021 individual tax returns are generally due April 18. Individuals get three more days to file because of D.C.’s Emancipation Day and the weekend. Calendar-year regular corporations (C corps) also must file by April 18. The deadline for calendar-year S corporations and partnerships is March 15. Tornado victims in Ky., Ill. and Tenn. have until May 16 to file returns and pay taxes, including estimated tax payments otherwise due in Jan. and April. We hope the 2022 filing season won’t be as problematic as 2021. But don’t count on it. IRS still has millions of unprocessed 2020 returns. 

Small businesses remain pessimistic about future business conditions

The share of small-business owners who expect economic conditions to worsen over the next six months has steadily increased in recent months.  Smalls are still struggling to find qualified workers. Nearly half of them report job openings they can’t fill, and the situation is even worse in some industries, such as construction, where 64% of smalls reported few or no qualified applicants. 

Many have scaled back hiring plans and raised compensation for current workers

Hiring challenges look set to continue for the foreseeable future.  Other inflationary pressures are also likely to persist. The share of smalls expecting to raise prices over the next three months is the highest since 1979. So far, most have been able to pass on rising material costs to their customers.  Nevertheless, there are some reasons for optimism. Sales remain strong, and many small businesses still plan to increase capital spending going forward. 

The courts will decide the fate of new surprise billing regulations from HHS... 

The Dept. of Health and Human Services…following a recent lawsuit from the American Medical Assn. and the American Hospital Assn. The recent rule prohibits surprise billing when a patient unknowingly receives emergency services or other care from a provider that is outside their health insurance network. 

At issue is the independent dispute resolution process for such cases

If a patient unknowingly receives care from an out-of-network provider, their insurer has 30 days to negotiate an acceptable out-of-network rate. Should negotiations fail, either party can opt to bring in a neutral arbiter to settle the issue. The administration says the arbiter should start with the assumption that the correct rate for a service is the median price usually paid for that service in the same geographic area. The AMA and AHA disagree, saying other factors, such as physician quality, must be considered. Surprise billing is especially common during medical emergencies, a time when patients often must use ambulance providers or receive care from providers outside of their insurance networks. But it can happen at in-network hospitals, too.