What’s Up in Washington, D.C.
Budget and Greenbook Outline 2023 Agenda
President Biden’s 2023 Budget plan was released this week, said to support families, climate, and housing, and make the tax system more equitable and fair. It also aims to provide $14.1 billion in funding for the IRS, a $2.2 billion increase, to improve the taxpayer experience and facilitate modernization.
Along with the Budget is Treasury’s explanation of revenue proposals, commonly referred to as the Greenbook, that aim to pay for proposed Budget investments. Proposed tax measures include:
Business-related
Increasing the corporate tax rate from 21 to 28 percent
Making the New Markets Tax Credit Permanent
Modifications to the international tax system to comply with global agreements and incentivizing U.S. activities
Taxing carried interests as ordinary income if the partner’s taxable income exceeds $400k
Repealing Like-Kind Exchange gain deferral over $500,000 per taxpayer per year
Taxing §1250 gains as ordinary income to the extent of the cumulative depreciation deductions taken after December 31, 2022
Permitting BBA partnership partners to receive a refund with respect to a net negative change in tax that exceeds income tax liability in the reporting year
Limiting basis shifting for related party partners
Conforming the control test under §368(c) with the affiliation test under §1504(a)(2)
Eliminating fossil fuel tax preferences
Ensuring if a private foundation distributes to a donor advised fund (DAF) that the DAF timely distributes the funds
Individual and Other
Increasing the top individual income tax rate from 37 to 39.6 percent (this will occur after 2025 anyway if nothing is done to extend the TCJA change) and reducing the level at which the top rate applies
Imposing a minimum tax of 20 percent on total income, generally inclusive of unrealized capital gains, for individual taxpayers with wealth (that is, the difference obtained by subtracting liabilities from assets) of an amount greater than $100 million
Taxing long-term capital gains and qualified dividends at ordinary rates for taxpayers with taxable income over $1 million ($500k for MFS)
Making death and gifts a realization event for some
Modifications to estate and gift taxation
Doubling the exemption to filing Form 1116 to claim the foreign tax credit
Extending the audit statute for certain transactions
Increasing tax preparer penalties in certain cases and allowing the IRS to regulate all paid preparers of Federal tax returns, including by establishing mandatory minimum competency standards
Most of the proposals have an effective date beginning after December 31, 2022, though it does vary. Many of these items look similar to what we’ve previously seen in the President’s agenda, and as we know, they have been met thus far with enough opposition to stall any real progress. Senator Manchin, a centrist Democrat who has derailed many a plan recently, has already spoken out against the proposed taxation of unrealized gains and fossil fuel related changes.
Retirement Bill Advances
Bipartisan bill “SECURE 2.0” passed the House with a vote of 414 to 5, now sitting with the Senate where a similar bill has been proposed. The House bill, Securing a Strong Retirement Act of 2022, follows on the heels of the 2019 SECURE Act that brought several changes to retirement provisions. SECURE 2.0 includes provisions that would:
Raise the required minimum distribution (RMD) age from 72 to 75 over a decade
Increase certain catch-up contributions to retirement plans
Make changes to the Saver’s Credit for low-income individuals who contribute to a retirement plan
Require employers to auto-enroll employees into retirement plans at 3 percent of salary, with exceptions
Allow employers to incentivize employees to contribute to their retirement
Allow employers to make matching contributions to an employee’s retirement plan based on the employee’s student loan payment
Index qualified charitable distributions (QCDs) top amount of $100,000 for inflation and allow for a one-time up to $50,000 transfer through a charitable gift annuity or charitable remainder trust
Allow SIMPLE and SEP IRAs to accept Roth contributions
Provide small businesses with retirement-related tax credits
Add domestic abuse as an exception to early withdrawal penalties
The Senate could vote on the House bill or combine it with elements from their own version, but it’s expected that this bipartisan topic will move forward at some point. However, it has been met with criticism that the provisions primarily benefit the wealthy.
Gas Price Probs
With gas prices continuing to rise, President Biden ordered the release of 1 million barrels of oil per day for six months from U.S. reserves until companies have a chance to ramp up their own production. It’s unknown how much of an impact this will have on lowering gas prices, but the President is hopeful it might be anywhere from 10-35 cents per gallon.
Lawmakers argue on long-term solutions, with Republicans blaming hostility towards the expansion of oil production in the United States and Democrats pushing for advances in renewable energy to reduce the nation’s dependence on fossil fuels. Could the answer be found in a combination of the two approaches?
House Speaker Pelosi is a “no” on a gas tax holiday, arguing that it would take money from the Highway Trust Fund, hurting road maintenance and mass transit, and may not help much in the end. She favors direct payments to individuals, in lieu of any reductions to the Trust Fund. Proposals to tax big oil companies who are profiting during the crisis or that are not using federal drilling leases have been suggested as well.
IRS Mess
Backlog Bummer
No update this week on the IRS’s tax return backlog progress, but suggestions to cut it down keep rolling in. National Taxpayer Advocate Erin Collins recommends the use of scanning technology to thwart the Agency’s “kryptonite” that is the paper filing. In fact, she can’t believe in this day and age the IRS doesn’t have it in place where manual processing is required.
“The IRS should be a leader in tax administration information technology practices, but due to a combination of funding limitations and management challenges over many years, it is not. The archaic keystroking of paper tax return data is a case study. Twenty years ago, at least 17 states had automated that task, yet the IRS still has not managed to do so.
If necessity can be the mother of invention, the unprecedented paper returns backlog resulting from the COVID-19 pandemic should spur the IRS to take immediate steps to automate the processing of paper tax returns – not in two years or three years but beginning with the upcoming filing season. The timely payment of tax refunds for millions of taxpayers is depending on it,” she said.
Commissioner Rettig confidently stated the backlog would be fully reduced by the end of 2022, but skeptics are plentiful. It’s clear that drastic measures need to be taken, both by Congress and the IRS itself to right this ship.
Tax Naughty List
Tax Protester Faces 30 Years in Prison
A Florida couple faces serious prison time for filing 227 fraudulent refund claims to the IRS asserting they were owed $2.9 billion over a decade-long scheme involving nonexistent trusts using biblical names and references. Most of the phony claims were denied but the pair still managed to swindle $5.8 million in fraudulent tax refunds from the government, which they used to purchase a home and luxury vehicles.
Apparently, the IRS caught wind of the situation and sent warning notices to the couple to stop the shenanigans. But the accused, who would later self-identify as part of the sovereign citizen’s movement that denies the legitimacy of the U.S. government and its taxes, refused to accept delivery of the notices and began moving assets around in an attempt to outsmart the system. It didn’t work.
“In the end, the taxman always cometh,” writes MarketWatch.
Guidance Drop
Advance Pricing Agreement Announcement
Not certain how much we get involved with §482 and transfer pricing, but I am a big fan of charts and graphs so will be sharing this announcement that details related on goings in this part of the tax world regardless, due to its impressive array of visual elements. The pie charts alone are worth it.
New Nationwide Average Purchase Price for Bond Issuers
Rev. Proc. 2022-21 provides issuers of qualified mortgage bonds, as defined under §143(a), and issuers of mortgage credit certificates, as defined in §25(c), with the nationwide average purchase price for residences located in the United States, and average area purchase price safe harbors for residences located in statistical areas in each state and U.S. territories. The new national average purchase price is $368,500, which is used for computing the housing cost to income ratio for new and existing residences.
Issuers may rely on this revenue procedure to determine average area purchase price safe harbors for commitments to provide financing or issue mortgage credit certificates that are made, or (if the purchase precedes the commitment) for residences that are purchased, in the period that begins on March 30, 2022.
Reminders
FBAR filings are due April 15, but they have an automatic extension until October 15. (Why don’t they move the deadline to October then?) Filings are required for U.S. persons having financial interest in, signature authority or other authority over one or more foreign accounts where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. Penalties are hefty on this one!
The above-the-line educator out-of-pocket expense deduction sees a $50 boost for 2022, all the way up to $300 (or $600 if two educators MFJ)! It’s the deduction’s first increase in 20 years. More details on who and what qualifies here.
The IRS reminds everyone to properly report stimulus payments received, to avoid delays and further backlogs. Look to Letter 6475 and/or the taxpayer’s online account to view totals of the third-round payments made. Married individuals will have their own portions of payments made reported on their own online accounts and Letter 6475. Where amounts don’t line up with what the taxpayer received, a payment trace may be initiated. If mistakes are made and the return claimed too much Recovery Rebate Credit, the IRS will correct the amount of the credit and send a notice, if necessary. The IRS states no amended return should be filed just for this correction. For those who didn’t claim a credit and are entitled to one, an amended filing will be required. More info here.
Have a great week!
Amie K