Summer is generally a slow time for tax news as Congress goes on recess and accountants take a break between the major spring and fall tax deadlines. However, some important news items came out over the past few months and we wanted to provide a quick summary of each.
Inflation Reduction Act
Since the 2020 election, we have been keeping an eye on potential tax legislation from the Biden administration. In 2021 the “Build Back Better Act” passed the House of Representatives but couldn’t garner enough support to be passed by the Senate. Just when it looked like that legislation was gone forever, an extremely trimmed-down version of the bill was finally passed this summer.
The new bill was dubbed the “Inflation Reduction Act” in what was a political move, as it seems unlikely any of the provisions will help to reduce inflation. The bill is generally focused on climate change initiatives through tax credits and it eliminated nearly all of the tax provisions originally proposed in the Build Back Better Act. If you were worried about higher tax rates, limitations on Roth conversions, lower estate tax exemptions, and carried interest changes, you can stop worrying for now. Here are the main items that were included in the bill that might impact you:
- Energy Tax Credits - The bill extends many of the green energy and energy efficiency tax credits that were already in place, added some new credits, and also puts some new requirements in place for existing credits. The implementation and timing of the various credits will be confusing but there is a website to help you navigate them.
- Clean Vehicle Credit - The $7,500 Federal credit will be limited starting in 2023 based on the vehicle price, the purchaser’s income, and the assembly location of the vehicle. This means that after this year, very few vehicles might qualify for the credit, at least until pricing comes down and more cars are manufactured in North America.
- Energy Efficient Home Improvement Credit - The old $500 lifetime credit has been replaced by a $1,200 annual credit and extended through 2023. This credit covers certain eligible home improvements like energy-efficient water heaters, heat pumps, furnaces, and many others.
- Residential Clean Energy Credit - This credit includes solar, geothermal, and small wind installations and increases the credit from 26% to 30% from 2022 to 2023. This credit will also apply to batter storage technology with a capacity of at least three-kilowatt hours.
- Prescription Drug Costs - One of the larger measures in the bill will allow the federal health secretary to negotiate the prices of certain expensive drugs each year for Medicare, starting in 2026. While this won’t have an immediate impact on drug prices, the hope is that it would eventually help reduce those prices. The bill also puts a cap of $2,000 on out-of-pocket prescription drug costs for people on Medicare, effective in 2025.
- IRS Funding - In a much-discussed provision of the bill, the legislation increased IRS funding by $80 billion over ten years. A little over half that amount was designated for enforcement and the bill calls for more IRS hiring, though the rumors of 87,000 IRS agents being hired appear to be overblown. The fears of mass audits of middle-income taxpayers have already prompted both the IRS commissioner and the Treasury Secretary to direct the IRS not to use the funds for examinations of taxpayers and small businesses earning under $400,000. Senate Republicans have already introduced a bill that would keep the IRS from auditing middle-class taxpayers. While it remains to be seen how these additional IRS funds will be used, it’s clear the IRS has been severely underfunded in recent years. We hope they will use this funding to modernize their systems and improve taxpayer service.
Student Loan Forgiveness
In a move that has sparked further division between our political parties, on August 24th, President Biden announced a plan to cancel $10,000 (up to $20,000 for Pell Grant recipients) of federal student loan debt for borrowers. He also announced a final extension to December 31, 2022, for the federal student loan repayment pause. The Department of Education has also proposed a new income-based repayment plan for federal student loans. Regardless of how you feel about the plan to forgive student loans, if you or anyone you know has loans outstanding, it’s important to understand the mechanics of loan forgiveness. This article from Broadridge provides more information on the plan. Keep in mind that while the loan forgiveness would not be considered taxable income at the Federal level, there are some states where it could be taxable.
Penalty Relief for Late Filers
The IRS recently announced broad-based penalty relief for certain 2019 and 2020 returns due to the pandemic. These returns include individual income tax returns (Form 1040) and fiduciary income tax returns (Form 1041). The failure to file penalty is typically assessed at a rate of 5% per month, up to 25% of the unpaid tax when a federal income tax return is filed late. To qualify for the relief, the tax return must be filed by September 30, 2022, and the refunds will be paid automatically.
New 1099-K rules for payments over $600
If you sell anything online this year and receive payments from services such as PayPal, eBay, and Venmo, you might be surprised to receive a Form 1099-K to report the sales proceeds. Before this year, gross payments of less than $20,000 were not required to be reported, but that limit has been reduced to $600 for 2022. While this doesn’t mean those sales proceeds will necessarily be taxable income, it does mean you’ll have one more headache to deal with at tax time next year. For more information, check out this article.
As always, if you have any questions about any of these issues, feel free to reach out to us anytime.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.