Financial professionals say clients need help deciphering details of new federal laws
And while he was not the first to express this certainty, Franklin was the first to connect the concept to the Constitution, the enduring document that delineates the frame of government upon which America stands.
That ever-evolving government determines how much we pay in taxes. And those who govern like to change the laws that determine just how much. Those changes send many U.S. residents and business owners to accountants and other financial professionals. They seek guidance and answers to clarify various tax benefits and issues. For the 2022 tax year, relative to prior years, those changes can be confusing.
Clients want to clarify the actual rules and regulations versus some proposed and discussed bills in the past 12 months, said Stephen Varner, CPA and partner at Kruggel Lawton CPAs in South Bend.
“There have been many changes the past few years with Trump’s TCJA, CARES Act and other small bills that have many temporary provisions,” he said.
Gary Fox, managing partner of tax services and office managing partner at Crowe LLP in South Bend, said the Inflation Reduction Act of 2022 will offer some relief to taxpayers. The 730-page act was passed by the Senate on Aug. 7 and the House on Aug. 12 and signed into law by President Joe Biden on Aug. 16.
“The bill and regulations will provide an opportunity for some taxpayers to benefit from the numerous clean energy credits, and certain corporate taxpayers will need to plan around to minimize new taxes that will be effective for tax years beginning after 2022,” Varner said.
He also said he still is reviewing the act’s hundreds of pages “to understand the real impact and opportunities for clients and taxpayers.”
In terms of tax developments, the Inflation Reduction Act is focused on energy and corporations, and mainly increases the Internal Revenue Service’s budget. The IRS is planning to hire 87,000 more employees.
Marisa Smoljan, CPA and tax department shareholder at McMahon & Associates in Munster, said tax professionals have been awaiting some reforms the past two years.
“Most recently, the Senate passed the Inflation Reduction Act, and (while we) don’t have all the details yet, we know the IRS will be ramping up the number of agents so that there is more tax enforcement,” she said.
More broadly, the act addresses inflation by decreasing the costs of health care and domestic energy production for families, and helps to reduce the deficit. It would also “reduce carbon emissions by roughly 40% by 2030. The act also allows Medicare to negotiate for prescription drug prices and extends the expanded Affordable Care Act program for three years, through 2025,” the summary of the act states.
Thomas Newman, CPA and tax manager at Swartz, Retson & Co. in Merrillville, noted that the Inflation Reduction Act works to address inflation issues, and includes some tax law changes for this purpose.
The act closes tax loopholes used by the wealthy with “a 15% corporate minimum tax, a 1% fee on stock buybacks and enhanced IRS enforcement,” according to the act’s summary from U.S. Senate Democrats.
The minimum tax rate on corporations with income of at least $1 billion per year would ensure a minimum of 15% of book profits from some of the largest corporations, including Amazon, to prevent them from paying almost no federal tax through credits and deductions, Newman said.
The act does not increase taxes on small businesses or families with $400,000 or less in income.
The bill also extends several different types of tax credits, including the Affordable Care Act premium tax credits program through 2025, some of the electric vehicle and residential energy-efficient installation tax credits, and increasing IRS funding by almost $80 billion during the next decade, according to Newman.
“With inflation continuing to rise, many individuals are looking for ways to bump up their paychecks, so they have more spending cash available,” Newman said.
Clients are asking tax professionals to review their withholdings to see if adjusting them to increase spending cash is a good idea, or whether this would lead to owing more in taxes next April.
“The IRS website contains a tax withholding estimator which can assist in estimating your withholdings, seeing how your refund, take-home pay or tax due is affected by withholding amounts, and choose an estimated withholding that works for your situation,” Newman said.
Major life changes, such as beginning a new or second job, getting married or having children, also would require re-calculating these numbers.
One aspect of the tax situation is a major backlog of refunds from the IRS, because the IRS shut down at the start of the pandemic. The number of unprocessed paper tax returns reached 21.3 million by the end of May 2022. Because of tax changes in 2021 and losing much staffing and funding, the IRS has left many taxpayers unaware of the status of their refunds and returns.
“There is a ‘Where’s My Refund’ tool on the IRS website that allows you to track the status of your refund, but that is only effective if the IRS has at least started the process of logging in a tax return,” Newman said. “That is the first place to check, though, on a refund status.”
As for this year’s tax burden, Fox’s advice for clients includes:
- Taking full advantage of retirement plans and health savings accounts when they are available
- Planning for itemized deductions, using standard deduction one year and “bunching” itemized deductions into the following year
- Using energy tax credits, such as the energy efficient property credit
- Taking full advantage of capital gains and losses by timing sales in an advantageous way
- Knowing what can and cannot be excluded in your taxes on gains of the sale of personal homes
- Making sure to take full advantage of all the personal dependent type of credits, including those for child care.
The experts suggest filing early is the best strategy. Gather any necessary documents and note any tax-related events from the last year.
These documents include confirmation letters from any charities you have donated to during the last year, experts say. A list of any items donated, including their value; and if not tracked by a brokerage, the original cost, date sold and the value sold for any cryptocurrencies sold, traded, mined or spent.
“Lastly, note from whom you should be expecting tax documents early next year,” Newman said. A new job means W2 forms from both old and new employers; refinancing equals 1098 forms from every bank involved.
“Being prepared will allow you to file early and get your taxes in and processed before the April 15 rush,” he said.
Varner, of Kruggel Lawton CPAs, said his most common advice for business owners is “to focus on their business, operations and long-term ownership/succession planning. From there we can focus on tax planning and strategies that fit with their plans.”
Smoljan, of McMahon & Associates, said she advises clients to “meet with your tax advisers well before the end of the year.”
“There are tax deductions and credits that often must be done before Dec. 31, so it’s important to review your tax situation before then,” she said.
She noted that Indiana residents, after they filed in 2021, may have received a $125 automatic taxpayer refund, or a $250 refund for joint married filing. Gov. Eric Holcomb also passed another $200 automatic taxpayer refund or $400 for joint married filing on Aug. 5.
“A little unexpected refund is always welcome,” Smoljan said.