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Failing to keep up with tax payments now could lead to an expensive surprise come next spring.
As of Oct. 1, the Internal Revenue Service is charging 8% interest on estimated tax underpayments, up from 3% two years ago. The increase is one of the many effects of rising interest rates.
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When it comes to estate planning and family giving, the funds tend to run downstream to the younger generations. But one strategy — called upstream giving — could assist older generations during their lifetime and lessen taxes for the family overall.
This complicated strategy isn’t for the faint of heart. There’s a lot to consider, and a lot of steps need to happen in perfect order for it to work as intended.
“While…
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If Donald Trump were to be elected president in 2024, what would it mean for U.S. tax policy and the national debt?
There are growing expectations that he could deliver another round of big tax cuts, with the reductions coming right as those enacted in 2017’s Tax Cut and Jobs Act are due to expire in 2025.
“If Republicans hold their House…
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If there were no tax cheats in America, there would be no Social Security crisis. Benefits could be paid, and payroll taxes kept the same, for the next 75 years.
That’s not me talking. That’s math. It comes from the number crunchers at the Social Security Administration and the Internal Revenue Service.
And it explains why those of us who support Social Security should be pounding the table in outrage over one clause of the Biden-McCarthy debt ceiling deal: The part where the president has to retreat from his crackdown on tax cheats just so McCarthy and the House Republicans would agree to prevent America defaulting on its debts.
It’s just two years since the administration got into law an extra $80 billion for the IRS to beef up enforcement. That was supposed to include hiring an estimated 87,000 IRS agents.
OK, so nobody likes paying taxes and nobody likes the IRS. Cue the inevitable critiques of an IRS tax “army,” and so on. But this isn’t about whether taxes should be higher or lower. It’s about whether everyone should pay the taxes that they owe.
After all, if we’re going to cut taxes, shouldn’t they apply to those of us who obey the laws as well as those who don’t? Or do we just support the “Tax Cuts for Criminals” Act?
Why would any voter rally around a platform of “I stand with tax cheats?”
The Congressional Budget Office calculated that the extra funding for the IRS would have reduced the deficit, because it would more than pay for itself. But it’s now been cut by an estimated $21 billion out of $80 billion.
If this seems abstract, consider the context and how it affects you and your retirement — and the retirements of everyone you know.
Social Security is now running at an $80 billion annual deficit. That’s the amount benefits are expected to exceed payroll taxes this year. (So say the Social Security Administration’s trustees.)
Next year, that deficit is expected to top $150 billion. By 2026, we’re looking at $200 billion and rising. The trust fund will run out of cash by 2034, and without extra payroll taxes will have to slash benefits by a fifth or more.
Over the next 75 years, says the Congressional Budget Office, the entire funding gap for the program will average about 1.7% of gross domestic product per year.
Meanwhile, how much are tax cheats stealing from the rest of us? A multiple of that.
According to the most recent estimates from the IRS, tax cheats steal about $470 billion a year. And that figure is four years out of date, relating to 2019. That’s the figure after enforcement measures.
Oh, and the Treasury Inspector General for Tax Administration says that’s a lowball number.
But it still worked out at around 12% of all the taxes people were supposed to pay (including payroll taxes). And around 2.3% of GDP.
Over the next 10 years, based on similar ratios to GDP, that would come to another $3.3 billion.
Sure, Social Security’s trust fund is theoretically separate from the rest of Uncle Sam’s finances. But that’s an accounting issue: A distinction without a difference.
Social Security is America’s retirement plan. Few could retire in dignity without it. Yet it is facing a fiscal crisis. By 2034, without changes, the program will be forced to cut benefits — drastically.
Some people want to cut benefits. Others want to raise the retirement age, which also means cutting benefits. Others want to raise taxes on benefits — which also means cutting benefits. Others want to hike payroll taxes, either on all of us or (initially) only on very high earners.
At last — just 40 or so years out of date — some are starting to talk about investing some of the trust fund like nearly every other pension plan in the world, in high-returning stocks instead of just low-returning Treasury bonds.
(It is hard for me to believe that it’s now almost 16 years since I first wrote about this ridiculously obvious fix And, yes, I’ve been boring readers on the subject ever since, including here and most recently here, and, no, I have no plans to stop.)
But if investing some of the trust fund in stocks is a no-brainer, so, too, is insisting everyone obey the law and pay the taxes they actually owe each year. I mean, shouldn’t we do that before we think about raising taxes even further on those who abide by the law?
How could anyone object? Any party that believes in law and order would support enforcing, er, law and order on tax evasion. And any party of fiscal conservatism would support measures, like tax enforcement, to narrow the deficit.
And, actually, any party that truly supported lower taxes for all would be tough on tax evasion: It is precisely this $500 billion in evasion by a small, scofflaw minority that forces the rest of us to pay more. We have, quite literally, a tax on obeying the law.
One of the many arguments in favor of taxing assets or wealth, instead of just income, is that enforcement would be easier and evasion much harder.
Washington, D.C., seems to be a place where people come up with complex proposals just so they can avoid the simple, fair ones.
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Americans’ discontent with the size of their federal income-tax bill is at a two-decade high, according to a new poll — even though Congress hasn’t passed any direct income-tax increases in recent years.
One month after the 2023 tax season’s conclusion, 51% of respondents in a newly released Gallup poll said their income taxes were not fair. That’s up from 44% last year and marks a record high since 1997, when Gallup’s pollsters started asking how people felt about their income-tax bills.
Meanwhile, 46% of people said they were paying a fair amount of income tax. That basically matched the dim mood over two decades ago, in in 1999, when 45% said that they were paying a fair amount.
Six in 10 poll participants said their federal income taxes were “too high,” pollsters said. 2001 was the last time that share of people felt the same way, Gallup said.
Feeling the squeeze: Grocery prices are rising more slowly, but food insecurity is surging among low-income Americans
Gallup pollsters spoke with more than 1,000 people, doing their field work through most of April.
The poll comes during a fierce debate about whether the wealthiest taxpayers, as well as corporations, are paying enough in taxes. The Biden administration has been pressing for higher tax rates on high earners. A Democratic-controlled Congress last year passed a law with an $80 billion funding infusion for the IRS over a 10-year span in part to launch more audits of rich individuals and corporations.
Many Americans walked away from tax season with income-tax refunds that were smaller than a year ago. That’s due, at least in part, to the end of pandemic-era boosts to certain credits, tax experts have previously told MarketWatch.
Both backdrops might be at play in the public mood on taxes, observers noted, and political affiliation could have something to do with these changes, Gallup said. Only one-third of Republicans said their income taxes this year were fair, for example — that’s down from 63% in 2020, the last full year of the Trump administration.
The change in Republican sentiment could be why there was a heavy swing since 2020, when 59% said their taxes represented a fair number. In 2020, 56% of political independents said their taxes were fair, and that percentage fell to 45% a few years later. Among Democrats, meanwhile, the 63% saying their taxes were fair was virtually unchanged over that span.
Republicans “are certainly more frustrated now with Biden in office,” said Jeff Jones, senior editor of the Gallup poll. “But they are even more frustrated than they were when Obama was in office.”
Democrat Joe Biden campaigned in 2020 on pledges to raise taxes on corporations and households earning over $400,000 a year and not on those making less than that. So far, the president has not been able to turn proposals like a billionaire’s minimum tax or a higher top tax rate into law.
The real tax-policy fight brewing in the background is the 2025 expiration of Trump-era tax cuts, experts have said.
In the sweeping 2017 tax-code overhaul, Congress reduced five of seven income-tax brackets and boosted commonly used features of the tax code, including payouts for the child tax credit and the standard deduction. But some of those tax cuts were scheduled to sunset, while others were permanent.
Another potential shaping the mood on taxes is the broader economy and recent tax season, Jones said. One possibility, he noted, is that some people are getting pushed to higher tax brackets with pay raises meant to keep up with inflation. (Tax brackets are adjusted annually to account for inflation.)
While inflation is still pinching wallets, tax refunds are lower than they were a year ago.
Refunds averaged just over $2,800, and that’s down more than 7% from a year earlier, according to IRS data through May 12.
So you know: What happens if you can’t pay your taxes? IRS has a payment plan — but read this before you sign up.
For his part, Lawrence Zelenak, who teaches tax law at Duke University, thinks the current darkening public mood “is largely a response to the disappearance of all the temporary pandemic-related tax relief,” he said.
In 2020 an estimated 60% of households ended up with no federal income-tax liability because they were making less and bringing in more through direct cash assistance from the federal government, according to Tax Policy Center estimates.
By 2022, an estimated 40% of households wouldn’t face any federal income tax, according to the nonpartisan think tank — which is more in line with levels seen before the pandemic.
Keep in mind: IRS will launch free tax-filing pilot in 2024. TurboTax, H&R Block and Republicans are opposed.
Refunds during 2022 got a kick from extragenerous payouts including the child tax credit, the child- and dependent-care credit and the earned-income tax credit.
Most taxpayers also got a chance to shave their tax bill with a temporary change that let them take the standard deduction and also write off a portion of their charitable donations. But the credits reverted to their prepandemic size, and the deduction on cash donations subsequently went away.
“With the end of the pandemic tax relief, many people have seen their income-tax liabilities go up, and it’s not surprising they see that as unfair,” Zelenak said. “So it may be the change more than the absolute level of tax.”
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Some clarity is emerging regarding statements from Biden administration officials that no one making less than $400,000 will see higher audit rates by the Internal Revenue Service, which is about to step up its scrutiny of wealthy taxpayers.
The Inflation Reduction Act — the tax and climate package enacted last summer — earmarked $80 billion for the IRS over the next decade and a half. The money is intended in part to facilitate more audits of corporations and wealthier individuals.
Ahead of the bill’s passage, Treasury Secretary Janet Yellen pledged that there would be no increase in the audit rate for households and small businesses with annual incomes below $400,000 “relative to historical levels.”
But Republican critics and other observers have asked what “historical levels” might actually mean.
The audit rate on returns for tax year 2018 is the reference point to keep in mind, IRS Commissioner Danny Werfel told senators on Wednesday. He emphasized that “there’s no surge coming for workers, retirees and others.”
The IRS audited fewer than 1% of 2018 returns with total positive incomes — the sum of all positive amounts shown for various sources of income reported on an individual income-tax return, which excludes losses — of between $1 and $500,000, according to statistics that the tax agency released last week.
The agency has three years to start an audit from the time it receives a return.
Also read: The IRS wants more people working in tax enforcement. Now it has to find them.
The numbers show that 0.4% of returns for taxpayers earning up to $25,000 were audited. That figure was 0.3% for returns between $200,000 and $500,000 and more than 9% for returns over $10 million, the IRS data show. Six years earlier, more than 13% of returns over $10 million were scrutinized, according to the IRS.
“Help us with understanding what the words ‘historic level’ means,” Sen. James Lankford, a Republican from Oklahoma, asked Werfel during a Wednesday budget hearing.
“We will take the most recent final audit rate, and it’s historically low … and we allow that to be the marker for least several years, and then we’re revisit it,” Werfel said. The 2018 audit rates were the newest final rates, he added.
“So the 2018 number is what it’s going to be?” Lankford asked.
“Yes,” Werfel replied.
“Werfel’s explanation that 2018 audit levels will be the reference point is the most detail I’ve heard so far,” Erica York, s senior economist at the Tax Foundation, told MarketWatch. “He did seem to leave open the possibility of revisiting the reference year for ‘historical’ in the future,” she added.
Another open question has been how the $400,000 income threshold will be determined. Months after the Inflation Reduction Act passed, IRS and Treasury officials still hadn’t finalized what counted as $400,000 in income, according to a January Treasury Department watchdog report.
“How are you arriving at this number?” asked Sen. Marsha Blackburn, a Republican from Tennessee. Blackburn’s state has many self-employed entrepreneurs who might appear richer on paper than they actually are, she said. “While they may have a higher gross, their net is very low,” she added.
“We’re going to look at total positive income as our metric,” Werfel said. He later added that “there would be no increased likelihood of an audit if they have less than $400,000 in total positive income.”
The IRS description of total positive income as “the sum of all positive amounts shown for the various sources of income reported on an individual income tax return and, thus, excludes losses” represents, effectively, a tally of income before taxpayers subtract their losses.
Total positive income is a metric the IRS usually applies to categorize audits, the Tax Foundation’s York noted. But one challenge of strict thresholds for more audits, she said, “is that it creates incentives for underreporting income” to stay under the line.
Compared with recent years, there are now more specifics about how the IRS will implement additional audits of higher-income taxpayers, said Janet Holtzblatt, a senior fellow at the Tax Policy Center.
“But still there are questions,” she noted, about how the agency will treat situations when taxpayers don’t provide full picture of their income.
Read on: Make sure the tax breaks you’re taking now won’t hammer you in retirement
Also: ‘This was a test’: IRS has handled more than 100 million returns already — Tax Day by the numbers
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The panel responsible for the nation’s first state-level exploration of reparations for Black Americans discussed an important question this weekend: How will the state pay for reparations?
The California reparations task force listened to testimony from experts who suggested possible sources for compensation, after previous meetings had touched on the potential for hundreds of thousands of dollars in monetary reparations for specific harms. The experts’ suggestions included taxing the rich, such as through a state estate tax or a “mansion tax”; incentivizing the wealthy to help fund reparations by providing tax breaks, akin to how charitable giving minimizes one’s tax burden; or helping all taxpayers with below-median wealth by means of a tax credit, which would in turn help Black households.
Suggestions from the expert testimony, given at the task force’s meeting at San Diego State University on Friday, could be incorporated into the body’s final recommendations to the state legislature, which are due this summer.
“This is incredibly insightful and provocative,” said Lisa Holder, a task force member. “It gives us lots to think about.”
The experts’ suggestions about possible sources of funding were based on their testimony that current U.S. tax laws favor the wealthy — who are most likely to be white.
“Our tax laws as written have a disparate impact,” said Dorothy Brown, a tax professor at Georgetown Law and author of the book, “The Whiteness of Wealth: How the Tax System Impoverishes Black Americans and How We Can Fix It.” She said “Black people are likely to pay higher taxes” because they are less likely to gain access to the same tax breaks as their white peers.
Key Words: California reparations push needs to be a ‘game-changer,’ author of bill says
Brown said what would be ideal is a reparations tax credit designed to compensate Black taxpayers, but she thinks it would face legal challenges. So she said the next best thing would be “a wealth tax credit applicable to all taxpayers in households with below-median wealth.”
“Given the racial wealth disparity, this will result in a disproportionate percentage of Black households receiving the credit,” she testified
A pair of estate planners who testified introduced the idea of taxing “swollen” wealth to replace “stolen” wealth, and showed that the racial wealth gap widened after 1981 — when the biggest tax cut in American history was enacted. They cited Federal Reserve figures from 2019 that showed the average white household had $812,000 more wealth than the average Black household.
One of their suggestions for sources of money for reparations is a state estate tax. (Under federal law, the lifetime estate-tax exemption is $12.9 million for individuals this year.) Their other suggestions include: a mansion tax, a graduated-property tax — which they acknowledged may not be likely in California because Proposition 13 taxes properties based on their value when they were sold — or even a tax on the fledgling “metaverse.”
Sarah Moore Johnson, founding partner at Washington, D.C.-based Birchstone Moore, is one of the estate planners who testified. She proposed a state-sponsored reparations tax fund that could receive charitable contributions.
“Charitable contributions are currently permitted to the state or federal government, but only for public purposes,” she said. “If racial repair is recognized as a public purpose,” it could be tax-deductible in the same manner as charitable contributions, she said.
Acknowledging that the idea of reparations continues to be controversial, task force member state Sen. Steven Bradford asked the experts whether they think wealthy people, like their clients, would be opposed to such ideas.
“What I hear from my clients is a level of guilt about being able to give this much money to their heirs,” Moore Johnson said. “From where I sit and what I see, I see some support.”
Raymond Odom, an estate-tax lawyer and director of Wealth Transfer Services at Northern Trust in Chicago who co-presented with Moore Johnson, echoed that sentiment.
Odom said he has helped “wealth get concentrated” for decades, and how that happens is through very wealthy people setting up foundations and charities that allow them to avoid taxes. “It’s a joy being able to talk to people who could change that,” he said, adding that he has “talked to wealthy white folks who are behind this.”
“I can tell you unequivocally: Very wealthy people have lots of trouble figuring out what to do with their wealth,” Odom told the task force.
The Value Gap: Reparations are a ‘human rights issue’ that will boost the economy, says California task-force chair
Addressing the possibility of relying on charitable sources, task force member Don Tamaki said, “I can’t argue with the fact that charity is not reparations. But in my humble opinion, we need to explore every avenue of funding.”
Wherever any possible compensation comes from, Brown, the tax professor and author, had two key suggestions for the task force. First, she said reparations should not be treated as taxable income, citing precedent such as tax-free treatment of Holocaust payments, and Japanese-Americans who received compensation because of their mass incarceration during World War II. And her second suggestion was that Black Americans should not have to pay for their own reparations, which she said “would be entirely inconsistent with the intent and spirit of the task force’s goals.”
See: Historic report lays out case to compensate descendants of slaves in California
The nine-member task force, established by a 2020 law and responsible for studying and developing reparations for Black Americans because of slavery, released a preliminary report last year. It is set to disband when it submits its final report and recommendations to the state legislature by its July 1 deadline, but on Saturday the task force voted to remain intact for another year — until July 1, 2024 — to help with the implementation of its proposals, despite questions from some of its members about whether it had the authority to decide to do so.
The task force also voted to change the dates of its next meeting, which was previously scheduled for the end of February. In what could be the final in-person meeting before the report is due will be held March 3 and 4 in Sacramento.
Related: Reparations task force also wants to change California policies
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“‘The Democrats should have never done it, the Supreme Court should have never approved it, and it’s going to lead to horrible things for so many people.’”
That was former President Donald Trump’s reaction to his tax returns being made public.
The Democratic-controlled U.S. House Ways and Means committee released six years of Trump’s tax returns on Friday, after several years of legal wrangling with Republicans opposed to the publication, in an effort to provide transparency and help improve tax laws. Experts will be looking closely at large business losses reported by Trump that significantly reduced his tax liability.
Read more: What could be learned from Trump’s tax returns
And: Trump paid $0 taxes in 2020. He’s not alone
In his statement following the release, Trump countered that America’s partisan divide “will now grow far worse.”
“The radical, left Democrats have weaponized everything, but remember, that is a dangerous two-way street!” he added.
What’s more, the real estate mogul and former reality TV star turned commander-in-chief suggested the returns will demonstrate his business savvy. Trump and his wife, Melania, paid $0 in income taxes for 2020, according to a previous report released by the congressional Joint Committee on Taxation.
“The ‘Trump’ tax returns once again show how proudly successful I have been,” he continued, “and how I have been able to use depreciation and various other tax deductions as an incentive for creating thousands of jobs and magnificent structures and enterprises.”
So why were Trump’s tax documents released? House Ways and Means Committee Chairman Richard Neal (a Democrat from Massachusetts) said in his opening statement on Friday that, “A president is no ordinary taxpayer. They hold power and influence unlike any other American. And with great power comes even greater responsibility.”
He added that, “Our work has always been to ensure our tax laws are administered fairly and without preference, because at times, even the power of a president can loom too large.”
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America’s high inflation rate will produce a 7% increase in the size of the standard deduction when workers file their taxes on their 2023 income, according to new inflation adjustments from the Internal Revenue Service.
It’s also going to pump up tax brackets by 7% as well, according to the annual inflation adjustments the IRS announced this week.
Many tax code provisions — but not all — are indexed for inflation, so the announcements are a recurring event. But when inflation is persistently clinging to four-decade highs, these annual adjustments carry extra significance.
“When inflation is persistently clinging to four-decade highs, these annual adjustments of approximately 7% for the standard deduction carry extra significance.”
Start with the standard deduction, which is what most people use instead of itemizing deductions.
The standard deduction for individuals and married people filing separately will be $13,850 for the 2023 tax year. That’s a $900 increase from the $12,950 standard deduction for the upcoming tax season.
For married couples filing jointly, the payout climbs to $27,700 for the 2023 tax year. That’s a $1,800 increase from the $25,900 standard deduction set for the upcoming tax year.
The increases in the marginal tax rates reflect the same 7% rise. For example, the 22% tax bracket for this year is over $41,775 for single filers and over $83,550 for married couples filing jointly. Next year, the same 22% bracket applies to incomes over $44,725 and over $89,450 for married couples filing jointly.
“The changes seem to be much larger than previous years because inflation is running much higher than it has in previous decades,” said Alex Durante, economist at the Tax Foundation, a right-leaning tax think tank.
The IRS arrives at its inflation adjustments by averaging a slightly different inflation gauge, the so-called “chained Consumer Price Index” instead of the widely-watched Consumer Price Index, Durante noted. That’s an outcome of the Trump-era Tax Cuts and Jobs Act of 2017, he added.
“The reason they do this is because the regular CPI is thought to overstate inflation because it doesn’t take into account the substitution that shoppers can make as cost rise,” Durante said. Shoppers substitute when they swap a more expensive item for cheaper one, and research shows many Americans are using the tactic.
The IRS inflation adjustments come after September CPI data last week showed inflation of 8.2% year-over-year, slightly off from 8.3% in August. Also last week, the Social Security Administration said next year’s payments would include an 8.7% cost of living adjustment.
“The payout on the earned income tax credit — geared at low- and moderate-income working families who have been hit hard by red-hot inflation — is also increasing. ”
The payout on the earned income tax credit is also increasing. The maximum payout for a qualifying taxpayer with at least three qualifying children climbs to $7,430, up from $6,935 for this tax year. The longstanding credit is geared at low- and moderate-income working families who have been hit hard by red-hot inflation.
More than 60 provisions are slated for an increase inline with inflation, but many portions of the tax code are not indexed for inflation. Depending on the circumstances, the taxes or the tax breaks kick in sooner.
Capital gains tax rules one example. The IRS lets a taxpayer use capital losses to offset capital gains taxes. If losses exceed gains, the IRS allows a taxpayer to deduct up to $3,000 in excess loses. They can then carry the remainder of the capital loses to future tax years. It’s been more than four decades since lawmakers last set the limit, according to Durante.
“While more than 60 provisions are slated for an increase inline with inflation, many portions of the tax code are not indexed for inflation. They include capital gains tax. ”
Given the stock market’s rocky downward slide this year, many investors might welcome a fast-approaching tax break — even if it only enables a $3,000 deduction.
At the same time, a married couple selling their home can exclude the first $500,000 of the sale from capital gains taxation, and it’s $250,000 for a single filer. It’s been that way since the exclusion’s 1997 establishment.
The once white-hot housing market may be cooling, but many sellers may still be facing the point when taxes kick in. The median home listing was over $367,000 as of early October, according to Redfin
RDFN,
The child tax credit is another example. After the payout to parents last year jumped to $3,600 for children under age 6 and $3,000 per child age 6 to 17, it’s back to a maximum $2,000. The credit’s refundable portion climbs from $1,500 to $1,600 during tax year 2023, the IRS notes.
Proponents of the boosted payouts and some Congressional Democrats want to revive the larger payments in negotiations tied to corporate taxes. The high costs of living are a strong reason to bring back the boosted credit, they say.
Related:
What smart strategies can lower your tax bill as year-end approaches? Read this before making any tax moves.
Three things the best 401(k)s offer that can help you save a lot more
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