Thursday December 7, 2023
Benefits for 19 Million Taxpayers on Extension
IRS Commissioner Chuck Rettig noted, "Each year, eligible taxpayers overlook money-saving deductions and credits that can help them with the cost of raising a family, daycare, paying for college, saving for retirement or making a donation to charity. We want to ensure they are aware of all the tax benefits for which they may qualify."
Approximately 19 million taxpayers are on extension until October 17, 2022. This summer is an excellent time to consider potential tax benefits. There are at least seven specific benefits that may be helpful for taxpayers.
1. Earned Income Tax Credit (EITC) — Low or moderate income individuals and those with dependent children will benefit from the credit. Taxpayers must have earned income to be eligible.
2. Child Tax Credit (CTC) — Many families received half of their available CTC during July through December 2021. They can claim the balance of their CTC by filing a tax return.
3. Child and Dependent Care Credit (CDCC) — Individuals with qualified dependents who pay for work-related child-care may receive up to $4,000 for one child and up to $8,000 for two or more children.
4. Recovery Rebate Credit (RRC) — There were three rounds of Economic Impact Payments. Some individuals did not receive the full amount of their third payment, including families who welcomed a child in 2021 and are eligible to receive this credit.
5. Gifts to Charity — Over 90% of taxpayers claim the standard deduction. During 2021, individuals who claim the standard deduction may also deduct up to $300 in cash gifts. Married couples filing jointly may report an above-the-line charitable deduction of $600. Those individuals who make large cash donations may choose to itemize rather than taking the standard deduction. Cash gifts up to 60% of adjusted gross income are deductible for those who itemize.
6. American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) — Individuals who are attending a college or university may benefit from credits for payment of tuition and other qualified costs. The credits will help reduce the net cost of their higher education program.
7. Savers Credit — There is a tax credit available for contributions of low-to-moderate income individuals for an individual retirement account or an employer-sponsored retirement plan.
The IRS urges taxpayers on extension to gather all of their IRS Forms W-2 and 1099. They should also ensure that they reported any Child Tax Credits as explained in IRS Letter 6419 or any stimulus payments as explained in IRS Letter 6475.
Taxpayers are encouraged to create an IRS Online Account. This will assist them to understand the correct amount of their Economic Impact Payments or Child Tax Credit payments. The IRS offers many helpful tools on IRS.gov.
Summer is an excellent time to update your 2022 withholding. If you have a life event such as marriage, divorce, a new child or a change of income, you may want to adjust your withholding. The IRS Tax Withholding Estimator on IRS.gov will be quite helpful.
If you need specific assistance, you can use the Taxpayer Assistance Center Locator tool and make an appointment with a trained representative. You can schedule an in-person visit at your local Taxpayer Assistance Center.
IRS Plans to Spend $80 Billion
The Inflation Reduction Act signed by the President provides an additional $80 billion for the IRS over the next decade. Treasury Secretary Janet Yellen sent a memorandum on August 17 to IRS Commissioner Chuck Rettig to encourage the IRS to develop a spending plan within the next six months.
Yellen stated, "Ahead of us is a monumental opportunity to transform tax administration in this country. It is also a significant operational challenge. The work will require an all-hands-on-deck approach from the dedicated employees of the IRS. And it will require the agency to modernize: first, to fully resolve the inventory backlog and make significant improvements in taxpayer services; second, to overhaul an information technology system that is decades out of date and invest in training employees so they can identify the most complex evasion schemes by those at the top; and third, to replace the attrition that is on the horizon from the expected retirement of at least 50,000 IRS employees over the next five years."
Yellen notes that the goal is for the IRS to increase audits but protect households that earned $400,000 per year or less. The goal for the IRS plan is to increase audits on upper-income individuals and businesses.
Secretary Yellen directed Commissioner Rettig to work closely with the Deputy Secretary of Treasury and create specific initiatives and timelines. The goals are to improve "taxpayer service, modernize technology and increase equity" in the tax system.
She concluded, "Thanks to the efforts of Congress and this Administration, we finally have the tools that we need to improve the service that is provided to American taxpayers and address noncompliance by the wealthy and those who aid and abet them."
The $80 billion is divided into three major parts. Approximately $45 billion will be used to hire auditors for increased enforcement, $25 billion will be allocated primarily to operations support and $5 billion is designated for information technology (IT) updates.
The IRS acknowledges that it still has a serious problem in processing 2021 paper tax returns. On August 15, 2022, 100 members of Congress sent a letter to the IRS demanding an update on the backlog. Commissioner Rettig has promised to reduce the backlog to a "healthy level" by December 31, 2022.
However, it is probable that the IRS will need to spend some of the new funding to clear the backlog. Yellen noted that the $80 billion is designed to allow expanded services but she would be prepared "to approve the near-term use of funds to improve services for the next filing season."
Will the IRS Build Free File Software?
The Inflation Reduction Act included $15 million for a study that could lead to an IRS run version of the Free File software.
The Free File Alliance system was developed in 2002. There had been multiple previous efforts to encourage the IRS to build its own Free File software. Former President Ronald Reagan first proposed a Free File system in the 1985 tax reform plan. In 1987, the IRS estimated the cost of developing that system would be approximately $1 billion and would require an additional 17,000 workers. The primary function of the workers would be to handle call sites to correct errors on wage and information tax returns.
Former President Bill Clinton also directed the IRS to study a Free File system in 1998. In 2001, the IRS determined that it was seriously behind in updating its technology platforms and decided not to proceed with government Free File software. As an alternative, the IRS signed a 2002 agreement with the Free File Alliance and allowed individuals to use commercial software to file tax returns.
The development of Free File software by the IRS has been advocated by Nina Olson of the Center for Taxpayer Rights for many years. In 2002, Olson stated, "At that time, I said very clearly that I felt that the government had an obligation to make free electronic filing available to everyone, regardless of income, and I felt it would be confusing to taxpayers to have so many products."
The Free File Alliance program has received significant criticism. In 2006, Senate Finance Committee Chair Chuck Grassley (R-IA) and Ranking Member Max Baucus (D-MT) sent a letter to the IRS and claimed tax software companies were "using the Free File program as an opportunity to bolster its revenue through the sale of ancillary products at taxpayer expense."
Olson asked the IRS to contact her about implementing a Free File software system. She noted, "I want to know whether they're actually going to talk to organizations like the Center for Taxpayer Rights and not just the software companies, because the IRS is a captive of the software companies and has been since the beginning of e-file."
Editor's Note: Many nations in Europe and Asia provide a government Free File software option. While the IRS has a pressing need to upgrade its database technology, Nina Olson is correct that the IRS is long overdue in building Free File software. With $80 billion in new funding, the government has the resources to join the rest of the first world nations and provide a simplified software. The initial versions of the software will have to be limited and will primarily serve individuals taking the standard deduction with wages earned from one employer. This is a large percentage of American taxpayers.
Applicable Federal Rate of 3.6% for September — Rev. Rul. 2022-17; 2022-36 IRB 1 (15 August 2022)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2022. The AFR under Section 7520 for the month of September is 3.6%. The rates for August of 3.8% or July of 3.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.