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It's hard to believe that summer is almost over and school is back in session!  We are hoping the cooler temps will follow soon. This issue has important reminders for upcoming due dates, information about Power of Attorney forms, student loan forgiveness and more.  Enjoy!

While Congress passed the Inflation Reduction Act in August, we are still getting familiar with the changes to  energy credits, electric vehicle credits and other provisions.  We will provide more information as we learn more.
We will be closed Monday, September 5th
in observance of Labor Day.

Student Loan Forgiveness

President Biden recently announce that he would forgive $10,000 in federal student debt for borrowers making less than $125,000 per year, or $250,000 for couples filing married file joint or heads of households.  Pell Grant recipients will have up to $20,000 canceled as long as the student loans are held by the Department of Education.

Currently, 43 million Americans have student debts and the White House estimated that Biden's student debt plan would eliminate the full remaining balance for about 20 million borrowers. The cancelation of these loans aims to support low-income individuals, with 90% of help going to those who earn less than $75,000 a year. 

Typically, cancelation of debt results in taxable income.  However, the White House confirmed that the American Rescue Plan of 2021, which made student loan forgiveness nontaxable through 2025, would also cover Biden's current plan.

3rd Quarter 2022 Federal Estimated Tax Payments are due September 15th
California does not have a third quarter estimate unless you missed a previous quarter.

Does your Trust document have a Power of Attorney?

Mandy and Jenni recently took a lunch-hour class on the importance of the Power of Attorney document included in trust documents.

A Power of Attorney (POA) is a legal document that grants someone, or multiple other people, the power to manage the financial affairs and make important decisions on someone else's behalf. The Principal is the person who executes the POA and the Agent is the person authorized to make decisions.  In order for the POA to be effective, the Principal must have capacity at the time of signing.

Some important provisions to discuss with your attorney to include in the POA:

  • Gifting - If the Principal becomes incapacitated do they want to continue their charitable giving or to gift money to grandchild for college expenses?  If gifting is not allowed, the Agent cannot continue this giving plan.
  • Estate tax planning - some plans involve annual gifts of property to family members which need to continue to utilize the gift tax exemption.  Don't let your estate plan stop because you become incapacitated!
  • Medicaid planning
  • Trust provisions - ability to create, amend, revoke, fund, etc.
  • Compensation for the agent
  • Control over digital assets - virtual currency
  • Life insurance
  • Retirement Accounts
  • Loans/promissory notes

Take Away: If you don't have a trust, make one!  If you do have a trust, do we have a copy?

2021 Extended Partnership & S Corporation Tax Returns are due September 15th

Does the Inflation Reduction Act mean more audits? 

Many people are wondering what the new Inflation Reduction Act will mean for them.  The bill provides the IRS with $80 billion over the next decade, with about $45 billion earmarked for "enforcement."  Most of the money in the bill is mandatory spending - meaning it is not easily subject to the whims of Congress. 

This includes the hiring of thousands of new IRS agents.  As practitioners this is great news to us.  The last two years we have been unable to get through to the IRS and help our clients resolve issues in a timely manner.  Some of these new hires will be for customer service and some will be auditors.  While this may result in more audits, the IRS has repeatedly said its goal is to increase enforcement for the ultra-wealthy individuals who habitually underreport what they owe.  One more reason to be sure you report all your income and retain your receipts!

The 87,000 new hire figure was plucked from a Treasury report released in May 2021 about how the administration hoped to address the “tax gap” — the difference between what is owed to the government and what is actually paid. That figure was thought to be at least $381 billion a year, with most of it because of underreporting of income, according to the nonpartisan Joint Committee on Taxation.

Many of the new hires will replace retiring staff and bring staff levels back to where they were 10 years ago.  “The IRS lost more than 33,378 full-time personnel between FY 2010 and FY 2020, including more than 13,388 key enforcement personnel,” the IRS budget justification for fiscal 2022 states.  A 2019 IRS report said the agency "anticipates up to 31% of its current workforce (about 19,719 full-time employees) will retire within the next five years.  In congressional testimony in 2021, IRS Commissioner Charles Rettig said the agency will need to “replace more than 50,000 workers lost through attrition over the next six years.” 

In a May report, the Government Accountability Office said audit rates have declined dramatically for the super rich. In 2010, more than 21 percent of tax returns reporting more than $10 billion in income were audited — and that dropped to 3.9 percent by 2019, GAO said.  Additionally, for the 2019 tax year, just 0.17% of taxpayers earning between $25,000 and $200,000 per year were audited.  The same percentage of taxpayers earning between $200,000 and $500,000 per year were audited.  

Increasing the staff at the IRS will also help reduce the processing time.  If you have been waiting for a refund from 2019 or 2020, it's in part because the agency is understaffed.  Additionally, the improvements to the agency in additional staffing and better IT support will benefit the majority of taxpayers because the level of service will increase significantly.  This could ultimately result in fewer audits due to it being easier to comply with tax laws.

2021 Extended calendar year end Trust Tax Returns are due September 30th.

Sounds too good to be true?

You hear a lot about phishing scams that try to steal your identity or separate you from your money.  But there is another scam that isn't talked about as often - Offer in Compromise "mills". 

Taxpayers with outstanding tax bills may be tempted by these "mills" which make outlandish claims, usually in local advertising, regarding how they can settle a person's tax debt for pennies on the dollar.  The reality is that taxpayers end up paying a fee for a deal they could have gotten on their own by working directly with the IRS. 

As the old saying goes: When something sounds too good to be true, it probably is. Dishonest Offer in Compromise mills try to take advantage of a taxpayer's lack of knowledge to make a quick buck.

Copyright © 2022 Merrell, Irwin & Associates, All rights reserved.

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