TaxBrief
Keeping you informed November 2022
Believe it or not, it’s already time to start gearing up for another tax season. As we wrap up the 2022 tax year, we thought it would be a good time to review the actions Congress and the IRS have taken in the last few months that may have an impact on your returns, refunds and future tax planning. If you have any questions about the changes and how they could impact your return, or need advice on how you can reduce your tax bill for the rest of the year and get a start on planning for tax season, please get in touch with us.
Inflation Reduction Act Tax Credits
The tax legislation that has received the most attention in the past year is the Inflation Reduction Act of 2022 (IRA of 2022), which was signed into law this August. One of its goals was to address climate change by offering tax incentives for going green. While some of these incentives are targeted at U.S. businesses, most are available to U.S. homeowners who make energy-saving improvements to their homes.
Many of the tax benefits offered by the IRA of
2022 are not new but are actually extensions and
modifications to existing credits that either had
expired or were set to expire soon. For example,
the nonbusiness energy property tax credit was
renamed the energy efficient home improvement
credit and extended through 2032. Beginning in
2023, the credit amount will be 30% of the costs
of eligible home improvements made during the
tax year, with a $1,200 annual limit. The specific
annual limits for improvements are:
• $150 for home energy audits
• $250 for exterior doors meeting Energy Star
requirements ($500 total for all doors)
• $600 for windows and skylights meeting Energy
Star’s most efficient certification requirements
• $2,000 for specified heat pumps and heat pump
water heaters, biomass stoves and boilers
(neither the $1,200 annual limit on total credits
nor the $600 limit on other qualified energy
property applies to this amount)
• $600 for other qualified energy property,
including central air conditioners; electric
panels and certain related equipment; water
heaters powered by natural gas, propane, or oil;
oil furnaces and water boilers
The IRA of 2022 also renames the residential
energy efficient property credit as the residential
clean energy credit. This credit was scheduled to
expire at the end of 2023 but has been extended
through 2034. The credit amount increased to
30% for 2023 through 2032, but drops to 26% in
2033 and 22% for 2034. The energy efficient home
improvement credit no longer applies to biomass
furnaces and water heaters, but will apply to
battery storage technology with a capacity of at
least three kilowatt hours
Updated Electric Vehicle Credit
It may seem the IRA of 2022’s $7,500 tax credit
for purchases of new electric vehicles is just a
continuation of a credit that was already available,
but the legislation made many substantive changes.
The credit is now known as the clean vehicle credit,
and the IRA of 2022 placed several restrictions
on the credit that may make it difficult for some
buyers of electric vehicles to take advantage of it.
The changes that are expected to have the
broadest impact include caps on the income of
the taxpayers eligible for the credit, a limit on
the retail price of qualifying vehicles and new
sourcing requirements. Starting in 2023, only
households with incomes of up to $300,000
qualify for the credit, with the credit limited
to individual taxpayers with incomes below
$150,000. Additionally, only battery-powered
cars priced at less than $55,000 are eligible, or
$80,000 for vans, SUVs and trucks. Finally,
final assembly of the vehicle must have been
in North America, and the materials from
which it is constructed must meet specified
sourcing requirements.
Student Loan Forgiveness
Not Taxable
President Biden’s decision to forgive a portion
of some student loans and the objections some
have raised to his actions received a great deal
of media attention over the summer. Receiving
significantly less attention were the potential tax
implications for those whose loans were forgiven.
Many in the tax community were concerned
that those who received forgiveness would end
up paying much larger tax bills because the IRS
has traditionally taxed forgiven debt as income to
the taxpayer. Fortunately, Congress had already
anticipated the problem and the American Rescue
Plan Act of 2021 preemptively excluded most
student loan debt from income for the 2021
through 2025 tax years.
Educators Expense
Deduction Increased
The out-of-pocket expenses that educators can
claim as a deduction increased to $300 for 2022,
up $50 from last year. This is the first increase
since 2002. The deduction for unreimbursed
expenses is available to all educators, even
those claiming the standard deduction. Married
educators who are both claiming the deduction
can claim a deduction of up to $600. If you
or your spouse are an educator who plans on
claiming the deduction for 2022, remember
that you need to track the receipts for your
out-of-pocket expenses to verify the amounts
you claimImproperly Forgiven
PPP Loans Taxable
One of the primary benefits of the Paycheck
Protection Program (PPP) loans to help businesses keep their workforce employed during the
COVID-19 pandemic was that many eligible borrowers qualified to have their loans forgiven, and
the forgiveness is not taxed. However, there were
some instances where borrowers had their loans
forgiven despite not being eligible for forgiveness.
An IRS review of the program discovered that
some ineligible taxpayers got their loans forgiven,
often through misrepresentations or omissions.
This fall, the IRS announced that those taxpayers
whose loans had been improperly forgiven must
include the forgiven amount in their income.
New Funds to Improve
IRS Enforcement
Treasury Secretary Janet Yellen recently outlined
the IRS’s plans for the nearly $80 billion in additional funding in the IRA of 2022, which includes
increasing the agency’s compliance and enforcement efforts. While the additional funding will
decrease the gap between what U.S. taxpayers
owe and actually pay, Yellen stressed that the
new resources will not be used to increase the
audit rates for households with less than $400,000
in annual income.
In addition to increased enforcement, Yellen
explained the funds will be used to transform
the IRS into a 21st century agency and improve
customer service by fully staffing IRS Tax
Assistance Centers, hiring 5,000 additional
phone representatives and improving the
agency’s slow turnaround for paper returns.
COVID Penalty Relief for Late Filers
The COVID-19 pandemic made it difficult for some
taxpayers to file their returns, and in September,
the IRS announced it would stop imposing failure
to file penalties on individuals and businesses that
filed their 2019 and 2020 returns late. The deadline
for taxpayers to file late returns for those years
and have their full penalty forgiven has already
passed, but the IRS says taxpayers can still file
and pay a reduced penalty within the next few
months. To receive complete relief from failure
to file penalties, taxpayers needed to have their
returns for those years filed by Sept. 30. The nearly
1.6 million taxpayers who have already paid the
failure to file penalty for that year received more
than $1.2 billion in refunds or credits.
Unfortunately, the penalty relief only applies to
the failure to file penalty for the 2019 and 2020
tax years. The IRS has said taxpayers who have
unpaid taxes from those years will still be assessed
the failure to pay penalty and interest, even if the
taxpayer is eligible for relief from the failure to file
penalty. However, taxpayers who have not filed
for 2019 or 2020 and owe tax should still make an
effort to file because the failure to pay penalty is
usually assessed at 0.5% per month from the date
the return was originally due. The interest rate the
IRS charges on unpaid taxes rose from 5% to 6%
on Oct. 1.
IRS Crackdown on Crypto Continues
This summer’s crash in cryptocurrency prices has
many Americans souring on digital assets as an
investment, but the IRS continues to expand its
efforts to locate taxpayers who are using crypto currency to avoid taxation. The COVID-19
pandemic slowed down the agency’s Virtual
Currency Compliance Campaign, but the IRS is
once again ramping up its enforcement efforts.
In September, the agency received a judge’s
permission to issue a summons requiring that a
bank turn over information on customers using
the popular crypto broker sFOX. It has also
warned taxpayers that it may take additional action
to get banking information for taxpayers using
other brokers. Additionally, the IRS is planning to
spend a portion of the funding the agency received
through the IRA of 2022 to improve its ability to
monitor cryptocurrency transactions.
The IRS treats cryptocurrencies such as Bitcoin
and Ethereum as property, and taxpayers are
required to pay the capital gains tax on any profits
they earn by buying and selling virtual currency.
For the 2022 tax year, the draft of Form 1040,
U.S. Individual Income Tax Return, includes
an updated question on whether a taxpayer has
engaged in any cryptocurrency transactions. If you
sold or are planning to sell any cryptocurrency
during 2022, it’s better to disclose your profits to
the IRS and pay the tax due than it is to get caught
not disclosing the assets to the government and
face penalties and interest.
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Article courtesy of NATP
