Fall 2022 Tax Newsletter

Some popular tax provisions are expiring at year-end. Unless Congress acts to extend the breaks for another year or so, the last time you can take them is on your 2022 business or individual tax return that you will file next year. Among the expiring extenders: The ability of businesses to write off 100% of restaurant meals, provided the cost isn’t lavish,  tax credits for biodiesel and renewable diesel, plus the temporary enhancements to the premium tax credit available to eligible individuals who buy health insurance through an exchange.

Two breaks start to phase out: The tax credit for installing solar panels, solar-powered water heaters and the like in your home falls from 26% to 23% next year. And the 100% bonus depreciation write-off that businesses take for the cost of new and used qualifying business assets of 20 years or less drops to 80% in 2023.

Failing to prove basis in a partnership interest precludes deducting losses. In general, partners can take flow-through losses from partnerships on their returns only to the extent of their adjusted basis in their partnership interest. Partners have the burden of proof, and those who can’t make this showing can’t deduct losses. Here is a prime example. A man owned 1% of a partnership. The other 99% was owned by an S corporation, which the man wholly owned. The partnership had $132,000 in losses for the year, and the man claimed he and the S corporation could deduct their pro rata share of the partnership’s losses. But because neither he nor the S corporation could prove their adjusted basis in their partnership interests, the Tax Court disallowed the pass-through losses.

IRS’s processing of paper-filed returns is antiquated and time-consuming. IRS workers must manually transcribe the information on paper returns for input into the computer systems by keystroking each digit and letter on the form. This takes lots of time and results in a significant amount of data entry errors. About 22% of paper returns transcribed by IRS employees in 2021 had such errors.

With the stock market’s bumpy year so far… Closely review your investment portfolio to take advantage of some tax-savings opportunities and to try to avoid some potential tax traps. Consider selling the duds in your portfolio to offset capital gains from sales of winners. But beware of the sneaky wash-sale rule. If you purchase substantially identical securities up to 30 days before or after the sale, the capital loss is not deductible. Any suspended loss is added to the tax basis of the replacement securities. The wash-sale rule can catch you by surprise. For example, if you buy stock in an IRA after selling the same stock at a loss in your taxable investment account, or if you sell a mutual fund at a loss 25 days after the date a dividend is reinvested. Note that the rule doesn’t apply to trades made completely within an IRA. You are fine if you sell securities in your IRA at a loss and buy them back in the IRA within 30 days.

Watch out for stock mutual funds that frequently buy or sell holdings. They can potentially generate big short-term capital gains distributions, which are taxed at ordinary income rates instead of the more favorable long-term capital gains rates. Before you invest in a mutual fund, check its turnover ratio. The higher the ratio, the higher the potential for tax-inefficient short-term capital gains distributions. See if you’re eligible for the 0% rate on long-term gains and qualified dividends. If taxable income other than long-term gains or dividends does not exceed $41,675 on single returns…$55,800 for head-of-household filers or $83,350 on joint returns… Your qualified dividends and profits on sales of assets owned more than a year are taxed at a 0% federal rate until they push you over the threshold amounts. But the 0% rate isn’t all gravy. Zero-percent-rate gains and dividends might not be taxed at the federal level, but they do hike adjusted gross income. The extra AGI can cause more of your Social Security benefits to be taxed. Also, your state income tax bill may jump, since many states tax gains as ordinary income

The IRS increased the standard mileage allowance for business vehicle usage. The rate will be 62.5¢ a mile for the final six months of 2022, a 4¢ hike. The Service raised the rate due to the steep gas prices at the pump this year. The mileage rate for medical travel and military moves also increases by 4¢, to 22¢ per mile. The rate used when driving for charity doesn’t change. It’s fixed by law at 14¢ a mile. The standard mileage rate for 2023 will be announced in Dec.

Cost segregation studies are on IRS’s radar screen. These studies, prepared by outside consultants for either newly constructed or acquired property, divide a building into its various components to maximize depreciation deductions. Companies rely on them for tax purposes to claim larger depreciation write-offs for assets that can be depreciated over a shorter period than the building itself.

Amended return filers need a lot of patience. As of June 11, the agency had a backlog of 2.1 million unprocessed 1040-X forms. Normally, it can take IRS up to 16 weeks to handle an amended return. Now the wait time is more than 20 weeks for e-filings and is running considerably longer if you file a paper amended return. Use IRS’s Where’s My Amended Return tool to check the status of a filed 1040-X. You’ll need to enter your Social Security number, date of birth and ZIP code.

People understandably gripe about the complexity of the tax laws. Take for instance the many meanings of modified adjusted gross income. IRS and other federal agencies sometimes use MAGI to determine your eligibility for certain benefits or to figure whether you are subject to surtaxes or surcharges. For example, it’s used in calculating income thresholds for the health premium credit, child credit, American Opportunity Tax Credit, and for making Roth IRA contributions. It determines whether you are hit with the 3.8% tax on net investment income and whether your Social Security benefits are taxed. And for people on Medicare, it dictates whether you owe monthly premium surcharges for Medicare Parts B and D. The definition of MAGI often differs, depending on what it is used for. For Medicare premium surcharges, MAGI is AGI plus tax-exempt interest income. For the child credit, the AOTC, and the 3.8% net investment income tax, MAGI is AGI plus certain excluded foreign income. For Social Security benefits taxation and premium-credit eligibility, another definition takes more tax items into account.

IRS still has a large batch of unprocessed Forms 941-X…199,000 of them as of Sept. 21. Many of these quarterly payroll tax returns were filed by employers to amend their original filings to claim temporary COVID breaks, such as the sick and family leave credit and the employee retention tax credit. IRS is making a dent on these returns. As of Feb. 1, there were over 447,000. Now we know why there is such a long processing delay. The Service didn’t start working on claims for the credits until 12 months after the legislation granting these tax breaks was enacted, according to Treasury inspectors. A lack of updated computer programming, guidance and training all contributed to the delay.