Income Tax News

When Eric Cooper, a 50-year-old early retiree, needed to tap his retirement savings before the age of 59 and a half, he faced the possibility of steep penalties.

But he found a way around it using an obscure IRS rule known as Section 72(t).

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By leveraging this rule, Cooper successfully withdrew $20,000 annually from his IRA without incurring the 10% early-withdrawal penalty.

The withdrawal bucks conventional wisdom about taking money out of your retirement vehicles before age 59.5. Usually, early withdrawals trigger stifling penalties, and they can slow the momentum of your portfolio as it barrels toward retirement, fueled by market rises and compound interest.

So why and how did Eric do it?

A quiet loophole

A diligent saver who was ready for a change, Eric told Business Insider that he decided to retire early and he needed a reliable source of income.

Knowing about early-withdrawal penalties for IRAs, and after doing some research, he found Section 72(t), which allows for penalty-free early withdrawals – known as Substantially Equal Periodic Payments – provided they follow a specific set of rules.

He calculated his SEPPs based on his life expectancy and started withdrawing $20,000 annually. This strategy gave him the necessary funds to support his early retirement while avoiding hefty penalties.

Understanding Section 72(t)

SEPPs are calculated based on one of three methods:

Required minimum distribution (RMD) method. Withdrawals are calculated annually by dividing the account balance by the individual’s life expectancy.

Fixed amortization method. Withdrawals are also determined using the account balance and life expectancy, but involving a slightly different calculation.

Fixed annuitization method. Withdrawals are based on annuity factor tables provided by the IRS.

Withdrawals must continue for at least five years or until the individual reaches 59.5, whichever is longer. For example, if Eric starts his SEPPs at age 50, he must continue them until he turns 59.5. If he begins at age 57, he must continue until he turns 62.

Story continues

Here’s a sample calculation: Let’s assume you have $500,000 in an IRA and use the fixed amortization method with an interest rate of 2%. Using this method, your annual withdrawal amount might be calculated this way:

• Account balance: $500,000

• Life expectancy: 34.2 years (based on IRS tables)

• Annual withdrawal: $500,000 / 34.2 = $14,619.

You could choose to adjust your withdrawal amount by selecting a different method or adjusting parameters within the allowed ranges. You can play with different scenarios using this calculator.

Read more: Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2024

Is Section 72(t) right for you?

Utilizing Section 72(t) can be a smart move for some early retirees, but it’s not without its risks and downsides. Here’s a look at why it may or may not be suitable depending on your financial situation:

Advantages: The primary benefit is avoiding the 10% early-withdrawal penalty, preserving more of your retirement savings.

Disadvantages: SEPP withdrawals must be maintained for the required duration. Stopping or altering the payments can result in penalties and interest on all previous withdrawals. Of course, withdrawing funds early can significantly reduce the potential growth of your retirement savings.

You should also consider keeping your accountant and financial adviser on speed dial: Determining the correct withdrawal amount requires precise calculations and often professional guidance to avoid mistakes.

There’s a reason why Section 72(t) is seldom used. Getting it right can be complex and requires a thorough understanding of the rules. But it offers a valuable tool for early retirees like Cooper, providing a way to access retirement funds without penalties.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

Originally Appeared Here

(Submitted)

Lifeline, Inc. has concluded its 2023 tax season with “its best results ever,” according to the agency’s administration.

Final statistics for the VITA Program for the season show that 345 residents had taxes prepared at a Lifeline VITA tax clinic — the most ever served in a single season.

Additionally, of those 345 residents, 77 received the Earned Income Tax Credit. Total returns generated at Lifeline’s VITA clinics totaled $300,795.

“We’re really excited about the number of people we served and at a time when we know so many families have struggled financially due to rising costs of food, gas, and housing,” said Lifeline Executive Director Carrie Dotson. “And we have to thank our partners at United Way of Lake County — they continued to provide funding for our VITA Program so that we could meet the increased demand this season.”

United Way of Lake County President and CEO Dione DeMitro said the nonprofit is grateful to partner with Lifeline.

“Far too many people in our community are living paycheck to paycheck, and this program makes sure our most vulnerable friends and neighbors are able to maximize their returns,” she said.

The Earned Income Tax Credit, originally approved by Congress in 1975, is a federal income tax credit for low- to moderate-income working families and individuals.

Eligibility factors include how much is earned and how many children a taxpayer has. Single adults and couples without children can also qualify for the credit, although families with children receive larger credits, according to program guidelines.

Lifeline uses volunteers trained and certified by the Internal Revenue Service who additionally assist elderly and disabled people.

Throughout the 2023 tax season, volunteers donated 546 hours to VITA, Dotson said.

Coordinator Heather Martucci agreed that the program was a huge success.

“We have been so fortunate to have had such an incredible tax season,” she said. “My volunteers and I truly enjoyed helping so many families and everyone always showed so much gratitude and appreciation.

“Seeing taxpayers walk out the door of our clinics feeling less overwhelmed makes the whole experience worthwhile,” Martucci added. “We were also very happy that all of our studies of tax laws and taking the time to take the certification exams did not go to waste.”

Dotson emphasized that partner sites, like the Perry Senior Center and the Wickliffe Family Resource Center, were instrumental in delivering a positive outcome.

“We truly appreciate everyone who devotes time and space — they really help us to reach every corner of Lake and Geauga counties,” she said. “We also appreciate the partnership of the IRS and the backing of all those involved in operating the tax clinics.

Lifeline has hosted VITA clinics since 2010 and has prepared tax filings for 2,760 residents.

In that span, volunteers have given 5,955 hours and $3,289,774 in refunds has been generated for residents.

“Besides being able to provide this assistance, this year was also significant because we surpassed $3 million in total returns,” Dotson said. “For a program that is completely volunteer-driven, that is an amazing amount of money to have brought back into the community.”

Lifeline’s tax clinics are additionally supported through the federal Community Services Block Grant.

Lifeline will host VITA clinics beginning again in January. Anyone interested in volunteering is encouraged to contact Heather Martucci at 440-354-2148 or heatherm@lclifeline.org.

Originally Appeared Here

What’s often billed as a friendly, no-appointment-needed, walk-in Saturday at the IRS turned into a stand in line, a frustratingly long line, a stretching down Michigan Avenue kind of a line, in downtown Detroit.

Hundreds of people stood outside for five hours or more and drew Detroit police presence, as well as a few officers wearing jackets marked as Homeland Security and IRS Criminal Investigations.

Dozens of people — some who brought their lawn chairs and fleece blankets, others who had their toddlers in tow — arrived at ungodly hours for in-person help at Internal Revenue Service offices in the McNamara Federeal Building at 477 Michigan Ave.

The second Detroiter in line — who asked not to be named — said he arrived at 10 p.m. Friday to grab his spot. The third man — who also did not disclose his name — said he arrived at midnight. They saved the spot for the first person in line who apparently was taking a break at around 8:15 a.m. when I arrived and began talking to people.

The IRS would start seeing people at 9 a.m. Saturday. And yes, many would end up being turned away.

As of 9 a.m., a young woman found herself at the end of the very long line, which then stopped at the end of the block at Third Street and Michigan Avenue. Later in the morning, according to the IRS, the line was expanding farther down Michigan Avenue.

Many say IRS told them they must visit Detroit office in person

All the people who would talk to me — and some would not — told me they were at the IRS building to verify their identities. Some tried to do so over the phone but were told that they needed to show up in person. Some filed their 2023 tax returns in February but couldn’t get their refunds until they verified their IDs. They were still waiting for refunds in late May. They wanted their money.

Nothing had changed about their tax situations, according to some, still working at the same jobs, still making the same kind of money. One man who also declined to give his name said he worked for the city of Detroit.

“I never had this problem, never, ever,” said one person in line who worked the same job for 22 years.

“We got to sit out here like animals in a line,” said Pia Smith, who said she arrived at “3 a.m., baby.”

She needs to get her identity verified to free up her tax refund and hoped to get the task done during the 9 a.m. to 4 p.m. hours of service Saturday. Smith couldn’t get help at another Saturday walk-in event earlier this year when she recalled freezing in line, waiting and being out of luck.

The IRS had four special Saturday, no-appointment-needed events this tax season, February, March, April and May. Typically, IRS taxpayer assistance centers are open from 8:30 a.m. to 4:30 p.m. Monday through Friday and will work with taxpayers by appointment only. To make an appointment, you’d call 844-545-5640.

More:Terrible tax tips promoted on social media trigger big refund headaches for 2023 returns

More:Tax pros warned that ‘new client’ could be a scammer, as crooks seek sensitive data

Much confusion about why tax refunds aren’t arriving

Lattrell Mapp — who arrived around 3:15 a.m. to verify her identity — was still waiting for her tax refund for her 2023 return, as well as her 2022 refund. Together, she says she’s owed about $19,000 for the two tax refunds. She filed her 2023 taxes in February. “I worked two jobs,” she said, both involve W-2s, including one from the post office. She’s had trouble paying her bills, including rent.

“All my stuff fell behind because the government is messing around with my money,” Mapp said.

Later Saturday afternoon after she met with an IRS employee in Detroit, she said she was told that she’d need to amend last year’s return to resolve some issues.

Many people are now stressed out over their taxes, even though the IRS had a fairly good season, as a result of ID theft and, and the IRS said, the fact that many taxpayers appear to be victims of some terrible tax advice.

To be sure, the IRS has been criticized in the past for taking too long to issue refunds to victims of identity theft. Nearly 500,000 people who had cases still pending with the IRS’s Identity Theft Victims Assistance unit at the end of 2023 found themselves waiting an average of 19 months for the IRS to resolve their problems, National Taxpayer Advocate Erin Collins stated in her 2023 Annual Report to Congress in January.

Collins then called the delays “unconscionable.”

To top it off this year, the IRS stated on May 14 that thousands of taxpayers filed inflated refund claims on 2023 returns and some taxpayers may be “scam victims” if they improperly claimed some obscure but now misused tax credits. “Given the questionable nature of many of these claims, the IRS has frozen the refunds for these taxpayers,” according to the IRS release.

Many times, returns that try to inflate refunds aren’t signed by the tax preparers, which is a huge red flag when it comes to potential fraud. The IRS said that many people in this situation will need to file an amended return to remove credits that they aren’t eligible for to avoid potential penalties.

Luis Garcia, a spokesperson for the IRS in Detroit, said about 99% of the people in line in Detroit Saturday were there to get their IDs verified.

“The IRS believes many of the people in line Saturday ultimately may turn out to be scam victims who have been misled by social media or ghost preparers to try claim big refunds — sometimes in the five figures — they aren’t eligible for,” Garcia said.

The IRS has not found an unusual or correlating rise in identity theft, he added.

Several taxpayers I talked with early Saturday morning said they’re not sure what’s going on, and they didn’t believe they wrongly claimed any credits.

“This is ridiculous,” said Charlene Smith, of Detroit, who stood in line Saturday to verify her identity. “Why would I lie?”

Smith, who grabbed her spot at 4 a.m. Saturday, said she’s never had to verify her identity in the past. She heard about the event from her tax preparer.

Ages range from 17 to 75 for those who need to verify ID

Lori Young, 63, drove roughly an hour on Saturday to the Detroit IRS office on Michigan Avenue from Clay Township near Algonac with her granddaughter Audrey Young, 17, who received an IRS 4883C letter related to identity theft.

Her grandmother tried to help her, by calling the IRS number. After all, the 17-year-old wasn’t all that sure what to say or do. But Audrey needed to talk to the IRS employee herself and was later told she needed to be seen in person.

Audrey Young had taxes withheld when she worked at Club Capri Restaurant in Algonac, as a cook who often made pizzas for $12 an hour. She’s a first-time tax filer who said she had taxes withheld from her checks. She believes she’s owed about $700 for her tax refund. She has a driver’s permit, not a full driver’s license. She couldn’t verify her ID on the IRS site.

Audrey and her grandmother Lori couldn’t snag an appointment in Detroit. At one point, Lori Young said, the IRS offered to look for possible appointment times in Flint, Grand Rapids, Cleveland, or Toledo. “I stopped it at that,” the grandmother said, “and said, ‘We’re not going to Ohio.’ “

The walk-in Saturdays were mentioned. The family drove to the one in Detroit in April, but the lines were way too long then and they drove home. They arrived at 8 a.m. Saturday but were still very far down the block minutes before 9 a.m.

As a backup, Audrey Young kept an appointment July 15 in the Flint office, an appointment that would be canceled if they could verify her ID Saturday.

On Sunday, though, Lori Young shared some good news with me. After nearly six hours outside in line, Lori and her granddaughter Audrey got into the IRS building at 1:45 p.m. Saturday. They went through security, filled out some paperwork, and were assigned a number, No. 480.

Then, they waited another hour and 15 minutes to be escorted to the fifth floor.

At about 3:30 p.m., she said, they met with an IRS employee. Audrey’s identity was verified, Lori Young told me. They expect that Audrey could receive a refund in about three weeks to nine weeks.

Many people recall seeing long lines for concert tickets, newly released sneakers, the latest Apple iPhones. But seeing crowds line up to see the IRS?

“We were up at the front of the building at 1:30 p.m. and it looked like the line was still way back, like where we were when you spoke with us,” Lori Young told me by email Sunday morning.

“When we did get in, they were taking in 10 people at a time,” she said. Best she could tell, the IRS took in more than 500 people in Detroit that day, given her spot in line and what she saw.

“We’re so happy that we got in,” she added. “If we arrived five minutes later, we would have missed the cut off. We were absolutely exhausted after standing and waiting for so long.”

She recalled walking out of the McNamara building at 4:05 p.m. when nobody was waiting in line any more. Many apparently were sent home before then.

“I’m thinking,” Young continued, “they had a lot of upset people after waiting for seven-plus hours and not being able to be seen.”

Garcia, at the IRS, estimated that less than 1,000 people turned out for the Saturday event. At around 3 p.m., he said, the line was cut off, which left about 250 taxpayers who did not receive service.

More than 25 IRS employees worked the event Saturday, he said, not including the number of employees providing support, such as security.

Far more taxpayers received help Saturday than at a similar event a year ago, he said. On Saturday, Garcia said 500 taxpayers received service from the IRS. A year ago at a Saturday event in May, he said, 280 taxpayers received service.

“Our Saturday events are normally scheduled in February, March, April and May of each year,” he said. “We currently have no other dates scheduled.”

Homer Cheese, 75, and his wife Venisher Cheese, 68, had heard about long lines at the IRS office in Detroit at another Saturday event April 13, so they arrived at about 5:30 a.m. But the couple still had a hard time believing the extent of the crowd, which Cheese noted was mainly African American, on Saturday.

“This is my first time ever being out here,” Venisher Cheese said. “I saw it on the news, but I never thought we’d be a part of it.”

The Detroit couple said they never had an ID problem. They had the same tax preparer for years, but she passed away. And they worked with a new preparer to file a 2023 return. They weren’t sure why they needed to verify their identity now. The couple said they didn’t claim anything different this year.

They both work in the cafeteria for Southfield public schools.

Venisher Cheese had worked with the Detroit Board of Education for 37 years and retired. But she stopped working only for about a year. “My girlfriend said I was going to die if I don’t get up and go to work, do something,” Venisher said. That’s how she ended up working for Southfield schools.

Homer Cheese said he talked to an IRS agent on the phone, but he was told he had to come downtown to show his driver’s license. “He said they got a lot of dead folks filing.”

“People stole a lot of money off them, I guess,” said Homer Cheese, as he stood holding his cane.

“I got a bad leg, so I told the people” on the phone, he said. “They said, ‘Well, we still have to see you.’ “

He had been standing in line about three hours when I talked with him and he showed me how his leg was swelling because of bad circulation.

The couple has not received their refund yet. “All we got is letters from the IRS,” he said.

By 12:15 p.m. Saturday, the couple was driving home after meeting with IRS employee around 11:45 a.m.

After putting in roughly six hours on Saturday, their issue still wasn’t resolved. Homer Cheese said the IRS gave them an appointment for 8:30 a.m. Friday and they’ll need to bring more paperwork.

Even so, he’s hopeful they’re one step closer to seeing the situation resolved and getting their federal income tax refund.

Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X (Twitter) @tompor.

Originally Appeared Here

Washington, D.C. – Senate Finance Committee Chair Ron Wyden, D-Ore., and Senate Judiciary Subcommittee on Federal Courts, Oversight, Agency Action, and Federal Rights Chair Sheldon Whitehouse, D-R.I, sent a letter on Wednesday to an attorney representing Supreme Court Justice Clarence Thomas demanding that Thomas clarify whether he repaid any of the principal on the loan he received to purchase a luxury motorcoach. The letter also sought clarification of whether Thomas reported the forgiven debt on his financial disclosure report and as income on his tax return, which is required by law. 

Previous investigation of this matter by the Finance Committee included a review of loan documents and correspondence between Thomas and the lender, Tony Welters. The Committee found evidence indicating that Thomas only made interest payments and the loan was forgiven before he paid any principal. After Senators Wyden and Whitehouse raised the prospect that Thomas may have failed to report the forgiven debt in violation of tax laws and ethics requirements, Thomas’s attorney responded with a brief letter stating that, “the terms of the agreement were satisfied.” He provided no new evidence of payments or disclosures or any explanation of what it meant for the agreement to be “satisfied.” 

“On December 19, 2023, we invited Justice Thomas to clarify discrepancies between his public statements regarding the treatment of the loan, and the evidence obtained by the Committee. That letter offered Justice Thomas an opportunity to state clearly, in plain terms, how much in principal and interest on the loan he repaid to Welters. We also offered Justice Thomas an opportunity to clearly state how much of the loan was forgiven or discharged by Welters. Unfortunately, the response you provided on Justice Thomas’s behalf was a non-answer,” the Senators wrote. “Your client’s refusal to clarify how the loan was resolved raises serious concerns regarding violations of federal tax laws … At the moment, Justice Thomas has done absolutely nothing to address the perception that he may have failed to report hundreds of thousands of dollars in forgiven debt on his federal income tax returns and pay the income taxes owed.”

The full text of the new letter from Senators Wyden and Whitehouse is available here. The questions in the letter are as follows: 

1. What was the total amount in principal and interest on the loan repaid by Justice Thomas to Tony Welters? When was the last payment made?
2. Were any payments of principal or interest made by other individuals? If so, please clarify how much was repaid by Justice Thomas and how much was repaid by any third parties (and who those third parties were).
3. Was any portion of the principal on the loan canceled, forgiven or discharged by Tony Welters? If so, how much? Please also state how much of this canceled, forgiven or discharged debt was reported as taxable income by Justice Thomas on his federal tax returns, and the related income taxes paid by Justice Thomas for that tax year.
4. If a tax return was later amended to include this canceled, forgiven or discharged debt, please provide the date on which the amended return was filed, the amount of the tax payment, and whether that tax payment was made by Justice Thomas out of his own funds or by any third parties (and who those third parties were).
5. If any portion of the principal on the loan was canceled, forgiven or discharged by Tony Welters, why did Justice Thomas fail to disclose the canceled, forgiven or discharged debt on his financial disclosure report(s)?

A web version of this release is here.

Originally Appeared Here

The Internal Revenue Service (IRS) announced its plans this month to significantly increase the audit rates of both large corporations and wealthy taxpayers in an effort to ensure they aren’t avoiding paying what they owe in taxes.

The agency plans to increase the number of audits of taxpayers earning more than $10 million annually by 50% for tax year 2026. The audit rates of corporations with assets over $250 million are expected to triple, meanwhile, and the audit rates of business partnerships with assets over $10 million are expected to increase by tenfold.

The IRS will complete these extra audits using funds provided by President Biden’s Inflation Reduction Act (IRA), which sought to make up for a decade of significant budget cuts to the agency at the hands of Republicans in Congress.

Those cuts had a huge impact on the agency’s ability to collect taxes from the wealthy and big corporations. The Treasury’s Deputy Assistant Secretary for Tax Analysis, Greg Leiserson, told reporters in February that the audit rate of millionaires and large corporations fell by more than 70% and 50% respectively from 2010 to 2019.

Ensuring that the super wealthy and corporations actually pay their taxes is one of the IRS’ biggest challenges; according to the agency, the tax gap—the difference between taxes owed and taxes paid—has grown to more than $600 billion annually.

A report released earlier this year found that a tax loophole allowed the richest Americans to sit on $8.5 trillion in untaxed profits in 2022.

But using an infusion of funds provided by the IRA, the IRS has already collected more than $520 million from 1,600 millionaires who had unpaid tax bills of more than $250,000. Recent estimates from the Treasury Department and the IRS indicate that tax revenues are expected to rise by as much as $561 billion from 2024 to 2034 due to increased enforcement made possible by IRA funding.

The IRS is hiring additional accountants, economists, engineers, data scientists, tax experts, and attorneys to conduct these extra audits. In total, the agency plans to add an additional 14,000 full-time positions by 2029, bringing the total number of IRS employees to 102,500, according to IRS Commissioner Danny Werfel.

The additional audits announced this month will not apply to American households that earn less than $400,000 annually.

“As I’ve said over and over again, there is no new wave of audits coming for middle- and low-income (taxpayers), coming for mom-and-pops,” Werfel said this month during a call with reporters. “That is not in our plans in any way, shape, or form.”

Republican lawmakers have nonetheless continued to attempt to cut IRS funding. During last year’s negotiations over the nation’s debt ceiling, House Republicans negotiated about $20 billion in cuts out of the original $80 billion provided to the IRS under the Inflation Reduction Act, even as projections showed doing so would dramatically increase the national deficit.

“Congressional Republicans’ efforts to cut IRS funding show that they prioritize letting the wealthiest Americans and big corporations evade their taxes over cutting the deficit,” National Economic Adviser Lael Brainard said in a statement earlier this year.

Making the nation’s tax system more fair has been a priority of President Biden’s. He has also proposed a billionaire tax and pledged not to raise taxes on families earning under $400,000 per year.

During his third State of the Union address in February, the president said that “no billionaire should pay a lower tax rate than a teacher, a sanitation worker, or a nurse” when speaking of his proposed billionaire tax.

The IRS has also used funds provided by the Inflation Reduction Act to improve services for taxpayers.

A US Treasury official said in late February that IRA funding allowed the IRS to get ahead of schedule during the most recent tax filing season, with the agency achieving a 92% level of service on its toll-free phone line. Hold times were also reduced to less than two minutes.

Additionally, the IRS will be using IRA funds to further improve efficiency in call centers, reduce the backlog of paper returns, hire additional staff in rural areas, develop new software, identify scams and the victims of scams, and more.

The agency is also seeking to improve the online tool known as “Where’s My Refund” so that American taxpayers can get real-time information on the status of their tax returns each year.

• Isabel Soisson is a multimedia journalist who has worked at WPMT FOX43 TV in Harrisburg, along with serving various roles at CNBC, NBC News, Philadelphia Magazine, and Philadelphia Style Magazine.

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Originally Appeared Here

Predictably, lawmakers entered the 2024 legislative session with a focus on affordability for Coloradans as average costs rise for housing, groceries and other living expenses.

They did so by passing a series of tax credits and tax-related fiscal measures that seek to keep more money in people’s pockets or find a way to return it during tax season.

“Because of our work, the future is brighter, especially for our children and families. We increased tax credits for hardworking Coloradans and families with children, putting hundreds of millions back into the pockets of the people feeling the brunt of the high cost of living in this state,” House Speaker Julie McCluskie, a Dillon Democrat, said after the session concluded.

House Bill 24-1311: Child poverty reduction

The new Family Affordability Tax Credit will be available to families with children up to 16 years old as an effort to dramatically reduce childhood poverty. The credit amount would depend on income, inflation and economic growth and would be a maximum of $3,200. It will be available to single filers who make up to $75,000 or joint filers who make up to $85,000.

“There are over 133,000 Colorado kids living in poverty, and this bill, coupled with the Earned Income Tax Credit, will dramatically cut our child poverty rate,” bill sponsor Rep. Jenny Willford, a Northglenn Democrat, said in a statement following its House passage. “These tax credits boost the incomes of our lower and middle-income families so they can keep their children safe and healthy by accessing quality health care, school supplies, and fresh food.”

The bill has not yet been signed by the governor.

House Bill 1052: Senior housing income tax credit

Under this bill, qualifying seniors aged 65 and older who make under $75,000 will be able to claim a tax refund up to $800 for the 2024 tax year. Those who claim a homestead property exemption would not be eligible.

Seniors who receive a property tax and rent assistance grant or heat assistance grant can get the maximum refund regardless of income.

This bill passed with near unanimous, bipartisan support.

It has not yet been signed into law by the governor.

House Bill 24-1134: EITC expansion

This bill implements a few tax-related adjustments, including expanding the state’s Earned Income Tax Credit for low-income households. It would set that credit at 50% of the federal EITC for 2024, 35% for 2025 and at least 30% for 2026 and beyond. The credit could go back up to 50% in years with strong economic growth. It would apply to households that make up to $65,000.

The bill also merges the Child and Dependent Care Tax Credit and the Low-income Child Care Expenses Tax Credit and creates the Child and Dependent Care Tax Credit. That new tax credit expands the state’s scope of qualified dependent to match the federal definition. It would apply to taxpayers who make up to $60,000.

The bill has not yet been signed by the governor.

Senate Bill 24-228: Temporary income tax cut

This bipartisan bill would create temporary income tax cuts in years when the state collects a certain amount of revenue over a state constitutional cap as a method to refund money to taxpayers. This year, for example, it would cut the income tax rate from 4.4% to 4.25% for about $450 million in relief.

If the revenue surplus is above $1.5 billion, the sales tax rate would be cut under the bill as well.

The bill has not yet been signed by the governor.

Senate Bill 24-233: Property tax cut

This property tax bill came at the tail end of session after months of work from the bipartisan Property Tax Commission. This year, the bill will cut residential property assessment rates and save homeowners a few hundred dollars.

It caps local property tax growth at 5.5% starting in 2025. It will also decouple assessment rates for school districts and other taxing districts, putting school districts at a flat 7.15% assessment rate and other entities at 6.95%. It will also set an annual revenue growth cap at 5.5%.

Additionally, it will exempt 10% of the value of homes under $700,000.

The bill will not take effect if voters pass a property tax-related ballot measure this November.

“I’m proud that we have come up with a long-term, bipartisan solution that will save Colorado homeowners and small businesses money on property taxes,” bill sponsor Rep. Chris deGruy Kennedy, a Lakewood Democrat, said in a statement after its passage in the House. “This legislation will responsibly reduce property taxes in a meaningful way to save people money while protecting school funding.”

The bill has not yet been signed by the governor.

Originally Appeared Here

Key appropriators on Tuesday questioned whether the Biden administration needs the additional cash infusion for the Internal Revenue Service that it requested, though lawmakers in both parties stressed the importance that the tax agency maintain its recently elevated levels of customer service. 

IRS is far short of its needs to answer the phones and staff walk-in centers around the country from just its annual discretionary funds, Commissioner Danny Werfel told members of the House Appropriations Committee’s panel on Financial Services and General Government, requiring the agency to maintain the boosted funding level made possible by the Inflation Reduction Act. In its recent fiscal 2025 budget request, IRS requested the funding boost be extended through fiscal 2034 for a total price tag of $104 billion. 

It asked for $12.3 billion as part of its normal discretionary allocation, the same level it received for the current fiscal year. Such funding would only provide for 25,000 employees for taxpayer services, Werfel said, whereas IRS actually needs 38,000 to meet taxpayer demand.

It is currently using IRA funds in an attempt to close the gap, but Werfel warned it would have to dramatically scale back efforts—and potentially furlough or lay off employees—if Congress does not provide an additional tranche of funding by fiscal 2026.“We will have to shrink our customer service,” Werfel said, “and you’ll see those lines start to emerge again at our welcome centers and on the phones.”

Still, Rep. David Joyce, R-Ohio, who chaired Tuesday’s hearing— and said IRS “deserves credit for a successful tax season”—suggested the agency should be able to do so without reopening the supplemental funding spigot. 

“It’s worth exploring why the IRS says it cannot deliver a successful filing season with the discretionary funds this subcommittee provides,” Joyce said, adding the agency would use the money to “rebuild an army of IRS agents.” House Republicans previously voted to rescind most of the $80 billion cash infusion the IRA provided and successfully negotiated to slash $20 billion from the total as part of a budget deal last year. 

Werfel emphasized the most recent success only occurred because of the money it already received. 

“Our ongoing success hinges on sustained investments to make sure that we have the right size workforce with the right training and tools,” the commissioner said.

IRS answered 1 million more calls in the recent tax season than it did in 2023, and 3 million more than it did in 2022. It has opened more walk-in centers and expanded hours at them. He added the agency also needs the funding to address tax evasion and rebuild the capacity subject matter expertise it lost since its funding was reduced in 2010. The agency has estimated its workforce will peak at 102,500 full-time equivalents in fiscal 2029, up from 90,000 currently and an increase over the 79,000 it employed at the end of fiscal 2022. 

Some Republicans questioned whether significant investments in technology have led to more efficiency at the agency and the potential for reduced headcount at IRS going forward. Werfel said his agency has realized significant gains through digitizing processing and using AI to better target tax cheats, but noted the population of taxpayers grew by 7% between 2010 and 2020. Additionally, Congress has put more on IRS’ plate, such as creating a tax system around digital currency. 

“So even though we may be driving efficiencies in these legacy systems that are in place, making them more efficient, when Congress changes the code and adds new requirements, our overall resource base grows,” Werfel said. 

Republicans on the committee also raised several questions regarding IRS telework policy, suggesting the goal of the workforce as a whole reporting to their offices 50% of the time was insufficient and negatively impacting taxpayer services. Werfel countered that IRS is meeting its goal—as evidenced by a successful tax filing season this year—must remain competitive with offerings elsewhere in the job market and is in line with the governmentwide standard set by the Office of Management and Budget.

Rep. Steny Hoyer, D-Md., the top Democrat on the subcommittee, vowed to provide IRS funding as close to its request as possible. 

“We’re gonna have a markup and I’m gonna work very hard to get the money that we need as Americans—not you, not the IRS employee—that we need, as Americans, to fund a tax system that is fair,” Hoyer said.

Originally Appeared Here

To help you understand what is going on in the economy our highly experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You’ll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest…

Big tax changes are likely coming in 2026. The culprit is the 2017 tax reform law. Most individual tax provisions were temporary. They expire after 2025. Unless extended by Congress, the provisions will revert automatically on January 1, 2026, to the rules in effect for 2017. We will look at key expiring provisions.

• Tax brackets: The individual income tax rates of 10%, 12%, 22%, 24%, 32%, 35% and 37% will return to 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, with different income-level break points than now. 
• Bigger standard deductions: The 2017 law more than doubled these breaks. 
• Higher child tax credits: Before 2018, it was $1,000. Now, it’s $2,000. Plus the $500 credit for each dependent who is not a qualifying child. 
• Alternative minimum tax: The higher exemption amounts and phaseout zones after 2017 have resulted in far fewer individual taxpayers having to pay the AMT. 
• The 20% qualified business income deduction for self-employed people and people who own interests in S corps, partnerships, LLCs and other pass-through entities. 
• The adjusted-gross-income (AGI) limitation on cash donations to qualified charities was increased from 50% to 60% under the 2017 tax legislation, helping big donors. 
• The larger lifetime estate and gift tax exemption. People who die this year have a $13,610,000 exemption. Compare this with $5,490,000 for 2017 deaths.
• The cutback on high itemizations for upper-income taxpayers would return.

Restrictions on popular deductions also end after 2025. Among them: 

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• Personal exemptions: In 2017, filers could take a deduction of $4,050 for themselves and each of their dependents. For example, a family of three claimed a $12,150 personal exemption deduction. The 2017 law eliminated this.
• The $10,000 cap on deducting state and local taxes on Schedule A of the 1040: This would be welcome relief for folks paying high property tax and/or state income tax. 
• The curbs on deducting home mortgage interest: Under the 2017 law, interest can be deducted on up to $750,000 of home acquisition debt down from $1 million. 
• Miscellaneous deductions on Schedule A, subject to the 2%-of-AGI threshold. The 2017 law eliminated this category of itemized deductions through 2025. This includes unreimbursed employee expenses (travel, meals, education, etc.), brokerage and IRA fees, hobby expenses, and tax return preparation fees. 
• Theft and casualty losses: Under current law, only casualty losses arising in a federally declared disaster area can be deducted on Schedule A.
• Job-related moving expenses: Now, only members of the military get the break. 

2025 is also the last year for two tax breaks not in the 2017 law: The expansion of the Obamacare health premium credit to more individuals who buy insurance through a marketplace. And, most student loan debt forgiven from 2021 through 2025 is exempt from federal income tax, which is an exception to the general rule that income from the cancellation of indebtedness is taxable.

This forecast first appeared in The Kiplinger Letter, which has been running a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

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Originally Appeared Here

Gov. Kim Reynolds signed into law a measure speeding up income tax cuts, lowering Iowa’s individual income tax to a 3.8% single tax rate beginning in 2025.

Reynolds signed Senate File 2442 into law Wednesday, a measure speeding up the cut made in 2022 to decrease Iowa’s individual income tax rate to a 3.9% single rate by 2026. The governor praised Iowa Republican leadership for working with her on tax measures that “comprehensively transformed our tax code and dramatically increased our competitiveness within a few short years.”

“When I took office, Iowa’s personal income tax rate was the sixth highest in the nation at 8.98%,” Reynolds said. “I think we had nine brackets and the list could go on and on. It was certainly clear that we needed to make a change, and that’s exactly what we’ve done.”

When this year’s tax cuts are implemented, Iowa will have the sixth-lowest income tax rate among the 41 states with an income tax, according to the Tax Foundation.

“At the same time, conservative budgeting practices have kept us living within our means and allowed us to continue making historic investments in key priorities of Iowans,” Reynolds said. “Even after these tax cuts, we closed Fiscal Year ’23 with $1.83 billion surplus, nearly $900 million in cash reserves and %3.7 billion and the Taxpayer Trust Fund. So it’s clear that we’re well-positioned to go further, faster.”

Lowering income taxes was one of the main priorities for both the governor and Republican legislative leaders this year. Earlier in the session, more dramatic reductions were proposed: Reynolds introduced legislation to reduce the individual income tax rate to a flat 3.65% in 2024 retroactively, in addition to another cut to 3.5% in 2025.

The chairs of both chambers’ Ways and Means committees, Rep. Bobby Kaufmann, R-Wilton, and Sen. Dan Dawson, R-Council Bluffs, introduced a bill to lower the tax to 3.775% in 2026 and 3.65% in 2027, as well as set up a system using money in the Taxpayer Relief Fund to finance future cuts until the state income tax was fully eliminated.

Some Democratic lawmakers, including Senate Minority Leader Pam Jochum, criticized the move to a flat income tax rate as unfairly benefiting wealthier Iowans over lower- and middle-class Iowans. She also said the tax cuts being made may not be sustainable if the state faces economic downturns in the future — and could put key funding priorities, like Iowa’s K-12 education system and other social services, at risk in the future.

“Sooner or later, it’s not going to work. It’s not good budgeting, it isn’t sustainable,” Jochum said in April. “I was trying to look at the long-term impact of all the different things that have been happening last few years in terms of educating our children, combined now with all the changes going on the tax system, that would reduce revenues very quickly.”

These larger proposals were not implemented this year, but both Reynolds and Republican lawmakers have indicated they plan to pursue further income tax cuts in the future. House Speaker Pat Grassley told reporters following the adjournment of session that the this year’s legislation ensures that tax cuts are done “responsibly and sustainably.”

The new law will be financed using excess tax revenue from this year’s budget plan, Republican lawmakers said, as well as through a withdrawal from the Taxpayer Relief Fund. If state revenues fall below state appropriations for a fiscal year, the measure also stipulates that the relief fund would be used to make up for a part of needed funding until July 1, 2029. The Legislative Services Agency analysis of the proposal stated that revenues are not expected to fall below state spending in this timeframe.

At the bill signing, Reynolds praised the tax cuts lawmakers have been able to implement since she took office, saying that from 2018 to Fiscal Year 2030, lawmakers will have saved Iowa taxpayers nearly $24 billion.

Lawmakers also passed two other proposals related to income tax this legislative session — the first steps to putting two proposed constitutional amendments on the ballot for Iowans in future elections. Senate Joint Resolution 2004, enshrining a flat tax rate, and House Joint Resolution 2006, requiring that increases to Iowa’s income tax reach two-thirds majority support in both chambers to pass, were both approved this session.

Both constitutional amendments must be passed by the next General Assembly before they appear on a general election ballot for voters to directly weigh in on. If the measures get a simple majority support on the ballot, the language will be added to the state constitution.

Originally Appeared Here

More than 140,000 taxpayers across 12 states used the IRS’s Direct File system this filing season, claiming more than $90 million in refunds and reporting $35 million in balances due, the tax agency said Friday. The future of the program, however, hasn’t yet been determined.

The IRS said that the pilot — which allowed for taxpayers in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming to electronically file their federal returns in 2024 directly with the agency at no cost — “started out small” and picked up “steadily increasing interest” from filers in those 12 states. 

“From the very beginning of the Direct File pilot, we wanted to test new ways to give taxpayers an easy, accurate and free way to file their taxes online directly with the IRS,” Commissioner Danny Werfel said in a statement. “We saw a strong response from the pilot, and Direct File’s users generally found it fast and easy to use. This is an important part of our effort to meet taxpayers where they are, give them options to interact with the IRS in ways that work for them and help them meet their tax obligations as easily and quickly as possible.”

Werfel added that the agency will now review results from the pilot, take in feedback and make a decision on Direct File, with the expectation of “an announcement about future plans later this spring.”

“We will consult a wide variety of stakeholders to understand how lessons from Direct File can help us improve the entire tax system as well as assess next steps,” Werfel said.

The IRS said usage of Direct File surpassed expectations and “far exceeded what was necessary to provide sufficient data for the agency to evaluate.” The pilot program ran as the agency embarked on broader IT and customer service modernization initiatives fueled in part by billions in Inflation Reduction Act funds. 

The IRS’s decision to develop a free tax filing tool represents a major challenge to the highly lucrative tax preparation industry. The development of a free tax filing tool — something most taxpayers have access to in developed countries — could eat into the revenues of firms like H&R Block and Intuit, the maker of TurboTax.

In a statement Friday, an Intuit spokesperson questioned some of the statistics cited by the IRS in its Direct File statement. 

“IRS claims of $90 million in refunds to Direct File filers acknowledges that those that filed their taxes with Direct File potentially received average refunds of around $640 which is thousands of dollars lower than the IRS’s own data showing the nation’s average refund is around $3,000,” Intuit spokesperson Rick Heineman said. “This means filers using Direct File not only paid for an already free service with their tax dollars but on average also got a substantially smaller refund.”

The IRS said in its press release that the total amount spent by the agency on Direct File was $24.6 million, a figure that Heineman said was “clearly low, inaccurate, and the IRS even acknowledges conveniently leaving out necessary costs to build and run the pilot.”

A Government Accountability Office report issued earlier this month found that the IRS’s budget estimates for Direct File didn’t include start-up costs for the technology behind the system. The congressional watchdog said the IRS would need “a comprehensive accounting” of Direct File’s costs if the agency decided to extend the program beyond 2024.

This story was updated April 26, 2024, with comments from an Intuit spokesperson.

Written by Matt Bracken

Matt Bracken is the managing editor of FedScoop and CyberScoop, overseeing coverage of federal government technology policy and cybersecurity.

Before joining Scoop News Group in 2023, Matt was a senior editor at Morning Consult, leading data-driven coverage of tech, finance, health and energy. He previously worked in various editorial roles at The Baltimore Sun and the Arizona Daily Star.

You can reach him at matt.bracken@scoopnewsgroup.com.

Originally Appeared Here