Income Tax News

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

Educate your clients on tax-friendly states for retirees.

Navigating state taxes on retirement income is a critical aspect of financial planning for retirees. While federal tax rules apply uniformly across the country, state tax rules can vary widely.

As an accountant, understanding state tax considerations for various sources of retirement income — including pensions, Social Security benefits, 401(k) and IRA distributions, Thrift Savings Plans (TSPs), and military retirement income — is crucial in helping your clients minimize their tax liability and make the most of their golden years.

In this post, we’ll explore some hot topics on state-specific retirement income taxes, including 401(k) withdrawals, states that do not tax retirement income, states that exempt military retirement income, and the best tax-friendly states for retirees.

Jump to:

State tax on retirement income 

State taxes on retirement income vary widely across the U.S. While some states fully exempt retirement income from taxation, others impose different degrees of taxation on distributions from pensions, IRAs, 401(k) plans, military retirement income, and Social Security benefits.

In addition to state income taxes, retirees should consider other state-level taxes, such as property taxes, sales taxes, and estate taxes, which can further impact their overall tax liability. These taxes can affect retirees’ overall financial well-being, particularly if they rely heavily on retirement savings for income.

Perhaps most importantly, choosing a tax-friendly state for retirement can provide significant financial benefits, allowing retirees to maximize their income and enjoy a more comfortable lifestyle. However, it’s essential to carefully evaluate the tax implications of retirement income in each state and consider other factors like cost of living, climate, healthcare, and quality of life when deciding where to retire.

State tax on 401(K) withdrawal

State tax on 401(k) withdrawals refers to the income tax imposed by states on distributions taken from a 401(k) retirement account. Individuals withdrawing funds from their 401(k) plans may be subject to state income taxes depending on where they reside.

Some states do not have income tax, while others make exemptions for retirement income. Most states do not tax Social Security benefits; a few tax 401(k) plans and IRA distributions but not pensions. With so many nuances, it’s important for retirees and individuals planning for retirement to understand how their state handles taxes on 401(k) withdrawals, as this can significantly impact their overall tax liability in retirement.

Which states do not tax retirement income?

Let’s take a detailed look at state tax considerations for various sources of retirement income, including pensions, Social Security benefits, 401(k) and IRA distributions, Thrift Savings Plans, and military retirement income.

• States with no income tax. Eight states do not impose a personal income tax, meaning retirement income from any source remains untaxed. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, New Hampshire only imposes income tax on interest and dividend income exceeding $2,400, with plans to phase out this tax by 2025.
• States with no tax on Social Security. In addition to the eight states above, plus New Hampshire, 39 states do not levy income tax on Social Security benefits. These states include Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin.
• States with no tax on pensions. While most states tax at least a portion of pension income, 17 states — including those without an income tax — do not impose taxes on pensions. These states are Alabama, Alaska, Florida, Hawaii, Illinois, Iowa, Mississippi, Nevada, New Hampshire, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Washington, and Wyoming.
• States with no tax on TSPs. Retirement distributions from Thrift Savings Plans are not taxed in 12 states – which include those without an income tax (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) plus Illinois, Mississippi, New Hampshire, and Pennsylvania.
• States with no tax on estate or inheritance. Lastly, 38 states do not impose estate or inheritance taxes, including Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

States that don’t tax military retirement income

Military retirement income is not subject to taxation in 33 states, including Alabama, Alaska, Arkansas, Connecticut, Florida, Hawaii, Illinois, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Washington, West Virginia, and Wisconsin.

Best tax states for retirees

Choosing the right state for retirement can substantially impact your tax burden and overall financial situation. Here are the top five tax-friendly states for retirees, along with a brief overview of the tax pros and cons of each:

1. Florida. Florida is renowned for its lack of state income tax, making it an attractive destination for retirees. However, property taxes can be high in some areas.
2. Nevada. Like Florida, Nevada does not impose state income taxes, offering retirees significant tax savings. The state also boasts a vibrant entertainment scene and a relatively low cost of living. However, sales taxes here can be higher than in other states.
3. Texas. Texas is another state with no state income tax, making it appealing for retirees seeking tax-friendly destinations. Additionally, it has a strong economy and a variety of cultural and recreational opportunities. Property taxes, however, can be relatively high in some areas.
4. Wyoming. Wyoming’s lack of state income tax and low overall tax burden make it an attractive option for retirees. The state also offers abundant natural beauty and outdoor recreational opportunities. However, its rural nature may not appeal to retirees seeking urban amenities.
5. South Dakota. South Dakota is known for its favorable tax climate, including no state income tax and low overall taxes. The state also boasts a low cost of living and a high quality of life. However, the climate may not suit retirees looking for warmer weather.

Understanding state taxes on retirement income is essential for retirees looking to maximize their financial resources and enjoy their golden years. By choosing a tax-friendly state and strategically planning withdrawals from retirement accounts, accountants can help those clients reaching retirement age to minimize their tax burden and prepare for a comfortable retirement lifestyle.

Blog For accountants, it is important to remind clients that early distributions from qualified retirement plans or other tax-favored accounts may incur penalties and trigger the need to file Form 5329.

How to stay up to date on state taxes on retirement income

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The revised deadline is the last day Montanans can apply for property tax relief programs available to lower-income residents.

By Eric Dietrich MONTANA FREE PRESS

Low-income Montanans seeking help paying their property tax bills now have until June 1 to apply for aid through two state relief programs administered by the Montana Department of Revenue — including the flagship Property Tax Assistance Program intended to keep property tax bills from forcing low-income homeowners out of their homes.

This year’s application deadline, previously set for April 15, was extended in an effort to give Montanans facing substantial tax hardship more time to apply, Gov. Greg Gianforte and the Montana Department of Revenue announced this week. 

The Property Tax Assistance Program offers aid to resident homeowners who meet income requirements and, as of this year, offers a tax break on the first $350,000 of value for a primary residence.

Additionally, the Montana Disabled Veteran Assistance Program offers relief to disabled veterans and their surviving spouses.

The state Legislature amended both programs last year to adjust the income requirements for inflation. The Property Tax Assistance Program’s value cap was also increased from $200,000 to the new $350,000 threshold to account for the dramatic growth in home values that Montana has experienced in recent years. 

Under the new income thresholds, Montana resident homeowners with incomes of up to $27,621 if they’re single and $37,019 if they’re part of a family can qualify for a 30% reduction on their property taxes on the first $350,000 of their home’s assessed value. Homeowners who meet lower income thresholds can qualify for higher reductions, with their property taxes reduced by as much as 80%.

Disabled veterans and their surviving spouses can qualify for that assistance program at higher income thresholds. Single disabled veterans with incomes up to $45,803 can qualify to have property taxes on their primary residence reduced to zero.

In 2022, about 21,500 taxpayers participated in the low-income property tax assistance program, saving $843 on average, according to the department’s 2022 biennial report. Combined, participants saved about $18 million on their property tax bills. According to the department, about $15 million of that amount was in effect shifted to other taxpayers.

Also in 2022, about 3,000 taxpayers participated in the disabled veterans’ program, saving $1,963 on average.

The state also offers an Elderly Homeowner/Renter income tax credit, generally available to Montana residents 62 years and older with annual household incomes below $45,000. That credit, as much as $1,150, offsets property tax payments through a formula based on a taxpayer’s income, rent payments and property tax bills. It can be obtained through annual income tax filings, which are also due April 15.

According to the revenue department, about 13,000 taxpayers obtained the elderly homeowner/renter tax credit in 2021, costing the state about $7 million.

All three assistance programs are distinct from the two-time $675 property tax rebates that the Legislature has made available to homeowners of all income levels this year and last. The application window for the first round of rebates closed last year and the revenue department says it plans to accept applications for the second round of rebates, which will apply to 2023 tax bills, starting in mid-August.

More information about the programs, including application forms for the property tax aid programs, is available on the Montana Department of Revenue website.

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Taxes can be a joyous time for those expecting a tax refund this year. They can also be a nerve-wracking time if you’re unsure about the return you just filed.

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If you’re looking for some reassurance this tax season because you’re worried you made a mistake, we’ve got you covered on everything you need to know.

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Why Would the IRS Reach Out to You?

“The IRS will normally reach out to you if there is something on your tax return that doesn’t match their records,” said Michele Cagan CPA, who’s also published 16 books on personal finance alone.

This could be something such as forgetting to report IRS Form W-2 or an IRS Form 1099-MISC. It could also be something minor such as forgetting to report interest paid to you from an investment (Form 1099-INT) or reporting income from the forgiveness of debt like student loans (Form 1099-C). Another common reason the IRS may reach out is that while your tax return matches its records, it still doesn’t make sense.

“For example, if you have a salary of $30,000 for the year and you report you have $20,000 in charitable donations, that doesn’t make any sense.”

Another example could be a freelance writer who writes within a certain niche and your write-offs don’t make sense.

“If you write about finance, and you’re trying to deduct 20% of your income to travel costs, that doesn’t necessarily make sense so the IRS might call.”

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How Long Does the Irs Have To Reach Out To You About a Mistake?

“The time frame the IRS has to reach out to you about certain mistakes can be anywhere from 3 years to forever,” Cagan explained. “Usually if there is a critical number that doesn’t match, you won’t even be able to e-file your tax return as it will bounce right back.”

A critical number could be a W-2 you forgot. It could also be that one of the forms mentioned above doesn’t match what was reported to them.

The IRS will usually send a letter stating the mistake and the amount you owe or if it’s a return, a refund check. This is something that its computer system can figure out on its own. This usually happens between three weeks to six months. However, if the IRS is coming to you years later, it’s because a person looked at your tax return and has flagged it.

Is It Likely That the IRS Will Catch a Mistake on Your Return?

“The IRS system automatically looks at everyone’s return that they process to see if it matches. However, the IRS also has another program where they will randomly audit people every few years to see how easy it is for people to follow tax laws.”

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If you are one of the unlucky few, a person will analyze every line of your return to see if it’s correct.

“This is done mainly with tax credits such as the earned income credit and child tax credit. It’s easy to make mistakes with these.”

Deductions that have a lot of different ways to qualify, unfortunately, are looked at the most. If this happens, the IRS will send a letter asking for verification and that’s that. But if the IRS is asking to meet in person, that’s a different story and a different reason.

When To Seek a Professional

Depending on the mistake, the IRS may look at additional returns to double-check. If you disagree and the IRS pushes back, that would be a time to call in a tax professional to help.

“If they want to meet you in person, you 100% want a professional to go in for you. As a matter of fact, you shouldn’t go because anything you say can be used against you. The IRS can make you feel uncomfortable and if you’re cracking jokes, they may take it seriously,” Cagan said.

Cagan emphasized that if the IRS requests to meet you in person, or even worse, meet you at your place of employment, you need a tax representative there and should allow them to do all of the talking on your behalf. Only enrolled agents (EAs), certified public accountants and attorneys are legally able to fully represent you when it comes to the IRS so it’s important to make sure that you have selected someone with the correct credentials.

“Other people can look at your stuff, such as your accountant can look at your return but not all tax preparers can speak to the IRS on your behalf.”

The best rule of thumb when it comes to filing your tax return is to find what way you feel comfortable with and go from there. Whether that’s using tax software on your own or finding an accountant to help, this will help you feel confident when it comes to Uncle Sam and your taxes.

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This article originally appeared on GOBankingRates.com: How Long It Typically Takes the IRS To Reach Out If It Finds a Mistake on Your Taxes

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