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This week’s presidential debate certainly created a lot of interest—although it was arguably short on new tax proposals. The tax discussion generally revolved around the 2017 Tax Cuts and Jobs Act of 2017, with the candidates, predictably, disagreeing on how it impacted taxpayers. (Trump had previously proposed exempting cash tips from income tax—an idea that Senator Ted Cruz (R-Texas) took up in the Senate this week.)
One area where the candidates differ—and have introduced proposals—is wealth transfer (including estate, gift, and generation-skipping transfer tax exemptions), including post-mortem basis adjustment rules (often referred to as a step-up in basis). If you’re looking for an explainer, you’ll find it here.
Whoever wins in November will face a significant financial issue. Specifically, the Congressional Budget Office’s latest fiscal update “is filled with terrifying numbers.” The projected deficit for this fiscal year will hit 7% of gross domestic product. By late 2034, the federal debt will top $50 trillion, nearly twice what it was last year. In 2034, the government is on track to spend more than 40% of all individual income taxes on interest on the debt. And that is without extending the 2017 Tax Cuts and Jobs Act.
The U.S. isn’t the only country facing elections this year. There’s so much voting scheduled for 2024 that Time magazine called it the “ultimate election year,” noting that voters in the EU and 64 countries, including the United Kingdom, will be headed to the ballot box. That’s about 49% of the global population—and climbing. What’s really up for grabs in the elections? Tax policy.
(In case you missed it, some players at the EURO 2024 have weighed in on the European elections. (☆))
And with a holiday looming next week, you’d think the IRS would take a breather. Nope—just the opposite. The tax news came at us pretty fast and furious. If you haven’t already gotten comfortable, settle in—there’s a lot to take in.
What Friday evening wouldn’t be complete without the IRS dropping some major guidance? Just after 4:00 p.m. on June 28, 2024, the IRS released final regulations (☆) on reporting requirements for brokers of digital assets. This is not a new tax—owners of digital assets have always been subject to tax on the sale or exchange of digital assets. However, under the Infrastructure Investment and Jobs Act, reporting requirements similar to those that already apply to traditional financial services are now in place to help taxpayers file accurate returns and pay taxes. Specifically, the final regulations require brokers to report gross proceeds on the sale of digital assets beginning in 2026 for all sales in 2025. Brokers will also be required to report information on the tax basis for certain digital assets. This will all happen on the new Form 1099-DA—think of it like your “normal” Form 1099, but for crypto.
That’s not the only guidance the IRS issued this week. The IRS also clarified exceptions to the early withdrawal penalty under SECURE 2.0 ACT. Typically, when you make an early withdrawal from your retirement plan, you are socked with a 10% additional tax (an early withdrawal penalty)—unless it’s subject to an exception. Exceptions under section 72(t) of the tax code include withdrawals that are made on or after the date you turn age 59 ½, those attributable to death or disability, distributions that are part of a series of substantially equal periodic payments made for your life or the joint lives of you and your designated beneficiary, and those made to an employee after separation from service after attainment of age 55 (other than from an IRA). Exceptions now include distributions for emergency personal expenses and victims of domestic abuse. (☆)
The IRS also issued a reminder that marijuana remains a Schedule I controlled substance. (☆) Why does it matter? The U.S. Drug Enforcement Administration (DEA) announced that it would move to reclassify cannabis as a less dangerous drug—as states continue to relax rules—leading some taxpayers who sell cannabis to file for refunds related to section 280E (the section of the tax code that disallows deductions relating to the sales of Schedule I or II controlled substances). Not so fast, says IRS—the federal tax laws related to cannabis sales have not changed.
And in a rare move, the IRS said “I’m sorry” (☆) to Kenneth C. Griffin, the billionaire plaintiff seeking damages in the Littlejohn leaker suit. The public apology was part of a settlement with the IRS and the Treasury to dismiss the case. Griffin’s information had been included in the data leaked to Pro Publica, and he filed suit months before IRS “contractor” Charles Littlejohn was revealed to be the leaker.
Earlier this year, IRS Criminal Investigation (CI) got a new chief: Guy Ficco. (☆) Ficco isn’t a stranger to the organization. He previously served as deputy chief. He was named to that post in 2022, having taken over from Jim Robnett, who retired after 36 years of IRS service. Before being appointed deputy chief, Ficco was the executive director of Global Operations Policy and Support at CI.
CI investigates criminal violations of tax laws—but fraud can also be civil. If a tax return is false or fraudulent or if there is a “willful” attempt to evade taxation, the IRS can look back as far as it wants, no matter how long ago the tax return was filed. While forever is a long time, what happens if the fraud is not committed by the taxpayer, but by the return preparer who incorporated the fraud into the tax return without the taxpayer’s participation? Is the taxpayer still on the hook? The IRS and courts have said yes.
Speaking of fraud—we’ve had a lively discussion on X (formerly known as Twitter) this week about tax professionals and self-described tax “experts” who have been serving up lousy advice (I’ll have more on this next week). A popular target is avoiding sales and use tax. The risk of prosecution is low, but that doesn’t mean that a sales tax case turning criminal is impossible. One memorable case? New York hotelier Leona Helmsely, who died in 2007 at age 87, was convicted of tax fraud and went to prison. Helmsely’s transgressions also involved sales tax. It didn’t help her that in her trial, a former employee testified that she said: “We don’t pay taxes. Only the little people pay taxes.”
That was a lot, right? There’s more good stuff below—including a look at what the Supreme Court ruled this week and a tricky trivia question.
Hopefully, things will cool off next week—both in terms of the weather and tax news. We could probably all use a breather. Stay cool and enjoy the Fourth!
Kelly Phillips Erb (Senior Writer, Tax)
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Taxes From A To Z: E Is For Earned Income Tax Credit
The Earned Income Tax Credit (EITC) or Earned Income Credit (EIC) is a refundable tax credit targeted to working people with low to moderate income.
A refundable credit (☆) means you can take advantage of the credit even if you do not owe any tax. Unlike a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is instead refunded to you.
To qualify, you must have earned income like wages, salary, tips, and net earnings from self-employment. Earned income also includes union strike benefits and long-term disability benefits received before your minimum retirement age. It may also include nontaxable combat pay.
Earned income does not include passive income like interest, dividends, pay you receive while incarcerated, retirement income, Social Security, unemployment benefits, and alimony. It also doesn’t include child support (that’s tax-neutral).
If you have earned income, you, your spouse, and any qualifying child (more on that in a bit) on your tax return must each have a valid Social Security number issued before the due date of your return (including extensions). You can’t claim the EITC with an individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or Social Security card with the words “Not Valid for Employment.”
You must also be a U.S. citizen or resident alien for the entire year and meet certain income criteria—your tax year investment income must be $11,000 or less for the year, and your earned income can’t exceed the limits for your filing status shown in the table above. Additionally, you must not file Form 2555, Foreign Earned Income.
You don’t have to have a qualifying child to claim the EITC. However, you (and your spouse if you file a joint tax return) must meet the rules outlined above, have your main home in the U.S. for more than half the tax year, not be claimed as a qualifying child on anyone else’s return, and be at least age 25 but under age 65 (at least one spouse must meet the age rule).
A qualifying child must be under age 19 at the end of the tax year OR younger than you or your spouse (if you file jointly) and under age 24 and a full-time student OR any age and permanently and totally disabled. The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or their descendant (your grandchild, niece, or nephew) and lived with you for more than half of the tax year (some exceptions apply). The child cannot file a joint return for the tax year unless the child and the child’s spouse did not have a separate filing requirement and filed the joint return only to claim a refund. Importantly, only one person can claim the same qualifying child for the same tax year.
Tax Statistics
In September of last year, the IRS announced plans to establish a special pass-through organization to focus on large or complex pass-through entities, which include entities like partnerships and S-corporations. Limited liability companies, or LLCs, can also be taxed as pass-throughs. Pass-throughs get their name for the unique way that they are taxed. They are not taxed at the entity level, like a C-corporation, but rather, income is “passed through” to the individual or corporate owners. That income, along with other tax characteristics like some gains and losses, shows up on tax forms from the entities—typically a Form K-1—and that information is reported on the owners’ tax returns.
Because pass-throughs can allow for simplicity, they are very popular with business owners. However, they are also frequently used by higher-income groups and can be involved in more complex tax arrangements, often through many different tiers of businesses (for example, one organization may own another).
The IRS had previously announced that it was opening examinations of 75 of the largest partnerships in the U.S. At the same time, Werfel announced that the IRS had flagged ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets. Those discrepancies can indicate potential non-compliance, and the IRS says that partnership returns are showing differences in the millions of dollars between end-of-year balances compared to the beginning balances the following year, without explanation.
That work is continuing. In May 2024, the IRS announced in an update to its Strategic Operating Plan that it would increase its audit rates of large partnerships—i.e., those with over $10 million in assets—nearly ten-fold as compared to its historical large partnership audit rates.
So, how do “large” partnerships compare to other pass-through entities? Here’s a look at the size of partnerships and S-corporations, as detailed by the IRS using data from the 2020 tax year. (Note that amounts are in thousands of dollars.)
Questions
This week, a reader asks:
I just got a job that requires me to move to a new state. How can I make sure that the IRS has my new info?
Congratulations on the new job!
The easiest way to let the IRS know where you are is to use your new address when you file—that’s assuming that you’re not currently in a payment plan, under audit, or otherwise involved in a situation where you’re communicating with the IRS regularly.
If you want to update the IRS before you file your next tax return, you can use Form 8822, Change of Address. It usually takes 4 to 6 weeks to process.
If you don’t want to use the form, you can go old school and send the IRS a written statement with your full name, Social Security number, your old address and your new address. You must sign the statement. Mail it to the address where you filed your last tax return.
You didn’t indicate your family situation, but if the change also affects the address for your children who filed income tax returns, you’ll need to file a separate Form 8822 or written statement for each child. If you file a joint return with your spouse, both you and your spouse should provide your names, Social Security numbers, new address, and signatures on the form or statement. And, if you filed a joint return but you now have an address separate from your spouse, each of you should notify the IRS of your new addresses.
One more thing: It may be tempting to rely on a change of address at the post office, but don’t—not all post offices forward government checks. While it’s a good idea to update your new address with the U.S. Postal Service, don’t skip the IRS.
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Do you have a tax question or matter that you think we should cover in the next newsletter? We’d love to help if we can. Check out our guidelines and submit a question here.
A Deeper Dive
Is a federal agency, like the IRS, above the law? On June 4, the Eleventh Circuit answered no, invalidating Notice 2017-10 because the IRS failed to follow all applicable laws and rules when issuing that Notice in Green Rock LLC v. Internal Revenue Service. Specifically, the IRS issued Notice 2017-10 without engaging in Notice and Comment. The IRS took the position that the rules requiring Notice and Comment don’t apply to the IRS. The Eleventh Circuit disagreed, invalidating the Notice. The notice was focused on a type of conservation easement transaction the agency viewed as abusive and warned taxpayers to tell the IRS that they were engaging in this transaction. Conservation easements have been a hot topic with the IRS for years—you can read more about that here.
And finally, the Supreme Court recently tackled a case that wasn’t really a tax case, but has implications for tax law. A 6-3 decision in Loper Bright Enterprises v. Raimondo has given federal courts broad new authority to curb the powers of federal agencies. While the immediate case involved regulation of fishing boats, the decision may have a major impact on the ability of the Treasury and IRS to write regulations that clarify gray areas in the tax code.
The underpinnings of Loper focused on a 1984 case called Chevron U.S.A., Inc. v. NRDC. Chevron stuck around for 40 years (it’s now been overruled) and stood for the idea that courts should give deference to regulatory interpretations of ambiguous statutes as long as those interpretations are reasonable. One peek at a previous Supreme Court use of Chevron in a tax context can be found in Mayo Foundation v. United States, when the court upheld a Treasury regulation stating that student employees working at least full-time are categorically ineligible for the exemption from payroll taxes. Before the most recent ruling, Tax Notes took a look at how Chevron has impacted the tax world and what a ruling could mean going forward.
Tax Filings And Deadlines
📅 July 4, 2024. Independence Day. All federal offices, including the IRS, will be closed.
📅 July 15, 2024. Due date for individuals and businesses in parts of Rhode Island, including Kent, Providence and Washington counties, affected by severe storms and flooding that began on December 17, 2023. More info here.
📅 July 31, 2024. Due date for individuals and businesses in parts of Massachusetts affected by severe storms and flooding that began on September 11, 2023. More info here.
Tax Conferences And Events
📅 July 15, 2024. Learn about the implications of Moore v. United States—called “the most important tax case of the century”—straight from the attorneys who argued the case. American Bar AssociationVirtual CLE, 1 p.m. EDT, registration required.
📅 July 19-20, 2024. #TaxTwitter TaxRetreat. Chicago, Illinois, registration required.
📅 July-September, 2024. IRS has announced the continuing education (CE) agenda for the 2024 Nationwide Tax Forum. Attendees can earn up to 19 CE credits over three days by attending one of the five forums in Chicago (July 9-11), Orlando (July 30-August 1), Baltimore (August 13-15), Dallas (August 20-22), or San Diego (September 10-12). Registration required.
Positions and Guidance
The American Bar Association (ABA) Section of Taxation has submitted comments to the IRS regarding the amortization of research and experimental expenditures (often called R&D) under section 174. Section 174 requires the amortization of specified expenditures over five years (15 years for expenditures attributable to foreign research), and was amended as part of 2017 tax reform. The comments included recommendations to expand or clarify existing guidance, including definitions related to specified research or experimental expenditures (“SREs”), clarifying what activities constitute software development, and allowing taxpayers to reduce proceeds from the sale of a product to the extent of any gain and that the recovery of the unamortized costs be deferred only to the extent of any loss. There were eight recommendations in all—you can read them here.
Noteworthy
Valor, a Fort Worth-based specialty asset management company focused on mineral management solutions and oil and gas outsourcing, has announced the addition of Ryan Linton as a new senior accounting manager to the company’s oil and gas accounting department. Ryan joins Valor with nearly two decades of accounting experience including with cash, intercompany, fixed assets, joint interest billing, reconciliation processes, and collaboration with internal land teams.
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If you have career or industry news, submit it for consideration here.
Trivia
When was the first televised presidential election?
A. 1956
B. 1960
C. 1964
D. 1968
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. This week, I asked our team: Taxes are a big issue in the upcoming presidential election. If you had the opportunity to make one change in the tax code—an extra credit, a disallowed deduction, whatever—what would it be?
Kelly Phillips Erb (Senior Writer, Tax): I will continue to beat the drum on student loan deductions. It’s nutty that it’s per return and not per person, and the phaseout is far too low.
Brandon Kochkodin (Writer, Money Team): Shooting for the moon. But just a simpler tax code overall. I think I’m one of those Georgists that the New York Times warned everyone about.
Mitchell Martin (Editor, Digital Assets): Stop taxing unemployment benefits.
Matthew Roberts (Contributor, Tax): I would repeal section 67(g) and its current disallowance of miscellaneous itemized deductions for 2018 through 2025. Its temporary repeal has had a disastrous effect on certain taxpayers—e.g., private plaintiff individuals who pay attorneys fees and have monetary settlement/judgment awards.
Andrew Leahey (Contributor, Tax): Easy one this week: I’d bring back the expanded Child Tax Credit. When it expired in 2022, 3.7 million more children were immediately tossed to the wolves of poverty. One of the most consequential tax policy decisions of the last ten years, and one we’ll be unpacking for a generation.
Amber Gray-Fenner (Contributor, Tax): Right at the moment? I would fix the marriage penalty in the SALT (state and local tax) cap. $20K for married filing jointly.
Virginia La Torre Jeker (Contributor, Tax): I would enact a provision that permitted Americans living abroad, in the true sense of the word, to be taxed on a residency base (RBT) as opposed to a citizenship base (CBT). So, an American living abroad would be taxed by the United States only on income from sources within the country. The individual would pay taxes to the country in which they are residing, most likely on a worldwide income basis. CBT is at odds with the global economy in which we are living today. The system is broken.
Key Figures
That’s the prison sentence that Leona Helmsley initially received for tax evasion and other crimes.
(She only served 19 months in prison and two months of house arrest.)
Trivia Answer
This is a trick question.
Most of you probably answered (B) 1960. That’s kind of right. The Kennedy v. Nixon debate in 1960 was the first time that two presidential candidates faced each other on television.
But I’ll also accept (A) 1956. According to the U.S. Senate, the first televised debate happened on November 4, 1956, when two surrogates debated on behalf of Adlai Stevenson and Dwight Eisenhower. Former First Lady Eleanor Roosevelt debated for Stevenson and Sen. Margaret Chase Smith (R-Maine) debated for Eisenhower (yes, the first televised presidential debate featured two women).
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