Social Security’s future: The problem and the proposals

Recent reports have raised anew concerns about the impending insolvency of the Social Security program, absent congressional action. Social Security reform has long been considered a “third rail” of American politics and understandably so — the options for heading off insolvency will inevitably cause pain for significant segments of the population. Yet some in Congress have stepped forward with proposals that aim to tackle the problem.

The impending shortfall

Social Security currently provides benefits to more than 66 million recipients. The Congressional Budget Office (CBO) estimates that about 78 million people, or about 20% of the U.S. population, will receive benefits from the Old-Age and Survivors Insurance (OASI) Trust Fund in 2032.

The CBO and the trustees of the Social Security and Medicare trusts have both raised alarms about how soon Social Security will become “insolvent.” Insolvency in this context refers to the point at which the trust fund will be depleted, and payments would come solely from income generated by payroll tax and income tax on benefits.

The 2023 Trustees Report states that the OASI Trust Fund will be able to pay 100% of total scheduled benefits only until 2033, one year earlier than the trustees projected last year. The program would then be able to pay 77% of scheduled benefits.

The CBO’s forecast is even more dire. It predicts the OASI fund will be exhausted in 2032. As a result, it says, payable benefits would be 25% less than scheduled benefits.

The declining ratio of workers to beneficiaries is one reason for the trust fund’s shrinkage, and the retirement of Baby Boomers has only accelerated this trend. High interest rates and historic inflation also play a large role. Due to inflation, beneficiaries saw an 8.7% cost-of-living adjustment (COLA) in 2023, the largest such hike since 1981.

According to the Congressional Research Service, the trust fund’s depletion, whenever it occurs, would create a conflict between two federal laws. Beneficiaries would remain entitled to their full scheduled benefits under the Social Security Act. But the Antideficiency Act prohibits government spending in excess of available funds, so the Social Security Administration (SSA) would lack legal authority to pay full benefits on time.

Limited options

Congress has a limited arsenal of weapons for addressing the shortfall in the OASI fund. It generally can increase trust fund revenues or reduce benefits by taking various steps, such as:

Raising the retirement age. Retirees normally begin receiving benefits at age 66 or 67, depending on their year of birth (reduced early benefits are available at age 62). Various legislators and others have called for increasing the full retirement age. For example, some have suggested raising it to age 70 for people born in 1978 or later.

The American Academy of Actuaries (AAA) points out several potential problems with this approach, though. For example, raising the retirement age is essentially a cut in benefits, and jobs might not be available for people ages 67 to 69 who would have to keep working, particularly those who perform manual labor. A higher retirement age would disproportionately affect low-wage workers and those who have higher mortality rates. In addition, it would likely increase disability insurance costs and the costs for employer-provided insurance.

Increasing payroll tax. Workers and employers each pay 6.2% payroll taxes, for a total of 12.4% on the first $160,200 of wages in 2023. Payroll taxes could be boosted in two ways — increasing the tax rate and adjusting or eliminating the wage cap.

The AAA says that, of all the many proposals and bills for addressing the impending deficit, “raising the tax rate best preserves the current system structure.” The CBO says that trust fund balances would be sufficient to pay scheduled benefits through 2097 if the total payroll tax rate was increased immediately and permanently to 17.6% (before accounting for the effects of such changes on the economy).

Others have proposed applying the tax to greater amounts of wages. Some would apply the tax to earnings greater than a specific threshold (for example, $400,000), creating a “doughnut hole” of income not subject to the tax.

The AAA explains that, if the contribution base is increased but not the benefit base, the fund could raise revenue with no increase in benefits. The effect would be similar to increasing the tax rate, but the additional tax revenue would come only from workers with earnings in excess of the benefit base. In other words, this would negatively affect higher earners.

But the AAA says that even including the additional taxed earnings in the benefit formula would help. That’s because the additional earnings in the benefit formula would be at the high end of the earnings scale, where the benefit formula percentage is lowest. Moreover, while the additional tax revenue would begin immediately, the additional benefits would slowly phase in over time.

Changing benefits formulas. COLAs currently are based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers. A different inflation index could be used to slow the annual increases. This would produce net benefit reductions as smaller benefit increases in early retirement years compound over time.

Other ideas include changing the primary formula for benefits for retirees or those for eligible spouses and dependents. For example, the basic Social Security benefit is called the primary insurance amount, based on average indexed monthly earnings (AIME) — generally, the average of a beneficiary’s highest earning years over a period of up to 35 years.

The number of averaging years included when calculating AIME could be increased, which would reduce the AIME for most workers. However, the AAA says this could have “especially adverse consequences” for workers who don’t have steady earnings, such as parents who leave the workforce to care for children.

Implementing means testing. Means testing generally refers to reducing or eliminating Social Security benefits for wealthy and/or high-income retirees whose current income or assets exceed a certain threshold. Supporters of means testing argue that the program shouldn’t benefit those who don’t have financial need.

Opponents contend that cutting or eliminating benefits for the wealthy would be unfair, as those individuals have contributed and been promised benefits just as others have. They also warn that it could undermine public support for Social Security, disincentivize work in later years and encourage consumption over saving.

Some recent proposals

Despite its third-rail status, several legislators on both sides of the aisle are working to confront the Social Security solvency crisis. For example, in February 2023, Sens. Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), along with several Democratic colleagues, introduced the Social Security Expansion Act.

Among other things, it would apply the payroll tax to earnings above $250,000, without crediting the additional taxed earnings for benefit purposes. It also would impose a 12.4% tax on investment income and change the inflation index for COLAs. The SSA’s Office of the Chief Actuary estimates that enactment of the bill would extend the ability of the combined OASI and Disability Insurance program to pay scheduled benefits in full and on time for 75 years. In addition, the bill would add $2,400 to beneficiaries’ annual benefits.

Sens. Angus King (I-ME) and Bill Cassidy (R-LA) are heading a bipartisan coalition exploring other options. They’re reportedly discussing the creation of a so-called “sovereign wealth fund” separate from Social Security. The fund would invest $1.5 trillion or more in the U.S. economy and accrue returns over 70 years. If it fails to produce an 8% return, the maximum taxable income and the payroll tax rate would be increased to ensure solvency for 75 years. Cassidy says this approach would “solve 75% of the problem.”

A political conundrum

Both parties acknowledge the need for some type of action regarding Social Security. Generally, Democrats oppose cuts to benefits and Republicans oppose higher taxes. And the political climate isn’t favorable for reaching a compromise. We’ll follow the developments and keep you informed of any significant changes coming your way.

© 2023  

Employee Spotlight – Katie Safa

Tell us about your career at Slattery & Holman.
I joined the administrative support department in 2019 and moved into a staff accountant position in 2022.

Tell us a little about your family.
I live in Noblesville with my boyfriend, Matt, and our two adorable fur babies. My mom and stepdad and my dad live nearby in Zionsville, which is where I grew up.

What fictional place would you most like to visit? 
I’m a bit of a Potterhead so I’d love to see Hogwarts. I’m a Ravenclaw. But alas, The Wizarding World of Harry Potter (at Universal Orlando) will just have to do.

What do you wish you knew more about? 
I bought my first house last year, so I wish I knew more about home improvement, landscaping, interior design, etc.

What’s the farthest you’ve ever been from home? 
Europe – I’ve traveled to Italy, Germany, Spain, and (twice to) Greece.

What is the most impressive thing you know how to do? 
I’ve been playing the trumpet since I was 10 years old. I regularly play in local groups such as the Indiana Wind Symphony and Zionsville Concert Band.

What is your favorite smell? 
I really like florals and sweet scents, especially coconut.

What’s the most unusual thing you’ve ever eaten?  
Probably escargot. I enjoyed it, although I admit it might’ve had less to do with the snails and more to do with the garlic butter.

If you could have any super power, what would it be?
I think shapeshifting is the ultimate superpower because it lets you take advantage of other superpowers. If I wanted to fly, I could turn myself into a bird. If I wanted to breathe fire, I could become a dragon. The possibilities are endless!

Use the tax code to make business losses less painful

Whether you’re operating a new company or an established business, losses can happen. The federal tax code may help soften the blow by allowing businesses to apply losses to offset taxable income in future years, subject to certain limitations.

Qualifying for a deduction

The net operating loss (NOL) deduction addresses the tax inequities that can exist between businesses with stable income and those with fluctuating income. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.

You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:

  • Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
  • Casualty and theft losses from a federally declared disaster, or
  • Rental property (Schedule E).

The following generally aren’t allowed when determining your NOL:

  • Capital losses that exceed capital gains,
  • The exclusion for gains from the sale or exchange of qualified small business stock,
  • Nonbusiness deductions that exceed nonbusiness income,
  • The NOL deduction itself, and
  • The Section 199A qualified business income deduction.

Individuals and C corporations are eligible to claim the NOL deduction. Partnerships and S corporations generally aren’t eligible, but partners and shareholders can use their separate shares of the business’s income and deductions to calculate individual NOLs.


The Tax Cuts and Jobs Act (TCJA) made significant changes to the NOL rules. Previously, taxpayers could carry back NOLs for two years, and carry forward the losses 20 years. They also could apply NOLs against 100% of their taxable income.

The TCJA limits the NOL deduction to 80% of taxable income for the year and eliminates the carryback of NOLs (except for certain farming losses). However, it does allow NOLs to be carried forward indefinitely.

A COVID-19 relief law temporarily loosened the TCJA restrictions. It allowed NOLs arising in 2018, 2019 or 2020 to be carried back five years and removed the taxable income limitation for years beginning before 2021. As a result, NOLs could completely offset income. However, these provisions have expired.

If your NOL carryforward is more than your taxable income for the year to which you carry it, you may have an NOL carryover. The carryover will be the excess of the NOL deduction over your modified taxable income for the carryforward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.

Excess business losses

The TCJA established an “excess business loss” limitation, which took effect in 2021. For partnerships or S corporations, this limitation is applied at the partner or shareholder level, after the outside basis, at-risk and passive activity loss limitations have been applied.

Under the rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus an inflation-adjusted threshold. For 2023, that threshold is $289,000 ($578,000 if married filing jointly). Remaining losses are treated as an NOL carryforward to the next tax year. In other words, you can’t fully deduct them because they become subject to the 80% income limitation on NOLs, reducing their tax value.

Important: Under the Inflation Reduction Act, the excess business loss limitation applies to tax years beginning before January 1, 2029. Under the TCJA, it had been scheduled to expire after December 31, 2026.

Planning ahead

The tax rules regarding business losses are complex, especially when accounting for how NOLs can interact with other potential tax breaks. We can help you chart the best course forward.

© 2023

There’s a favorable “stepped-up basis” if you inherit property

A common question for people planning their estates or inheriting property is: For tax purposes, what’s the “cost” (or “basis”) an individual gets in property that he or she inherits from another? This is an important area and is too often overlooked when families start to put their affairs in order.

Under the fair market value basis rules (also known as the “step-up and step-down” rules), an heir receives a basis in inherited property that’s equal to its date-of-death value. So, for example, if your grandfather bought shares in an oil stock in 1940 for $500 and it was worth $5 million at his death, the basis would be stepped up to $5 million for your grandfather’s heirs. That means all of that gain escapes income taxation forever!

The fair market value basis rules apply to inherited property that’s includible in the deceased individual’s gross estate, whether or not a federal estate tax return was filed, and those rules also apply to property inherited from foreign persons, who aren’t subject to U.S. estate tax. The rules apply to the inherited portion of property owned by the inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before his or her inheritance. The fair market value basis rules also don’t apply to reinvestments of estate assets by fiduciaries.

Lifetime gifting

It’s crucial for you to understand the fair market value basis rules so that you don’t pay more tax than you’re legally required to.

For example, in the above scenario, if your grandfather instead decided to make a gift of the stock during his lifetime (rather than passing it on when he died), the “step-up” in basis (from $500 to $5 million) would be lost. Property acquired by gift that has gone up in value is subject to the “carryover” basis rules. That means the person receiving the gift takes the same basis the donor had in it ($500 in this example), plus a portion of any gift tax the donor pays on the gift.

A “step-down” occurs if someone dies owning property that has declined in value. In that case, the basis is lowered to the date-of-death value. Proper planning calls for seeking to avoid this loss of basis. Giving the property away before death won’t preserve the basis. That’s because when property that has gone down in value is the subject of a gift, the person receiving the gift must take the date of gift value as his or her basis (for purposes of determining his or her loss on a later sale). Therefore, a good strategy for property that has declined in value is for the owner to sell it before death so he or she can enjoy the tax benefits of the loss.

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes. Contact us for tax assistance when estate planning or after receiving an inheritance.

© 2023

Businesses, be prepared to champion the advantages of an HSA

With concerns about inflation in the news for months now, most business owners are keeping a close eye on costs. Although it can be difficult to control costs related to mission-critical functions such as overhead and materials, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). Of course, some employees might not react positively to a health plan that starts with the phrase “high-deductible.” So, if you decide to offer an HSA, you’ll want to devise a strategy for championing the plan’s advantages.

The basics

An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 major advantages

There are three major advantages to an HSA to clearly communicate to employees:

1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free as long as the withdrawals are used for eligible expenses.

3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the upsides

Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact us for help evaluating the concept and assessing the costs of health care benefits.

© 2023

IRS guidance coming regarding the IRA’s Clean Vehicle Credit


The Inflation Reduction Act (IRA) extended and expanded the Section 30D Clean Vehicle (CV) Credit, previously known as the Electric Vehicle (EV) Credit. The credit now covers “clean vehicles,” which include plug-in hybrids, hydrogen fuel cell cars and EVs.

On April 17, 2023, the IRS will publish proposed regulations to clarify how a CV can qualify for the credit. The proposed regs effectively limit the number of currently available models that qualify, due to strict sourcing requirements that will apply to CVs that buyers take delivery of on or after April 18, 2023. The federal government is taking steps to help taxpayers identify eligible vehicles.

The previous EV Credit

The Sec. 30D EV Credit has been available since 2008. Prior to the IRA, it started at $2,500, with a maximum credit of $7,500. (Note that the EV Credit remains available for qualifying vehicles placed in service on or before April 17, 2023.)

It was also subject to a cap based on the number of qualifying vehicles a manufacturer had produced. Because of this cap, some popular EVs — including those made by Tesla, Toyota and General Motors — were no longer eligible for the EV Credit.

The extended and expanded CV Credit

The CV Credit continues to top out at $7,500, but the IRA splits it into two parts, based on satisfying new sourcing requirements for both critical minerals and battery components. Vehicles that meet only one of the two requirements are eligible for a $3,750 credit.

Specifically, an “applicable percentage” of the value of the critical minerals contained in the battery must be extracted or processed in the United States or a country with which it has a free trade agreement, or be recycled in North America. Similarly, an applicable percentage of the value of the battery components must be manufactured or assembled in North America. The IRA increases the applicable percentage for both requirements every year starting in 2023, with initial percentages of 40% for critical minerals and 50% for battery components.

The IRA includes price restrictions, too. Vans, pickup trucks and SUVs with a manufacturer’s suggested retail price (MSRP) of more than $80,000 don’t qualify for the credit, nor do automobiles with an MSRP higher than $55,000. Qualified vehicles also must undergo final assembly in North America.

The credit also is subject to income limitations. It’s not available to taxpayers with a modified adjusted gross income (MAGI) over:

  • $150,000 for single filers,
  • $300,000, for joint filers, or
  • $225,000, for head of household filers.

In addition, the credit isn’t allowed for vehicles with any critical minerals (after 2025) or battery components (after 2024) from a “foreign entity of concern.” The IRA doesn’t define this term, but the IRS and U.S. Department of Treasury have stated that future guidance will address this provision.

The credit isn’t refundable and can’t be carried forward if it’s claimed as a personal credit. It can, however, be carried forward if claimed as a general business credit. If a taxpayer uses a qualified vehicle for both personal and business use, and the business use is less than 50% of the total use for a tax year, the credit must be apportioned accordingly.

Relevant proposed regs

The sourcing requirements are intended to reduce manufacturers’ reliance on suppliers in countries such as China. As a result, many of the proposed regs are of greater interest to manufacturers than consumers. They spell out, for example, processes for determining the percentages of value of critical minerals and of battery components. They also explain how to identify countries with which the United States has a free trade agreement.

But the proposed regs also include several provisions with useful information for taxpayers. For example, the regs define MSRP as the sum of 1) the MSRP for a vehicle and 2) the MSRP for each accessory or item of optional equipment that’s physically attached to the vehicle at the time of delivery to the dealer. This information is found on the label affixed to the vehicle’s windshield or side window. So adding optional equipment can result in losing out on the CV Credit in some cases.

As far as the “final assembly in North America” requirement, the proposed regs provide that taxpayers can rely on the final assembly point reported on the label affixed to the vehicle. Alternatively, they can rely on the vehicle’s plant of manufacture reported in the vehicle identification number. North America refers to the United States, Canada and Mexico.

The proposed regs also discuss the treatment of the credit when a vehicle has multiple owners. They state that only one taxpayer can claim the credit; no allocation or prorating is permitted. In the case of married taxpayers filing jointly, either spouse may be identified as the owner claiming the credit on the seller’s report.

If a partnership or S corporation places an eligible CV into service, the credit is allocated among the partners or shareholders. They can claim their portion on their individual tax returns.

The proposed regs also clarify the MAGI limit. The credit isn’t available for any taxable year if the lesser of 1) the taxpayer’s MAGI for the year or 2) the taxpayer’s MAGI for the preceding year exceeds the applicable threshold. If a taxpayer’s filing status changes (for example, from single to married) during this two-year period, the MAGI limit is satisfied if the MAGI doesn’t exceed the threshold amount in either year based on the applicable filing status for that year.

The MAGI limit doesn’t apply to taxpayers other than individuals. If a qualified vehicle is placed in service by a partnership or S corporation, though, the limit will apply to partners or shareholders who claim their portion of the credit.

In the market for a CV?

While the IRS has promised additional guidance on the CV Credit, taxpayers interested in taking advantage of the credit needn’t wait. The U.S. Department of Energy has created a website that includes a list of eligible clean vehicles. The list will be regularly updated as manufacturers provide information on their vehicles that qualify for the credit. For additional information from the IRS, visit: If you have questions regarding the CV Credit, please don’t hesitate to contact us.

© 2023



President Biden’s proposed budget includes notable tax provisions

President Biden has released his proposed budget for the federal government for the 2024 fiscal year. The budget, which aims to cut the deficit by nearly $3 trillion over 10 years, includes numerous provisions that would affect the tax bills of both individuals and businesses. While most of these proposals stand little chance of enactment with a Republican majority in the U.S. House of Representatives, they shed light on the Democrats’ priorities as they prepare for the 2024 election season.

Individual tax provisions

The proposed budget includes tax provisions that would affect taxpayers of various income levels. In particular, it would make the following changes:

Tax rates. The proposal would reinstate the top individual tax rate of 39.6% for single filers earning more than $400,000 ($450,000 for married couples).

Net investment income tax (NIIT). The NIIT on income over $400,000 would include all pass-through business income not otherwise covered by the NIIT or self-employment taxes. The budget also would increase both the additional Medicare tax rate and the NIIT rate by 1.2 percentage points. Thus, the Medicare tax rate would be 5% for earnings above $400,000, and the NIIT rate would be 5% for investment income above $400,000.

Capital gains tax. The highest capital gains rate now is 20% (or 23.8% if the NIIT applies). For individuals with taxable income of more than $1 million, the budget proposes that capital gains be taxed at ordinary rates, with 37% (or 40.8% with the NIIT) generally being the highest rate — or 39.6% (or 43.4% with the NIIT) if the top tax rate is raised.

Child tax credit (CTC). This proposal would expand the CTC and make it fully refundable and payable in advance on a monthly basis. For eligible parents, the credit would increase from $2,000 to $3,000 for children age six and older and $3,600 for children under age six.

The proposal also would establish a “presumptive eligibility” for determining when a taxpayer is eligible to claim a monthly specified child allowance or receive a monthly advance child payment. After a taxpayer establishes presumptive eligibility for a child, that child would be treated as a specified child of the taxpayer for each month during the period of the taxpayer’s presumptive eligibility.

Premium tax credits (PTCs). The American Rescue Plan Act expanded eligibility for healthcare insurance subsidies to taxpayers with household incomes above 400% of the federal poverty line for 2021 and 2022. It also reduced the applicable contribution percentage (the percentage of household income a taxpayer must contribute toward a healthcare insurance premium). The Inflation Reduction Act (IRA) extended the expansion through 2025. The proposed budget would make this expansion permanent.

Cryptocurrency taxation. The proposal would amend the “wash-sale” rule to cover digital assets. The rule prohibits the deduction of a loss when the taxpayer acquires “substantially identical” investments within 30 days before or after the sale date.

Minimum wealth tax. The proposal would impose a minimum 25% tax on total income, generally inclusive of unrealized capital gains, for all taxpayers whose assets exceed liabilities by more than $100 million. According to the White House, the tax would apply to only the top 0.01% of taxpayers.

Gift and estate taxes. The proposal would close loopholes related to certain trust arrangements. Specifically, the changes would affect grantor-retained annuity trusts and charitable lead annuity trusts.

Business tax provisions

The proposed budget’s tax provisions target numerous issues of interest to businesses, including:

Corporate tax rates. The proposal would trim back the large cut made to the corporate tax rate in the Tax Cuts and Jobs Act (TCJA). It would hike the tax rate for C corporations from 21% to 28% — still significantly less than the pre-TCJA rate of 35%. In addition, the effective global intangible low-taxed income (GILTI) rate would increase to 14%. Overall, with other proposed changes, the effective GILTI rate would rise to 21%.

Global minimum tax. The proposal would repeal Base Erosion and Anti-Abuse Tax (BEAT) liability, replacing it with an “undertaxed profits rule.” In conjunction with the GILTI regime, the rule would ensure that income earned by a multinational company, whether parented in the United States or elsewhere, is subject to a minimum rate of taxation regardless of where the income is earned.

Stock buyback excise tax. The IRA created a 1% excise tax on the fair market value when corporations buy back their stock, with the goal of reducing the difference in the tax treatment of buybacks and dividends. The proposal would quadruple the tax to 4%.

Carried interest loophole. A “carried interest” is a hedge fund manager’s contractual right to a share of a partnership’s profits. Currently, it’s taxable at the capital gains rate if certain conditions are satisfied. The budget proposes to close this loophole.

Like-kind exchanges. Owners of certain appreciated real property can defer the taxable gain on the exchange of the property for real property of a “like-kind.” The proposal would allow the deferral of gain up to an aggregate amount of $500,000 for each taxpayer ($1 million for married couples filing a joint return) each year for like-kind exchanges. Under this proposal, any like-kind gains in excess of $500,000 (or $1 million for married couples) in a year would be recognized in the year the taxpayer transfers the real property.

Low-income housing tax credit. The budget proposes to expand and enhance the largest federal incentive for affordable housing construction and rehabilitation.

The elephant in the room

The budget proposal doesn’t address many of the temporary tax provisions of the TCJA that have expired or are set to expire in the next few years. The increased standard deduction, reduced individual tax rates, qualified business income deduction for pass-through businesses, and limit on the state and local tax deduction are among the numerous provisions scheduled to expire at the end of 2025 — potentially affecting the tax liability of a wide swath of taxpayers. We’ll keep you informed if there’s significant movement on this front.

© 2023

U.S. Supreme Court rules against the IRS on critical FBAR issue

The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what’s generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.

Reporting requirement

The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.

According to related regulations, individuals with fewer than 25 accounts in a given year must provide details about each. Filers with 25 or more accounts aren’t required to list each or provide specific details; they need only provide the number of accounts and certain other basic information. FBARs generally are due on April 15, with an automatic extension to Oct. 15 if the April deadline isn’t met.

Under the BSA, a willful violation of the requirement is subject to a civil penalty up to the greater of $100,000 or 50% of the balance of the account at issue. A provision prescribes a penalty of up to $10,000 for a non-willful violation of the filing requirement (with an exception for reasonable cause). Criminal penalties also may be imposed.

Violations at issue

The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.

The IRS deemed his FBARs deficient because they didn’t include all of the relevant accounts. Bittner then filed corrected reports with information for each of his accounts. Although the IRS didn’t contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.

Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.

High court’s ruling

The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.

For example, the Court noted that Congress had explicitly authorized per-account penalties for some willful violations. When Congress includes particular language in one section of a statute but omits that language from another, it explained, the Court normally understands the difference in language as conveying a difference in meaning. In other words, Congress obviously knew how to tie penalties to account-level information if that was its intent.

The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet. These references, the Court said, suggested to the public that the failure to file a report represents a single violation that exposes a non-willful violator to a single $10,000 penalty. (Note: The Supreme Court emphasized that such guidance wasn’t “controlling” or decisive, but only informed its analysis.)

Implications for taxpayers

The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single violation.

As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.

It’s important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness aren’t subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.

Questions remain

The Supreme Court’s ruling in Bittner should bring relief to taxpayers who’ve non-willfully violated the BSA’s filing requirement, but it didn’t clear all uncertainty around FBAR penalties. For example, the Court didn’t address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.

© 2023

Reading the tea leaves: Potential tax legislation in the new Congress

The 2022 mid-term election has shifted the scales in Washington, D.C., with the Democrats no longer controlling both houses of Congress. While it remains to be seen if — and when — any tax-related legislation can muster the requisite bipartisan support, a review of certain provisions in existing laws may provide an indication of the many areas ripe for action in the next two years.

Retirement catch-ups at risk

The SECURE 2.0 Act, enacted at the tail end of 2022, reportedly includes a technical drafting error that jeopardizes the abilities of taxpayers to make catch-up contributions to their pre-tax or Roth retirement accounts. According to the American Association of Pension Professionals and Actuaries, under the existing statutory language, no participants will be able to make such contributions beginning in 2024.

The American Retirement Association has brought the issue to the attention of the U.S. Department of Treasury and the Joint Committee on Taxation (JCT), a nonpartisan congressional committee that assists with federal tax legislation. While the JCT has apparently acknowledged that the language does appear to be a drafting error, a timely correction is far from guaranteed.

Indeed, such “technical corrections” legislation once passed Congress routinely. However, it has proven more challenging in the political climate of the last decade or so. For example, it took three years for Congress to pass minor corrections to the first SECURE Act. And a glitch in the Tax Cuts and Jobs Act of 2017 (TCJA) affecting eligibility for bonus depreciation wasn’t corrected until the CARES Act became law in 2020.

Expiring tax provisions

Tax-related legislation often includes so-called “sunset” dates — the dates tax provisions will expire, absent congressional action. For example, the Consolidated Appropriations Act, enacted in 2021, boosted the allowable deduction for business meals from 50% to 100% for 2021 and 2022. In 2023, the deduction limit returned to 50%.

A JCT report released in January 2023 highlights numerous significant provisions that are scheduled to expire in coming years without congressional action to extend them. For example, several tax credits related to renewable and alternative energy will expire at the end of 2024.

But 2026 is the year when some of the most wide-reaching and particularly valuable provisions — many of them created or modified by the TCJA — are set to disappear. They include:

  • Lower individual tax rates,
  • Enhancements to the Child Tax Credit (CTC),
  • Health insurance premium tax credit enhancements,
  • The New Markets Tax Credit,
  • The employer credit for paid family and medical leave,
  • The Work Opportunity Tax Credit,
  • The increase in the exemption amount and phaseout threshold for the alternative minimum tax,
  • The increase in the standard deduction,
  • The suspension of the miscellaneous itemized deduction,
  • The suspension of the limit on itemized deductions,
  • The income exclusion for employer payments of student loans,
  • The suspension of the deduction for personal exemptions,
  • The limit on the deduction for qualified residence interest,
  • The suspension of the deduction for home equity interest,
  • The limit on the deduction for state and local taxes,
  • The qualified business income deduction,
  • The deduction percentages for foreign-derived intangible income and global intangible low-taxed income,
  • Empowerment zone tax incentives, and
  • The increase in the federal gift and estate tax exemption.

At the end of 2026, bonus depreciation also is slated for elimination. In fact, the allowable deduction already has dropped from 100% to 80% of the cost of qualified assets in 2023. The limit will drop by 20% each year until vanishing in 2027.

Expired tax provisions

Several notable provisions expired or changed at the end of 2021, despite chatter in Washington about the possibility of extensions. For example, as of 2022, taxpayers can no longer deduct Section 174 research and experimentation expenses, including software development costs, in the year incurred. Rather, they must amortize these expenses over five years (or 15 years if incurred outside of the United States). In addition, the calculation of adjusted taxable income for purposes of the limit on the business interest deduction has changed, potentially reducing the allowable deduction for some taxpayers.

Individuals also saw the end of several tax provisions at the end of 2021, including the:

  • CTC expansions created by the American Rescue Plan for some taxpayers,
  • Expanded child and dependent care credit,
  • Increased income exclusion for employer-provided dependent care assistance,
  • Treatment of mortgage insurance premiums as deductible mortgage interest,
  • Charitable contribution deduction for non-itemizers, and
  • Increased percentage limits for charitable contributions of cash.

It’s possible that some of these could be included in any “extender” legislation Congress might consider this year or next.

The FairTax Act

Unlikely to see much progress, however, is the proposed FairTax Act. Although it has the support of a group of U.S. House Republicans, GOP House Speaker Kevin McCarthy has stated that he doesn’t support the legislation.

The bill would eliminate most federal taxes — including individual and corporate income, capital gains, payroll and estate taxes — as well as the IRS. It would replace the taxes with a 23% federal sales tax on goods and services, which couldn’t be offset by deductions or tax credits. The plan has been around for two decades and has yet to garner a floor vote, an indicator of its odds this time around — especially with Democrats in control of the U.S. Senate.

Ear to the ground

Congress may not feel a sense of urgency to address tax provisions that aren’t set to expire for three years, but the catch-up contribution error would have substantial repercussions for many taxpayers in less than a year. We’ll let you know if lawmakers take action on this or any other important tax matters that could affect you.

© 2023

Year-end spending package tackles retirement planning, conservation easements

On December 23, 2022, Congress passed the Consolidated Appropriations Act of 2023. The sprawling year-end spending “omnibus” package includes two important new laws that could affect your financial planning: the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (also known as SECURE 2.0) and the Conservation Easement Program Integrity Act.

Bolstering retirement savings

The original SECURE Act, enacted in 2019, was a significant bipartisan law related to retirement savings. In the spring of 2022, with an eye toward building on the reforms in that law, the U.S. House of Representatives passed the Securing a Strong Retirement Act. Despite strong bipartisan support, the bill stalled. Then, the U.S. Senate introduced its own retirement legislation, dubbed the Enhancing American Retirement Now Act.

SECURE 2.0 incorporates provisions from both bills and addresses a wide array of areas that make major changes to retirement planning, including:

Required minimum distributions (RMDs). The first SECURE Act generally raised the age at which you must begin to take RMDs — and pay taxes on them — from traditional IRAs and other qualified plans, from 70½ to 72. The new law increases the age to 73, starting January 1, 2023, and boosts it to 75 on January 1, 2033. This change allows people to delay taking RMDs and paying tax on them.

The law also relaxes the penalties for failing to take full RMDs, reducing the 50% excise (or penalty) tax to 25%. If the failure is corrected in a “timely” manner, the penalty would drop to 10%.

Catch-up contributions. Beginning January 1, 2025, individuals who are ages 60 to 63 can make catch-up contributions to 401(k) plans and SIMPLE plans up to the greater of $10,000 or 50% more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025. (The annual dollar limit on catch-up contributions is $7,500 for 2023, up from $6,500 for 2022.)

The law also changes the taxation of catch-up contributions, though, which could reduce the upfront tax savings for those who max out their annual contributions. Catch-up contributions will be treated as post-tax Roth contributions. Previously, you could choose whether to make catch-up contributions on a pre- or post-tax basis. An exception is provided for employees whose compensation is $145,000 or less (indexed for inflation).

Qualified charitable distributions (QCDs). QCDs have gained in popularity as a way to satisfy RMD requirements while also fulfilling philanthropic goals. With a QCD, you can distribute up to $100,000 per year directly to a 501(c)(3) charity after age 70½. You can’t claim a charitable deduction, but the distribution is removed from taxable income.

Under the new law, you also can make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to directly to the charity). The law also indexes for inflation the annual IRA charitable distribution limit of $100,000.

Automatic enrollment. Beginning in 2025, new 401(k) plans must automatically enroll participants when they become eligible. However, the employees may opt out. The initial contribution amount is at least 3% but no more than 10%. Then, the amount is automatically increased every year until it reaches at least 10% but no more than 15%. Existing plans are exempt, and the law provides exceptions for small and new businesses.

Annuities. Annuities can help reduce retirees’ risk of depleting their savings before they die. But RMD regulations have interfered with the availability of annuities in qualified plans and IRAs. For example, the regulations prohibit annuities with guaranteed annual increases of only 1% to 2%, return of premium death benefits and period-certain guarantees. SECURE 2.0 removes these RMD barriers to annuities.

The law also makes qualified longevity annuity contracts (QLACs) — inexpensive deferred annuities that don’t begin payment until the end of the individual’s life expectancy — more appealing. Among other things, it repeals the 25% cap on the maximum annuity purchase and allows up to $200,000 (indexed for inflation) from an account balance to be used to purchase a QLAC.

Matching contributions on student loan payments. The law also aims to help employees who miss out on their employers’ matching retirement contributions because their student loan obligations prevent them from making retirement contributions. It allows them to receive matching contributions to retirement plans based on their qualified student loan repayments. Employers can make matching contributions to 401(k) plans or SIMPLE IRAs. These provisions are effective for contributions made for plan years beginning January 1, 2024.

Part-time employee eligibility. SECURE 2.0 lowers the hurdles for long-term, part-time employees to participate in 401(k) plans. They’ll still need to work at least 500 hours before becoming eligible but they’ll have to work for only two consecutive years, rather than the three years required by the first SECURE Act. The provision takes effect for plan years beginning January 1, 2025.

Small business tax credits. To incentivize small businesses to establish retirement plans, SECURE 2.0 creates or enhances some tax credits. For example, it increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. An additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee.

Tax-free rollovers from 529 plans to Roth IRAs. The new law permits a beneficiary of a 529 college savings account to make direct rollovers from a 529 account in his or her name to a Roth IRA without tax or penalty. This provides an option for 529 accounts that have a balance remaining after the beneficiary’s education is complete. The 529 account must have been open for more than 15 years and other rules apply. The provision is effective for distributions beginning in 2024.

Cracking down on certain tax shelters

The retirement provisions in the omnibus law are partially offset by the law addressing conservation easements. Current law generally allows taxpayers to claim a charitable deduction for qualified donations of real property to charity. According to the IRS, though, promoters have twisted the relevant tax provision to develop abusive “syndicated” conservation easements that use inflated appraisals and partnership arrangements to reap “grossly inflated” deductions.

Going forward, the Conservation Easement Program Integrity Act disallows charitable deductions for qualified conservation contributions if the claimed deduction exceeds 2.5 times the sum of each partner’s relevant basis in the partnership making the contribution. An exception is granted if the contribution meets a three-year holding period test, substantially all of the partnership is owned by family members or the contribution relates to the preservation of a certified historic structure.

More to come

These are only some of the provisions in the new law. The entire omnibus law is sure to generate additional questions and guidance. We’ll keep you apprised of the developments that could affect your financial health.

© 2022