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Thursday March 23, 2023

Washington News

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Top Seven Tax Refund Myths

In IR-2022-80, the Internal Revenue Service (IRS) attempted to dispel seven common myths about tax refunds. These myths are shared widely on social media during tax season.

The IRS has made good progress processing 2021 tax returns and refunds. Most of the refunds have been issued within the 21 day target. As of April 1, over 63 million refunds with $204 billion in value have been issued. The typical taxpayer receives a refund this year of $3,226.

To review the status of a refund, taxpayers should use the "Where's My Refund?" tool on the IRS.gov website or the IRS2Go mobile app. The "Where's My Refund?" status is normally available within one day after you receive an acceptance notice for e-filing your tax return. The tool is generally updated every night.

Here are seven common myths about tax refunds:

1. Contact the IRS — Taxpayers are wrong when they think that contacting an IRS agent on the phone or making a visit to the IRS Taxpayer Assistance Center will speed up a refund.

2. Wait for 2020 Return to be Processed — Some taxpayers still have not had their paper 2020 return processed by the IRS. They should still file their 2021 return and enter $0 (zero dollars) for the prior year adjusted gross income (AGI) on their tax return.

3. Order a Tax Transcript — Taxpayers may order a transcript of their past returns. This is often done to qualify for a mortgage, student loan or small business loan. However, this does not speed up your refund.

4. No Deposit Date on "Where's My Refund?" — The IRS processes electronic returns and issues most refunds within 21 days. However, there can be delays due to an incomplete return, transposed numbers on the return, identity theft or fraud. The "Where's My Refund?" tool still has the most current data.

5. Refund Amount Below Your Expectation — Taxpayers who benefited from the Recovery Rebate Credit or Child Tax Credit may have a decrease due to prior payments. There also could be adjustments for delinquent federal or state taxes or past-due child support. If the IRS makes an adjustment, you will receive a letter of explanation.

6. Call Your Tax Preparer — Your tax preparer cannot change your refund date. They have access to the same information that you have with the "Where's My Refund?" tool.

7. No Need to Adjust Tax Withholding for 2022 — Taxpayers who receive a refund this year may still need to change their withholding. The Tax Withholding Estimator tool will help you determine the right amount to withhold. You may have a life event such as marriage, divorce, childbirth, adoption, a home purchase or other major income change that requires an adjustment in your withholding.

Inflation Impacts Nonindexed Tax Provisions

The Labor Department reported in March that the 12 month inflation rate was 8.5%, the highest inflation rate in four decades. Because many of the tax numbers and provisions are not indexed, there can be a significant impact. Taxpayers who benefit from the state and local tax deduction, the exclusion of capital gains for the sale of a primary residence, the mortgage interest deduction or pay the Medicare 3.8% surtax are all affected by inflation.

With higher rates of inflation, many properties have also appreciated dramatically in value. As a result, the amount of capital gain recognized upon sale has increased significantly. With the dramatic increases due to inflation, Washington tax writers will be under pressure to index more areas within the tax code. The decision by Washington tax writers to index provisions has significant budget impact. With the large current budget deficits, the indexation of tax provisions will have significant cost.

1. State and Local Tax Deduction — The maximum SALT deduction is $10,000 and remains the same each year. A deduction of $10,000 in 2022 is equivalent to $8,736 in January 2018. In essence, the benefit of the deduction has declined by nearly 13% since that time. Two members of the House Ways and Means Committee have proposed a change in SALT to $80,000, however, there has been no movement on this bill in Congress. If the SALT limit were indexed for inflation, it could have increased from $10,000 to $11,262. This would primarily benefit individuals with incomes from $100,000-$200,000.

2. Home Sale Exemption — Taxpayers who sell their principal residence and have lived there for two of the past five years qualify for an exemption of $250,000 of capital gain for single filers and $500,000 for joint filers. This amount is not indexed. The other factor is that the U.S. National Home Price Index increased 19.717% from January 2021 through January 2022. In addition, the rate on 30-year fixed mortgages has increased by two percentage points and is 5.12% as of April 11, 2022. With these changes, the effect of the fixed exemption is to reduce its value to $218,411 for single filers and $436,822 for joint filers.

3. Mortgage Interest Deduction — Homeowners with mortgages are able to deduct the interest on loans for up to $750,000 of debt. This number also has less value when adjusted for inflation between January 2018 and the present. The $750,000 limit is now at a value of $655,234.

4. Medicare Surtax of 3.8% — There is a tax on net investment income (NII) that applies for incomes over $200,000 for single persons and $250,000 for married couples. With the impact of inflation over the past two years, this effectively applies now to individuals with incomes of $174,729 for single persons and $218,411 for married couples.

Because many of the tax provisions are not indexed, the value of these benefits has been reduced by 12% or more over the past two years. If high inflation continues in the future, the future value could be dramatically lower for these various tax benefits.

Protect Yourself from Identity Theft

In IR-2022-78, the Internal Revenue Service (IRS) reminded taxpayers about ways to protect yourself from identity theft and actions you should take if you suspect you are a victim of identity theft.

The IRS has tracked a significant increase this year in attempts by identity thieves to obtain personal information and file false tax returns. There is also a substantial increase in the number of identity thefts that are not tax related, but nevertheless may affect your financial accounts.

1. Identity Protection PINs — The IRS will assign taxpayers an Individual Taxpayer Identification Number (ITIN) that will reduce the risk of misuse of your Social Security Number. The Identity Protection Pin (IP PIN) is helpful because your tax return will only be accepted if you include this number. You can request an IP PIN to either protect your Social Security number or in cases where you suspect your personal information has been exposed through theft or fraud. The IRS website has a page that will walk you through a thorough authentication check. Once you pass that check, you will be given an IP PIN. When you are enrolled in the program, you will receive a new IP PIN each year. This is added security for your protection. You should receive the new IP PIN in early January, but you may also access it by going to IRS.gov/getanippin.

2. IRS Tax Fraud Letters — If someone uses your Social Security Number to file a fraudulent return, the IRS may catch it and send a letter notifying you. Letter 5071C asks you to go online and verify your identity. Letter 4883C asks you to call the IRS to verify your identity. If you have been victim of a data breach, Letter 5747C may ask you to go to a Taxpayer Assistance Center and verify your identity in-person.

3. You Suspect Tax Identity Theft — There are multiple reasons why you might suspect you are a victim of tax identity theft. If you are not able to e-file your tax return, your dependent's Social Security Number was previously used, you receive a tax transcript you did not request, you receive a notice from a tax preparation software company that your online account was accessed or disabled or you receive a notice from the IRS that you owe additional tax, you may have been victimized by tax identity theft. If this is the case, the "IRS will work to verify the legitimate taxpayer, clear the fraudulent return from the taxpayer's account and, generally, place a special marker on the account that will generate an IP PIN each year for the taxpayer who is a confirmed victim."

4. General Identity Theft Signs — Taxpayers may also become victims of identity theft that is not directly related to a tax return. This identity theft will expose you to significant financial risk. If you receive a bill from a company that you do not know, an unsolicited magazine subscription, a notice of unemployment benefits for which you did not apply or a Form W-2 from a company for which you do not work, you may be a victim of general identity theft. If this is the case, you should take appropriate steps to safeguard your financial identity. If you do not have identity theft insurance, you will need to contact all your financial services companies to clear your account.

Applicable Federal Rate of 2.2% for April - Rev. Rul. 2022-8; 2022-14 IRB 1 (16 Mar 2022)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2022. The AFR under Section 7520 for the month of April is 2.2%. The rates for March of 2.0% or February of 1.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published April 15, 2022
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