Federal Tax Updates

Roger and Annie discuss Congress and IRS roles when it comes to taxes, how tax code is used to encourage behaviors, how tax policy scoring works, and explain deductions versus credits.

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Links mentioned in this episode

  • (00:00) - Federal Tax Update E3
  • (01:32) - Don't miss the Deductions on Credits on your Tax Return
  • (09:44) - How tax policy is scored?
  • (15:15) - Limitations of Deductions and Credits
  • (18:13) - Do you take a standard deduction or a Itemized deduction?
  • (22:20) - Deductions on Charitable Donations
  • (24:40) - Gift Tax Returns
  • (29:07) - Education Credits
  • (36:12) - Sole Proprietorship Deductions
  • (40:57) - Refundable Credits
  • (43:12) - What does it cost to raise a child?
  • (46:57) - Updates on the Employee Retention Credit
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The full transcript for this episode is available by clicking on the Transcript tab at the top of this page

All content from this podcast by SmallBizPros, Inc. DBA PADGETT BUSINESS SERVICES is intended for informational purposes only.

Creators & Guests

Annie Schwab, CPA
Franchisee Operations Manager at Padgett Business Services
Roger Harris, EA
President at Padgett Business Services

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Roger: [00:00:00] Got to go to at least 3:00 then. Are you ready?

Annie: [00:00:06] I'm ready.

Roger: [00:00:10] Hello and welcome to another Federal Tax Update podcast. My name is Roger Harris and we are here today sponsored by Paget. Paget is a national accounting and tax firm over 50 years, and if you're interested in learning more about Paget, please visit Paget Advisors dot com. As I said, my name is Roger Harris and I'm joined today by Andy Schwab.

Annie: [00:00:35] Hello everyone, and welcome to be here, Roger. That's right, Andy Schwab. I am the tax manager and operations specialist over at the pageant office. Been with the firm for about 15 years. So Roger and I are this is our third podcast. So if you missed the first two, please check on it. We are enjoying this little adventure and today we've got a lot of stuff to cover, so hopefully you'll enjoy it.

Roger: [00:01:00] Yeah. So what are we talking about today anyway? What do we want to talk about today?

Annie: [00:01:04] We are talking about don't miss the deductions and the credits on your tax return. And really what this is about is sort of talking about some common deductions and some tax credits explaining the difference between the two and then more importantly, how these credits and deductions come about and why do they change so often? And what do you have to keep in mind as you enter tax season?

Roger: [00:01:26] Yeah, because I think one of the things that, you know, everybody complains about the complexity of the tax code and really, if you look at it, a lot of what makes it a complicated tax code are deductions and credits. So common sense would say, if that's what makes it complicated, why do you have so many of them? And I think it's it's helpful to understand how we get to deductions and credits that we have while we don't have others. Why some come, why some go away? Whose fault is it if that's the case? So where do you want to start?

Annie: [00:02:01] Well, I think you kind of let us into it. I mean, if there's somebody to blame, I feel like the public tends to blame the IRS. Right? The IRS makes this so hard. The IRS changes the rules. The the IRS just wants to get more money out of my pocket. And and while, you know, some of that might be true, that's that's really not how tax policy comes about. Right. Right. You know, we've got go ahead.

Roger: [00:02:29] And tax policy is not something the IRS has anything to do with. The tax policy really lies, first of all, in Congress. They determine what the policy is by passing laws. If there is a discussion or a back and forth between policy, it's Treasury and Congress. The IRS just administers. They just take whatever hand is dealt to them. I mean, they have some comments on the edges, but they're not supposed to set policy. So they get blamed for pretty much everything because they're just easy to blame. But a lot of it's the policy's fault.

Annie: [00:03:08] And it's and it's the intention, I think, or the goal, so to say, of the policy makers. I mean, it could be something, you know, to discourage a behavior, for example, or to encourage a behavior, for that matter. It could be they're trying to shift action from a group of a subset of taxpayers. And most probably it's because they need to raise money for another project, right? You have to get money from from one place in order to fund something else. So even if you know our divided government these days, even if they come to an agreement and they both think, you know, a particular tax policy is great, just because you like it doesn't mean it just comes about into law. You have to be able to pay for it, right?

Roger: [00:03:51] Sure. Sure. And I think it's important as as practitioners, tax preparers, that we understand the system that leads us to some of this stuff that we have because clients look at us and go, well, that doesn't make sense or that's not fair. And quite honestly, neither of those two matter. Yeah, if you understand how we get tax law, what factors are considered? Maybe you'll be able to better understand some of these deductions, some of these credits understand how long we may have them, whether they're temporary, they're permanent, you know, all those sorts of things. So we're going to spend a few minutes just before we get into the details of the individual credits and deductions and and make sure everybody understands, because it's not common sense necessarily as to why we have what we've had. So I think we need to to take a couple of minutes and and go in and you mentioned a couple of them. What's an example of one where. A deduction or credit is trying to change our behavior. In fact, we just had one recently.

Annie: [00:04:53] Well, yeah, the the Inflation Reduction Act that had a large part of that legislation was regarding clean energy credit, clean vehicle energies and credits. And basically that was an incentive for more people to buy clean vehicles. And that was a policy that was encouraging a behavior. And that behavior was to invest money in these these clean vehicles. And they even enhanced that with where they could be made, how many of them how much they could cost and set stipulations on that policy.

Roger: [00:05:30] Yeah. So what they're trying to do is they're trying to get us to go away from our gas engines and whatever and move into an electric vehicle. And they're trying to use the tax system as a way to incentivize us to do that in the form of credits. Now, again, they put rules on the credits in terms of what kind of vehicle and where it has to be built and what kind of battery it has to have and what kind of income can you make. But clearly, one of the messages here is, hey, American public, we want you to move from a gas engine to a electric engine. And they use the tax code.

Annie: [00:06:08] And they also.

Roger: [00:06:10] Go ahead.

Annie: [00:06:10] I'm sorry. Oh, we've seen it before, too. If you remember at one point a years back, you could deduct your credit card interest, whether it be business or personal, your car interest. I mean, now we still have the housing mortgage interest, but that's even changed over time. Now it's limited to a certain dollar amount and it's subject to whether you itemize or you take the standard deduction. But all of those things have come and gone. And that's basically, you know, whether they want to shift an action for more investing into the housing market. So to say, we you know, we've seen a lot of that stuff with as it relates to incentives from COVID, you know, putting money into the restaurants and all of these employer retention credits and special stuff for COVID gear deductions for all that kind of stuff. So whatever's going on, whether it be interest rates, inflation, pandemic, you're going to see tax law that that relates to that.

Roger: [00:07:12] Sure. Yeah, It's sort of made a decision a few years ago that mortgage interest was good interest. Credit card and car loan interest was bad interest, though for most people, those aren't choices, You know, if they need to get a car. Most people can't pay cash for it. They have to finance it. But now there's some other reasons that besides just good versus bad that we'll talk about. But you're right, during the pandemic, we saw a lot of things, again, administered through the tax code in the form of credits and deductions and things to to help people get through the pandemic. So but one of the problems is the people passing the laws are congressmen. They're not tax experts. Right. So they may spend two paragraphs passing something to express their desire for change in behavior or something like that. It may take the IRS 2000 pages to explain what Congress just did in two paragraphs. And that's where we get frustrated with the IRS. So the IRS may be to blame for the speed in which we get guidance or the level of the guidance or even the guidance we get. But they didn't ask to do that. They were told to do that through a piece of legislation.

Annie: [00:08:29] And sometimes they want it to happen overnight. Sometimes it's even retroactive. Right. I remember when the law passed about the stimulus checks, they were ready to cut checks the next day. They were you know, everybody's waiting on their money. Where's my money? Where's my check? And the poor IRS was trying to implement that as as fast as possible. But they have to work with what they've got.

Roger: [00:08:49] Yeah. And sometimes they do it retroactively. So you've got to go back and do something. So. So the first thing I think we need to understand about our tax policy and our tax code is that it's driven. Not everybody thinks it's there just to collect revenue, which it's obviously there to do. It collects all the revenue to fund the government, but there's so much more that goes into it that has nothing to do with collecting money because there's a lot simpler and easier ways just to collect money. Now there's another thing that really is important, and it will be really important coming, coming years. And that's what they call scoring. You want to tell everybody what scoring means?

Annie: [00:09:31] Well, sure I can, so I'll try to give it very clear cut here. So when a tax policy is is brought up, presented, it's scored. And based on how it's scored is the way in which they have to find the fund to pay for it. So you can't just like I mentioned earlier, you can't just throw a policy out there. Everybody agrees on it and then it's law. You have to figure out a way to pay for that policy. And and the amount that it costs is based on a scoring system. And so when it comes down to it, when policymakers are out there, if they want this particular new law, they're searching around all kinds of places to get the money. So Roger gave me this this figure, which I just think is absurd, but it is what it is. The 179 deduction, that particular deduction is worth $5.5 billion for a single year. So if someone was looking for a place to find some funding to to implement a new tax policy, a new deduction, a new credit, that would be a good place to go because it's worth 5.5 billion. Now, all of these things get it gets complicated because you can take a little from here and a little from there. Or maybe you tweak this law, you don't necessarily remove it, or maybe you add a different inflation adjustment to it, a different requirement, expand it, reduce it. All of these things are ways of negotiating to get this policy scored and then get the policy paid for and then eventually get the policy passed.

Roger: [00:11:08] Yeah, So and I'm not smart enough. I've actually taken a suggestion to Congress and had it scored and I couldn't tell you where they came up with their number. I mean, I don't know. There's a couple of elements to scoring a bill, You'll notice and we'll talk about the Tax Cuts and Jobs Act. It has an expiration date because that helps the scoring, because in theory it expires. So it has a period of time by which it stops. And so the scoring is less than making it a permanent cut where you have to score it forever. I have no idea. There's a bunch of very smart people that go back in a room and they come out with a score. And if the score is a dollar, to Annie's point, if that's a dollar I want to spend, then I got to find a dollar somewhere to pay for it. And of course, the tax code is a great way to do that, either by raising some tax rate or reducing some deduction or credit to prevent that or give us that dollar to spend. So we hear a lot about it at budget time. You know, what bills cost and are they paid for and things like that. And the tax code gets caught up a lot in that process because that's where the money is, quite honestly. I mean, so as we look, they suspended some of that during COVID. But right now, as we we look ahead and think about, you know, certain things that we've all dealt with in the last few years, you know, we gave up personal exemptions, for example, because that produced some amount of money. I don't know what we got in return. I think we got lower tax rates. But if you're going to lower the tax rates from 15 to 12%, somebody is going to go in a room and say that change is going to cost. Eight gazillion dollars, whatever they come up with, and then.

Annie: [00:12:57] Somebody else is going to choose dinner for all.

Roger: [00:12:59] Of us. Somebody is going to go in there and find that money somewhere. So.

Annie: [00:13:02] Exactly.

Roger: [00:13:03] There's economics, there's budgeting, there's policy. There's so much that's in our tax system that really doesn't have anything to do with necessarily good tax policy. And we need to understand that. We're trying to figure it out in terms of, well, why is this deductible? And that's not why, for example, and I think we're going to cover it later. Why are medical bills restricted to an amount over an amount of your income? And charitable contributions aren't. There's there's no reason for that other than somebody needed to find money. And probably that was a way to produce the money needed. And there's no consistency. 1960, they may have made that policy because they needed 19 $60 and now we're in 2023. So I don't know. It's just I think it's interesting and we all need to understand how we get some of the messes we get. Then we can do anything about it. But we should understand it.

Annie: [00:14:02] Yeah, yeah, yeah, I know. We're not going to spend too much time on. I do want to get into some of the deductions and some of the credits, but it is but it's really interesting and it's something just for you to keep in the back of your mind when you're talking to your clients or trying to explain a situation or why is it this way? You know, it's just it's not that simple.

Roger: [00:14:20] No. Then it'll make you look smart when somebody says, Why don't we just do this? Well, because it's just not the way the system works.

Annie: [00:14:27] You can just say, because it wasn't scored.

Roger: [00:14:29] It won't score well. And they'll look at you won't score.

Annie: [00:14:32] There you go.

Roger: [00:14:32] What does that mean? Oh, don't worry about it. It just won't.

Annie: [00:14:36] Right, exactly.

Roger: [00:14:37] All right. Now that you know all the theory behind some of these crazy deductions and credits, we can talk a little bit about them specifically. But I do want to tell you before we leave, we're going to talk a little about we mentioned it as we get to the end time permitting the Tax Cuts and Jobs Act. That's going to be something in our near future that we're all going to have to be prepared for in a Congress that doesn't seem very good at negotiating. There's one big negotiation that's going to be coming soon.

Annie: [00:15:03] Yeah, it's coming down the pipe. Yep. Yep. All right, so let's get on with it. Deductions and credits. So sometimes those terms seem to be interchangeable, but they are quite different. Deductible expenses reduce taxable income. So you earn $1,000 and you have a qualifying expense of $100. And now you have taxable income of $900 a credit. On the other hand, that's something that reduces the actual dollar in tax. So if you owe $50 in tax and you have a $20 credit, now your tax is $30. So which is better? Well, generally speaking, I would say that the credit is better because it reduces the dollar amount of the tax that you owe. But all of these deductions and credits, they all come with limitations. Some are income limitations, some come with various qualifications. You have to meet X, Y, and Z in order to get this one. Like, for example, like a child tax credit. Some you can carry over, some you can carry back, some expire, some, you know, come to a point where they can be one year back and then two years forward, you know, they kind of have the both going back and forth and we're going to talk about a couple of them.

Annie: [00:16:22] But but keeping in mind that the credit and the deduction is different are different. There are some similarities. Most of them have been around for a really long time. For example, the standard deduction, and then some are going to be new, like I mentioned, deductions for COVID related protective gear. So you've got two different deductions there. One's been around for a long time. The amounts may change and then you've got something as a result of the economy or or what's happening. And now you have additional deductions, credits. Same way some have been around a lot. Some are new, some come, some go. It sort of just depends on the year. So the reason we're here today is so that we don't want you to overlook some of the most common deductions and most common credits as you enter tax season and also get a better understanding of what they could mean to you. So that's kind of why we're here.

Roger: [00:17:15] Yeah, and we've probably all heard this question. It's a good it's a good way of looking at the difference from a tax payer standpoint. We probably all have employees who work for employers who provide through their benefits plan a way to deduct from, say, your child care. And so they take $100 of your money. And then when you pay your child care, that $100 doesn't qualify for the credit. And everybody's trying to understand what's better. Is it better to have the money taken from my paycheck or take the tax credit? So individuals are dealing with these choices and these things on a regular basis? They don't know the difference between the two, but we do. And sometimes we have to help them. Be in a position to understand the difference in a deduction and a credit.

Annie: [00:18:10] Yeah. Yeah. Well, we mentioned the standard deduction. I think everybody knows what that is. It's been, like I said, been around for a while. We had the personal exemption that is now gone away. It used to be like around $4,000 per person. That has been a couple of years now since it's been there. But we've always heard about this sort of like, do you take the standard deduction or you take the itemized deduction? And for most people, they kind of do what they've done in the past, like, oh, no, I just take the standard. I you know, I've been taking the standard for years. But it's important to realize what that itemized deduction it's schedule A on the tax return. You know what? Why is it there and what's on it? And why are some people able to itemize and some people take the standard? And it comes down to in simple terms, the IRS gives you a deduction. And if you have some of these other items, like a bucket of itemized deductions, if you had a bucket of itemized deductions, which include, for example, medical charitable interest, that's your mortgage interest, real estate taxes, those types of things sit in a bucket. And if that bucket is greater than what the IRS is giving you as the standard deduction, then you itemize and it is an option. You can opt out or opt in for the standard. You can't you can't opt in to itemize unless you qualify, meaning it's above the standard. But there are two different types. And like I said, you know, it's it depends on the taxpayer. Most people generally, if you itemize, it's because you have a home and real estate taxes. So you'll continue to itemize for multiple years. And if you if your house is paid off or you don't have a home, you generally take the standard that's kind of the norm. Would you agree? Roger?

Roger: [00:19:51] Yeah. I think the only time that maybe I've seen people itemize that don't own a home is if they're huge givers to our church or something and they have huge charitable donations. One thing that's got.

Annie: [00:20:04] Taxes.

Roger: [00:20:05] State taxes, but even that's limited to some extent in some states to the 10,000 that and states are really making it a little more difficult because every state is a little different in how their tax system works, assuming they have one. Some states don't. So they're irrelevant. But, you know, some states require your federal and state to be prepared the same way, meaning if you take the standard deduction on your federal return, you're forced to take the standard deduction on your state return. Some allow you to do whatever is best for you. If you are a potentially high earner in multiple states, sometimes you may have the state need to be the driver as opposed to the federal return, because you may pay a little bit more in the federal, say by taking itemizing, even though you're slightly under the the threshold because you need those excess itemized deductions on the state returns. And so that's one of the things that we have to be a little more careful about than we maybe used to be is looking and considering the impact on the state returns as we make this decision, simply because we've seen instances where paying a little more on the federal actually pays it back on state savings. So it's a nice little way to save some clients some money and make them.

Annie: [00:21:31] Yeah, but you've got to watch your states because only some states let you do that. Some require to do what you did on the federal, you know, same kind of like can you do married filing separate on one on the federal can you do married filing married filing joint on the state. You know some of some of the states you might have to match some you can kind of pick and choose.

Roger: [00:21:49] Yeah. And even if you have to do the same, sometimes we just assume the federal is always the most important. And sometimes, again, if you're really close to the itemized line, particularly, I mean, the where you are going to itemize as opposed to state the standard, then go consider the impact on the states. If there's a requirement to do the same, because you might save money by paying a little more in the federal. So it's not going to be a lot. But every little penny you can save your clients, they get very happy about that.

Annie: [00:22:21] Exactly. Let's talk about charities real quick. We won't spend a lot of time on this, but it's kind of a concept that, you know, giving a charity, a qualified charity, whether it be cash or non cash, seems like a a good thing. Right. And and the donor, the taxpayer gets to decide who to give it to, how much to give it to, when to give it to that particular charity. And like you said, that is fully deductible. But if you look at, let's say, medical expenses. That's subject to a limitation of seven and a half percent of your AGI. So you only get a deduction for out-of-pocket medical expenses if it reaches a high enough number to a threshold. And that to me, just sounds kind of odd because most people it's not like you choose to get sick or choose to get, you know, need a surgery or some care or whatever, but yet that is subject to like a limitation where charity is not. It's just kind of odd.

Roger: [00:23:23] Yeah, Well, it goes back to again, I'm sure those numbers are partly political in the sense that to your point, we don't choose when to get sick, but we do choose who and when to donate to. And yet one's restricted. I mean, I guess charitable donations are somewhat restricted by AGI, but that's the net impact a lot of people. But but we make choices there. So what is the reason for there that there is a difference between the two? It's either the scoring and monetary or it's political. You know, the lobby, I guess, of the churches is stronger than the medical profession. So they get 100% of their, you know, things there. So again, it's just another example of where you don't want to think through the tax code about, well, that doesn't make sense because we're looking at it from a preparer standpoint, not from a politician standpoint and where they get their money from or where they need to create deductions. So those are those are a good contrast in where things fall.

Annie: [00:24:27] Yeah. Yeah. A couple of little tips on charity real quick. Remember, political contributions are never deductible. Right. And if you if you give let's say you give money to a school, you can't earmark that money for a particular student or particular reason. And a lot of times you hear about gifting versus to a charity than to like a person where you can gift that lifetime. Gifting is 16,000 per person per year.

Roger: [00:24:55] Yeah. And one thing you should know is if you give more than 16,000 and that number is moving, I mean, it rounds up after, you know, inflation causes it to go up. But just so you know, I mean, I think right now our our estate and gift tax exemption is like over 5 million for single and over ten for a couple. So you think, well, what difference does it make? I gave somebody $20,000 and I can only give them 16. Just know that the law requires you to file those gift tax returns anyhow and and take that additional donation or additional gift out of your lifetime exemption, even though you and I probably will never reach the threshold where estate and gift tax applies, the law does require those gift tax returns. If you exceed that annual given giving amount, even though there's no you can choose to pay the gift tax on why you do that. But you could or you can take that excess and take it off of your lifetime exemption. So just be aware that even your clients who are never going to own a state or gift tax are just never going to get in that position. They still may have a gift tax filing requirement if they make donations are not donations. I keep saying donations gifts to someone in excess of whatever the annual exclusion amount is for that year. And remember those exclusion amounts husband and wife can each give. So for 16 that means 32 for one person could receive up to 32. The question I always get, Annie, and I'm sure you get it, is when, oh, if somebody gave me $15,000, how much tax do I owe on it? Well, that's one of the few times that I'm happy you called because I look like a hero. The answer is never. Well, not.

Annie: [00:26:43] 15 is not taxable.

Roger: [00:26:45] If there's a tax consequence on a gift, it's on the person giving it more likely than the person receiving it.

Annie: [00:26:53] Exactly. Okay. A couple of interesting points on the medical and then we'll jump to some other deductions here. I always kind of read some of these items that I think people know. Is that deductible as a medical expense or is it not? And and so just so, you know, pregnancy test kits, telephone equipment for the hearing impaired, orthopedic shoes, a guide dog, COVID tests and that personal protective gear we talked about earlier, crutches, hearing aids and a vasectomy are all deductible, but you cannot deduct your pregnancy, clothes, gym or health clubs. There's a small minor time when you can do that. Teeth whitening, not deductible. Diapers not deductible. Marijuana, even if it's legal at the state level, not deductible. So there are some interesting little tidbits there.

Roger: [00:27:43] Yeah, we sometimes we spend a lot of time worrying about medical deductions and then we get to the point in the seven a half percent wiped them all out anyhow. So now remember, it includes health insurance and things like that. But it's getting harder and harder to have enough medical if your income is of any amount. It's getting harder and harder to claim those medical deductions unless, I mean, if you have someone in a nursing home or, you know, some uninsured event, you know, that surgeries or something. But but if you have good health insurance now, it's kind of hard to have enough if you're making.

Annie: [00:28:17] Yeah. I generally tell my clients, unless they really had something unusual, don't even bother adding up all those receipts for your medical. Yeah, it's just you got to have too much in there.

Roger: [00:28:26] Not there. All right, Where are we going next?

Annie: [00:28:30] Let's talk education credits.

Roger: [00:28:32] Okay.

Annie: [00:28:32] That's been on the table for years. One one that I find interesting. Of course, my mom's a teacher, so I like this one for her. But there's that above the line, $300 per year educator expenses. And I feel like sometimes that gets overlooked. I always kind of talk to my clients if I ever see their occupation, being a teacher, educator, that kind of stuff. Because I don't know about you, but I watch my mom go into Hobby Lobby and all these different stores to get all kinds of cute stuff to decorate the classroom or little prizes, incentives for the kids in her class. And she does that out of pocket. And so there's, you know, $300 is not a lot, but it is an above the line deduction on the tax return. So just keep that in mind if you've got some teachers, educators as clients.

Roger: [00:29:20] And again, another example of why is it unlimited? Why if a teacher spends $1,000, shouldn't they be able to claim the full amount or whatever? Again, it's either budgetary or policy or something. That said, if we take that number up to the unlimited amount, it's going to produce somebody and some back room is going to probably come up and say that's $1,000,000,000 or something and something's got to go. So that's why it's limited. It's not based on do we think that's all teachers spend or all we should allow? It's it's not an intention of the value of teachers or what they spend, but there you go.

Annie: [00:29:59] Another yeah.

Roger: [00:30:00] Another.

Annie: [00:30:00] $100 came out of the air somewhere.

Roger: [00:30:03] Somebody made it up in that room. Yes. Am I in a back room? Said we can only afford 300. So that's what it is. Now education's got you know, we've got college education credits. Now, again, they're limited by income again, that's probably a fiscal choice. Yeah, there's some restrictions on now you have to get what is it, 1098 T or something. Not on that. You don't get it. So we have all these limitations on what you spend. But now there's a lot of talk about forgiveness of the student debt that you had to borrow to spend that money. And we have different rules regarding what you can have forgiven and the taxability of it versus what you actually spent to go to college in the first place.

Annie: [00:30:45] And then scholarships come into play and you've got 529 plans out there. There's all kinds of incentives to go one way or the other. And, you know, there's phase outs and there's certain you can earmark the money for certain things where some of it, you know, computer supplies, that kind of stuff. Some do room and board, some don't. It just sort of depends on on what you're what the credit is. But most softwares actually will run an analysis to see which one it would be better for the taxpayer. You can kind of optimize the opportunity, the American Opportunity credit or lifetime learning credit and kind of see what works.

Roger: [00:31:23] And one thing that's I don't know, supposedly this is being handled by the state, but if you do any let's say you have a taxpayer whose son or daughter is an athlete at school, There's a good chance now they may be receiving something called NIL name, image and likeness. And those funds are taxable. And in some cases, they're big, big dollars. I live in a college town. I live in Athens, Georgia, where the University of Georgia is. They have a lot of football players making a lot of money off of in ill whose parents may. Not realize that there's a chance they could lose the deduction for their child or that the child has a tax obligation. So if you have parents with college students who are athletes, this whole nil world that we're in and I read an article the other day, it's now bleeding down into the high school levels that some high school levels inhale. So and these aren't small dollars for some of your better athletes. So we have a whole different world where when we get into the education and not only is my son or daughter receiving a scholarship, they're also getting this nil money. Supposedly the colleges are and are advising the student athletes on their tax filing obligations. I don't know well beyond saying you have to file a tax return. They're telling them anything. So but it's just one other little quirk that that if you again, if you have those people that you prepare taxes for or you have the parents of those young men or women, it's another question you're going to need to start asking about. Did they receive any nil money? And if so. What are we doing about the child's tax return?

Annie: [00:33:11] Yeah, and the parents get affected, too, like you said. So.

Roger: [00:33:15] So it's just. Something that seems so simple can get so complicated so quickly, right?

Annie: [00:33:22] Absolutely. All right. A couple of other things here. We've talked we mentioned this earlier about state and local income tax. Sometimes that's referred to as salt asphalt. State and local tax. There's a cap on that now. There used to not be a cap, and that cap is $10,000 per year. That was supposed to expire in 2025, but it's actually been extended now until the end of 2026. I don't know if that'll get rolled over, you know, if that's going to continue to happen. But it's a big deal to a lot of states for taxpayers who live in that high income dollar state. It was a big hit that they had to take with a cap of 10,000. In fact, there's there's you know, you hear all of this state and local or salt tax workaround kind of thing. States are trying to figure out ways so that they can get an amount greater than that on the tax return. But it's definitely something we need to keep our eye on.

Roger: [00:34:20] Yeah, because you mentioned a lot of states are trying to work around this. This is clearly was clearly a political way of paying for something because this is part of the Tax Cuts and Jobs Act, which was done in a Republican administration. And most of the states where this has the greatest impact were what we call blue states or Democrat run states. So it was a very easy thing for Republicans to do, which was to cap something that impacted more Democrat voters than Republican voters. So it clearly impacts Republican voters. But more in their excuse was we're not subsidizing high tax rates in blue states. That's political argument. But that's but that's where it creeps into the tax code. And now we're stuck in certain states with the limit. And now the states are trying to work around it, somehow trying to figure out donate money over here and pay your taxes over there and you'll get around it. And the federal government is fighting it, but it's a reality. It doesn't matter how we got it. It is a reality. And again, we'll talk a little bit more in detail about the Tax Cuts and Jobs Act. But this was clearly a way of raising money for something else and targeting it to hurt the other party's voters more than our voters. And the tax code gets to be the place that that happens.

Annie: [00:35:35] And another another talking point to come up soon. Yeah.

Roger: [00:35:41] Another election topic.

Annie: [00:35:43] Yeah, an election topic for sure. Just a couple of others. We'll run through them and then we'll get to some credits here. But we've got the mileage deduction and that's kind of an interesting one because it's not only changed mid-year in 2022, but it's interesting, like the business mileage rates like $0.65, 65 and one half cents, but the rate for medical is 22 and then the rate for charity is 14. So, I mean, how do you decide, you know, the mileage per the purpose? Now they're all sort of increasing, hence gas prices are increasing. But that's just that's another one again, sometimes overlooked, especially for the medical or the charity. The business mileage is a pretty popular it's, you know, 65 and a half cents. It's a pretty popular one that you'll see with self-employed individuals. But again, who sets that increment? I don't know. Probably come up with.

Roger: [00:36:37] Same person driving the same car to work in their job one time and then they quit doing it and they use the same car in the same person to drive to a doctor and then the same car and the same person to do some charity work and that same person in the same car get three different rates based on what they're doing, not the vehicle or the person.

Annie: [00:36:56] Right. It's the purpose of the of the driving. So so again. Exactly. A couple of other deductions with regards to retirement contributions. Sometimes these get overlooked, too. You've got your deductible IRA contribution. For those that are self employed, you have the SEP, that one you have until you file the tax return, including extension. So that's one that's often calculated towards the end of preparation of the tax return to kind of see what limitation that is for your C tax. For those self employed. You do get half of that as a deductible expense and I think I will touch on some schedule C filers.

Roger: [00:37:37] Yeah. One comment on retirement. I'm going to put in a senseless plug for a future podcast. We did have the secure act that was attached and passed with the omnibus at the end of 2022 and he and I will be doing a podcast. We may even bring in a special guest to help us with that to cover the Secure Act. So keep an eye out for future podcast and we'll talk more about it.

Annie: [00:38:02] Yeah, that'll be a good one. I'm looking forward to that. Two other two other topics here. One is your schedule C, your self employed individuals. Those generally will maintain a separate. Kind of accounting, you know, but you'll get a bank account in the business name or a credit card in the business name. So and that's really a good idea to kind of separate personal and business expenses and and records. Commingling of funds is never a good thing when dealing with the IRS, so it's always good to have separate accounting records for that. But some common business expenses that, you know, have been around for a while advertising and office supplies, postage, you know, your legal and professional fees. There's a couple that are a little more iffy or I would say a little less common. We talked about mileage. Don't forget that depreciation sometimes Home Office, there's qualifiers there for home office. But that's that's one cell phone and never recommend taking 100% of a cell phone but a legitimate business use cell phone, there's some deductible expenses there, travel and meals and entertainment. So those are ones that have the IRS might look at a little bit closer, but ones that you definitely don't want to overlook, They could be a legitimate business expense for your sole proprietors.

Roger: [00:39:23] And missing a deduction as a sole proprietor is really, really expensive because in addition to just your regular state and federal income tax, your Social Security tax is based on your profit of the company. So if you do the math, let's just say you're in a 20% federal tax rate of 5% state tax rate. Now you're going to pay, you know, the self-employment tax, you know, you're looking at for $0.45 out of every expense deduction you miss in taxes that you're going to pay. So tracking deductions in a sole proprietor is really, really important because the the return for the money is pretty pretty good for the time it took to track it.

Annie: [00:40:07] Yeah. And you'll see there's been some changes for meals and entertainment in 2021 and 22, basically because of the pandemic, trying to help out restaurants that were really, really hurt. And so you can, you know, that's just another example of policy that that's as a result of the times. Really?

Roger: [00:40:29] Yeah. Yeah. All right. We want to talk a little bit about some credits now, which generally speaking, are probably better for most people than deductions because it's kind of dollar for dollar. Some are, some are refundable, some are not, some are partially refundable. But a credit and I think you've mentioned this is usually better in most instances than a deduction, because the deduction will reduce income and you'll get a percentage of that in in taxes, whereas a credit, a dollar credit should offset a dollar in taxes. And if you don't have a dollar in taxes, some of those credits will actually send you money. So credits are really important and Congress pretty good about handing out free money through credits when they think it's.

Annie: [00:41:19] Probably a good idea. I mean, the Earned income credit is highly scrutinized. It is a refundable credit. There's some AGI thresholds associated with it. But a lot of times, I mean, they'll be, you know, taxpayers with very little earnings, if any, get nice large refunds as a result of their earned income credit.

Roger: [00:41:39] Yeah, And I was told this and I don't think it's changed that if the Earned Income Credit were taken out of the tax code and just the government was handing out that money through another agency, it would be the largest social welfare program in the United States. So again, Congress use the tax code to distribute money to those who needed it and those that had children, and some tinkering with working and not working. But it's a huge amount of money that is handed out through the tax code that you could argue really has nothing to do with paying your taxes. It's just a way to to track the information. And therefore, there's a lot of fraud in it because any time a lot of the fraud in the tax system relates around credits, because that's where the money is handed out, and that's where while we have a lot of due diligence requirements to try to make sure we're not participating or facilitating those dishonest returns.

Annie: [00:42:49] We've also got the child tax credit. Yep. And that one's kind of difficult in the sense that child is that like some estimate of what it costs to raise a child. And I don't really think that's what it's costing me.

Roger: [00:43:06] No, no, it's it's not close to what a child is worth. It's what they can afford to give out and call it a child tax credit. And remember, last year we had the advanced child tax credit. During the pandemic, we were advancing funds against a higher credit to help put money in the hands of people who may or may not have been working due to the pandemic. So, again, we're instituting public policy through the tax code that's not here this year. Don't don't have your people looking for it. They're not going to get checks. But still, there is a child tax credit. And again, you know, where does that number come from? Not based on the cost of a child, for sure.

Annie: [00:43:45] No, no. Same with the dependent care credit. I mean, the goal was it excuse me, the goal of it was so that more people could go to work. Right. But how do you come up with the amount for dependent care? I mean, you're paying way more than what the percentage of the qualifying child would get. You and I get at The incentive is so that, you know, both mom and dad can go to work, increase their income, increase the livelihood of their kids, etc.. But, you know, it's it's one that has fluctuated some it's never really gone away that I'm aware of. But there have been temporary rules or expanded child and dependent care credits that kind of have gone back and forth.

Roger: [00:44:26] The other thing in the tax code that we have to watch for, and this is where the dependent care is probably lagging behind, is some things are indexed for inflation, some are not. So when we pass a law and we set a credit at one amount, if it's not indexed for inflation, it stays at that amount. And I don't think anybody could argue that what it cost to send a child to daycare today is close to what it was even five years ago. I mean, it's terribly expensive. So it's not intended to provide free daycare for all of your clients. It's a help. That's all it is. It's a help and it can be a substantial help. And you certainly don't want to not claim it, but it's not there and it's not indexed for inflation. So it's not going up, you know, particularly in a year like we've had for 2022 with inflation. Yeah, yeah. Child care went up with the deduction or the credit did.

Annie: [00:45:22] Right. Yes, that's very unfortunate for a lot of families. But but that's you know, when you get that question from your clients or they're saying, you know, man, it just seems like I'm never getting ahead here. And and those are some of the conversations that you can have with them about. Yeah. You know, I, I know this credit's pretty low or I know, you know, the cost of education is going up, but that's sort of some of the discussions that you can have explaining what's kind of going on.

Roger: [00:45:48] And one last thing, not to dwell on this too much. The IRS cannot make those changes that takes Congress. Congress if Congress wants to index something for inflation or Congress wants to increase a credit amount or a deduction amount, that takes an act of Congress. That's not the IRS being just the big bad IRS and doing that. Some of the problems we saw during COVID and it seems like we can't do a podcast without.

Annie: [00:46:14] Mentioning the attention.

Roger: [00:46:15] Credit, but some of the problems coming.

Annie: [00:46:17] Up next.

Roger: [00:46:18] Some of the things we did and talked about in the employee retention credit, where there were better ways to do it and the IRS got blamed for it were things that took action by Congress. So the IRS sometimes, as we said, gets all the blame and there's nothing they can do. They might even acknowledge there's a better way to do it, though they probably won't because that would creep into policy. But they can't.

Annie: [00:46:43] It's common. Roger, tell us a little bit about the employee retention credit. You could probably say it faster than I could. I know we're running low on time.

Roger: [00:46:48] Well, just given the only thing I'll say because we spent a lot more time on in our first podcast, but if you have small business owners that have employees that were impacted by either a government shutdown and or had a loss of wages or maybe a supply chain interruption, and they have still not claimed the employee retention credit, it is still available and you need to take advantage of it while it's still there. It's going to require some work and some coordination, particularly with those that got PPP loans. But the ads that you hear all over the TV and radio, about $26,000 a person, those are true. That is that is an amount that's not a made up number. It is possible. So please, please, please, if you have small business owners who had employees and came through the pandemic and survived and have not at least looked at the employee retention credit. Take a minute to see if they're eligible. It's a lot more complicated than that.

Annie: [00:47:47] Yeah, Yeah. But back to our first podcast, gave a really good overview and sort of especially for tax practitioners going into this tax season, Like what does it mean? Yes, it was something that came about in the past, but it still has a really big impact this tax season. So it's worth going to going to watch that podcast and talking to your clients about it.

Roger: [00:48:06] Yeah, and find time because there is a statute, it's going to run out. It's not tomorrow, but it's close. And depending on the year, it could be closer than you think. And I just would hate to have a client come up to me and say, Why didn't you tell me? I could have gotten because we've had clients in pageant get hundreds and thousands of dollars that they wouldn't have gotten had someone not talked to him about it. So. So go take a look at it again. Well, we'll probably be doing our 50th podcast and still talking about the employee retention credit.

Annie: [00:48:37] But I would like to do a podcast and not even mention the word COVID or pandemic or any of those kinds of words.

Roger: [00:48:43] But yes, let's hope we're getting close to that.

Annie: [00:48:45] But we are where we are. Roger, let's jump to to sort of our forward looking, our outlook. We mentioned earlier that we wanted to talk about the Tax Cuts and Jobs Act because it most of the provisions all but except I think a handful are set to expire at the end of 2025. And so what does that what does that mean?

Roger: [00:49:02] What are we. Well, that means and I think this I'm trying to remember it was passed the Tax Cut and Jobs Act is also called in the political world, the Trump tax cuts. So it has two names, again, to make them affordable in a budget way. There was an expiration date applied. That expiration date is December 31st of 2025. Now, what happens is on that date, assuming nothing else happens, all of those provisions, that's 199A eight. That's it's a lot of the lower tax rates. The personal exemptions would come back. I mean, so much was in that bill. If something doesn't happen in time for a replacement or an extension, all of that goes away. And we go back to the tax law that we had before. Now, what's interesting is the expiration date is one year after the next presidential election, and that also means we'll have the full House up for election and a third of the Senate up at 2024. It's going to be or should be a major topic in our political discussions that unfortunately, even though we just finished an election, will start up again. They probably already started up. But it's going to be a major tax piece of legislation that something has to be doing. Nothing means it goes away. So right. We need to start as we get closer and closer to the election. Pay attention to what your politicians say about it, which deductions they like, which ones they don't like, which credits they like, which credits they don't like because something will have to be done. Sadly, the way things tend to work in Washington, they'll be done right tail end of 2025 and we'll go through all year not knowing what the laws are.

Annie: [00:50:49] So right, which makes tax planning very difficult.

Roger: [00:50:52] Yeah, because they tend to only get things done at the last minute.

Annie: [00:50:56] Right. It's going to be a crazy couple of years.

Roger: [00:51:01] Yes. We'll never get away from politics, unfortunately.

Annie: [00:51:04] Well, we talk about this year, end extenders all the time and, you know, government shutdowns and how are we going to get out of the deficit. And, you know, there's always something going on. It's it's I'd like to be in one of those back rooms and hear these conversations from time to time.

Roger: [00:51:20] There must be a lot smarter than I am because, like I said, they go back in that room and come out and tell you how something that you thought raised money cost money and vice versa. I don't get it. There is one bit of good news before we get off today that let's hope it's a permanent thing. And I think we mentioned this gentleman's name on our last podcast, Ken Corbin. I've got another quote from him or another statement from him, the Practitioner Hotline, which a lot of us use on a regular basis. We mentioned that the IRS has added some new people not related to the Inflation Reduction Act. They were already hiring and attempt to improve customer service. He quoted that there the week that he quoted. I don't remember if it was last week or the week before those phones were being answered in an average of 10 to 12 minutes. So the wait time has significantly declined because of the people that they have put on the phones. Now, he did qualify that answer by saying he's not sure if that's a permanent or a glitch or a blip in the system. So but so we'll see. But hopefully that's a sign that, at least for us, the practitioner hotline is getting answered quicker. And as he mentioned earlier, there's 5000 new IRS trained employees that are going to go on the general phone lines by Presidents Day. So hopefully we'll see some improvement in the customer service side of the IRS. And again, this has nothing to do with the Inflation Reduction Act and the $84,000 agents who, by the way, were putting in that bill to pay for something else, because. Exactly, somehow they knew how these 84,000 agents would work and what they would do and how much more tax they would collect because they were there. And that made up number allowed them to give us a lot of the energy credits that we got. So there you go. But this is unrelated to that. So hopefully that's a good sign. At least that last we.

Annie: [00:53:23] Crossed, right? Yeah.

Roger: [00:53:25] And anecdotally, we've heard from people who have called and said, and one guy was funny. He said I wasn't ready when they answered because I didn't think they would be there for another 30 or 40 minutes. So I held it up because I had to prepare my question because I thought I had another 30 minutes to be ready for it. So they are doing a better job. Let's hope that continues.

Annie: [00:53:43] You got it. All right, Roger. Well, we got through doctors, we got through credits. We got through how the government is working. We got through some outlook. So I hope everyone enjoyed this podcast. We will be coming back to you with several more topics, including the Secure Act in the near future.

Roger: [00:54:00] So yeah, and encourage your friends if you like this and you think this is good information, please encourage your friends wherever they get their podcast. Again, this is the Federal Tax Update podcast. You can subscribe to it, you can say nice things about us. If you don't want to say nice things about us, go find some other podcast to complain about. This is as good as we get, but we hope you enjoy this. We enjoy doing it. We'll be back with another podcast in a few weeks and. Good luck with tax season. It's. It's here.

Annie: [00:54:32] It's here. It's off and running now.

Roger: [00:54:33] Yeah, we're in the middle of it, Manny. Thank you. And we just don't know. Andy's in the Dallas area. This is the first day she's been able to move around because of the ice and snow.

Annie: [00:54:42] So I've caught a cold. Excuse me for my horse voice and coffee. I've got a cold, but my kids are back in school, so this is wonderful news. We were snowed in for nearly a week. Yeah. Tough week.

Roger: [00:54:53] Yeah, tough week. But good luck with tax season. Thank you for joining us and we hope to see you again in a few weeks with another podcast. Thank you, everybody.

Annie: [00:55:03] Bye.