Sunday October 1, 2023
Protect Yourself From Natural Disasters
1. Key Documents — Your initial priority should be protecting important documents. This may include recent tax returns, Social Security cards, birth certificates, deeds, insurance policies and medical records. These documents should be kept in a waterproof container in a secure location. You may want to make copies of the documents and store the digitized files on a portable external hard drive kept in a safe deposit box or entrusted to an individual in a different area.
2. Records of Your Valuables — Many individuals own art, collectibles or other types of valuable personal property. It is recommended that you compile a list of your valuables and have photos or videos to catalogue the items. These photos or videos will help you support your claims for insurance proceeds or an applicable tax deduction. The IRS offers disaster loss publications for both individuals and businesses that need guidance in making a list of valuables. An individual should refer to Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property). If you own a business, you may want to review Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook.
3. Reconstructing Records — If you are a victim of a natural disaster, you may lose important financial or tax records. These could be required for federal assistance or insurance reimbursement. Many types of reimbursement require an accurate estimate of the amount of the loss. The "Reconstructing Records" webpage on IRS.gov is an excellent starting place if you need to rebuild your records.
4. Employer Fiduciary Bond — Employers who use a payroll service provider should verify there is a fiduciary bond in place. If the payroll service provider is in the natural disaster region, the organization may suffer a major business loss and default on its obligations. An employer may obtain a fiduciary bond that will protect it in the event of a disaster that causes the payroll service provider to default.
5. IRS Tax Relief — Following a declaration of a disaster zone by the Federal Emergency Management Agency, the IRS frequently postpones tax filing and payment deadlines, more information is available on the IRS Disaster Relief page on IRS.gov. If you are in a federal disaster zone, you may qualify for filing and payment relief. Individuals who are not in the covered disaster area but are impacted by a specific disaster may still qualify for relief. If you wish to speak to a trained IRS specialist, you may call 866-562-5227 for answers to disaster-related concerns.
Is IRS Direct File Coming?
The Inflation Reduction Act authorized $15 million to study the feasibility of the IRS developing a direct tax filing system. A government-linked not-for-profit entity called MITRE Corp. conducted an initial survey to determine if taxpayers are interested in this IRS-provided tax software system.
IRS Commissioner Daniel Werfel noted the MITRE study had not been initiated by the IRS. However, he stated, "MITRE is a very credible organization" and "we will incorporate the findings from the MITRE study into our final study."
The IRS has operated the Free File program with commercial software providers since 2003. However, it has been subject to increasing criticism. While 70% of taxpayers are eligible, only 2% of taxpayers use Free File to prepare their tax returns. In addition, some commercial providers have withdrawn from the program because they were accused of using the Free File program to direct taxpayers into selecting options that required payments.
The survey covered three different options. It asked taxpayers whether they would prefer to use existing commercial software, a direct-filing system with the IRS or an IRS "Return-Free" filing system.
The most popular option proved to be Return-Free filing, especially with younger individuals. Just over half of the poll respondents were open to using an IRS system if the state returns were included. However, if state returns were not included, most individuals said they would stay with the commercial software.
Given a scenario where the IRS populates the return with W-2 and Form 1099 information, interest in an IRS system rises substantially. According to the survey, 73% survey recipients indicated they would use this type IRS software.
Some taxpayers who have been using commercial software were skeptical. Their comments ranged from "I cannot think of a single thing I trust the IRS to do correctly or efficiently" to the IRS "does not have my best interest at heart." These individuals seem to indicate a plan to stay with commercial software, even if the IRS does develop tax return software.
Finally, the study concluded, "Tax filers want fast, easy and free. However, they will exchange cost over convenience showing willingness to pay for commercial service when it comes to filing federal and state returns at the same time."
Editor's Note: There is solid support in Congress for developing an IRS filing option. Members of Congress observe that many countries offer no-cost government software. However, the survey shows a strong interest for the IRS to develop both federal and state tax-filing software, which will be a major challenge.
Colleges and Universities Support Tax-Free Pell Grants
In a May 5 letter to Representative Lloyd Doggett (D-TX) and Representative Mike Kelly (R-PA), the American Council on Education (ACE) and a coalition of higher education groups "strongly endorsed" the Tax-Free Pell Grant Act.
On April 28, Representatives Doggett and Kelly introduced the bill in the House of Representatives. It would repeal income taxes on Pell Grants. This would help hundreds of thousands of low-income recipients. It also would expand their access to the American Opportunity Tax Credit (AOTC).
For the past three decades, Pell Grants have often been used for room and board and other non-tuition costs. These amounts are taxed as passive income. ACE stated, "The tax law could be made simpler while allowing low-income students to get more of this crucial financial aid if Pell Grants were no longer taxable."
Pell Grant recipients also have a challenge because of the calculation of the AOTC. If a student receives a Pell Grant and uses it for non-cash tuition expenses (such as room and board), it reduces the student's ability to benefit from the AOTC. The student must calculate the amount of the Pell Grant to include in taxable income and determine the tax liability for that amount. This complicated calculation determines if the student saves taxes by claiming part of a Pell Grant as taxable income and also if they qualify for the AOTC.
The letter continues, "Fixing the AOTC-Pell interaction issue by repealing the taxability of Pell Grants and the AOTC Pell offset advances efforts to simplify the tax code by ensuring low-income students access a tax benefit they qualify for and which many of their peers are utilizing and makes it easier for these students to navigate their tax obligations."
Representative Doggett published an April 28 press release and noted, "Simplifying our tax code means more in-pocket financial assistance for students seeking higher education." The bill is designed to also expand permitted expenses to include computers and childcare.
Rep. Kelly continued, "Pell Grants are an important way for more lower-income Americans to get an education and work toward a successful career." He also emphasized that the expanded ability to use Pell Grants for childcare would be particularly important for single mothers who desired to become educated and secure jobs that would provide long-term financial stability.
In February, Steven Bloom of the American Council on Education noted, "The Pell Grant has bipartisan support, and the notion that this low-income grant… should be subject to taxes is bad tax policy and inconsistent with the purpose of the Pell Grant because you are giving with one hand and taking with another."
The letter urges House and Senate tax-writing committees to repeal the taxation of Pell Grants and to address the Pell-AOTC interaction issue. It emphasizes that Pell Grants are a benefit for low-income students.
Applicable Federal Rate of 4.4% for May — Rev. Rul. 2023-9; 2023-19 IRB 1 (15 April 2023)
The IRS has announced the Applicable Federal Rate (AFR) for May of 2023. The AFR under Sec. 7520 for the month of May is 4.4%. The rates for April of 5.0% or March of 4.4% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.