This year, inflation in the U.S. hit a four-decade high as prices hit a 9.1% increase compared to last year.
As Americans try to navigate these tough times, it’s more important than ever to know any changes in tax policy that might arise. Tax laws like the Inflation Reduction Act are constantly evolving to help resolve issues, which can directly affect your bank account.
In this article, we’ll look at several issues and policies you need to look out for.
Keep reading to learn more.
Student Loan Forgiveness
Since the day that Joe Biden stepped into the oval office, student loan borrowers have been waiting to see if he was going to follow through with his promise to cancel $10,000 of student loans for each borrower. On August 24, 2022, he made his plans official for up to $20,000 per borrower.
Loosely defined Individuals under the income level of $125,000 and families under $250,000 are eligible (there are adjusted gross income rules that play into this). Pell grant recipients can receive up to $20,000 in student debt cancellation, while those that are non-Pell borrowers can receive up to $10,000 in debt cancellation.
The policy also has extended forbearance until the end of 2022, meaning those who still have more student debt don’t have to make payments until 2023 begins.
What Does It Mean For Taxes?
Biden signed the American Rescue Plan in March 2021 which included a provision stating that all student loan forgiveness is tax-free at the federal level.
Although there won’t be federal income taxes to forgiven student debt, you might still owe income tax to the state depending on how much debt is forgiven (and some states are considering laws to tax the debt forgiveness). If you fall under this category, you may need to save some extra money for this.
In other situations, most of the forgiven debt is usually taxable. Here’s an example of how forgiven debt worked before Biden’s tax update.
If someone had $10,000 of loans cancelled, it would add that $10,000 to their taxable income and would receive a 1099C if the debt was cancelled. If you’re under the 20% federal tax bracket, this would result in another $2,000 in taxes.
So you wouldn’t need to pay back the $10,000, but you would owe $2,000 in taxes.
But with unforeseen events like the pandemic, further exceptions were made and debt forgiveness is not taxable federally.
Inflation Reduction Act
The Inflation Reduction Act signed by President Biden on August 16, 2022, helps fund clean energy investments and lower prescription drug costs.
Although it isn’t as big as the previous version (Build Back Better), it will still have a significant effect on the citizens of America. It takes measures to:
- Lower the cost of drugs for people with Medicare
- Create cleaner air and lower emissions by 40% by 2030
- Create stable healthcare premiums
- Raise savings on power bills for most Americans
Despite its name, it won’t be able to lower inflation immediately. Citizens probably won’t feel the impact for a while. It’s not a bill about 2022 – it’s more about 2023, 24, and 25. It will fight against persistent inflation in the future.
In reality, there’s little that policymakers can do to fight against inflation overnight.
What Does It Mean For Taxes?
There are several implications for your taxes from the Inflation Reduction Act.
For taxes and IRS funding, it includes the following:
- 15% minimum taxes on corporations that have over $1 billion in revenue
- 1% excise tax on corporate share buybacks
- Another $79 billion in additional funding from the IRS over 10 years
For clean vehicle credits, you can receive tax credits up to:
- $7,500 when you purchase a qualified vehicle that is commercially clean
- $40,000 if the vehicle is over 14,000 pounds (for commercial electric vehicles)
- Whichever is lesser, $4,000 or 30% of the price of used electric vehicles
For the Residential Clean Energy Credit, the amount is 30% for 2023-2032. In 2033, it goes down to 26% and again goes down to 22% in 2034.
The Nonbusiness Energy Property Credit is also extended through 2032. For this, the credit will equal 30% of all costs of eligible home improvements.
There are also extra credits that can be given for:
- Home energy audits
- Exterior doors
- Exterior windows
- Qualified energy properties like air conditioners
- Heat pumps
Employee Retention Credit (ERC)
Although this one isn’t new, it is still marketed aggressively by third-party vendors.
After some businesses came to a screeching halt during the COVID-19 pandemic, the government introduced the Employee Retention Credit. This helped businesses keep their staff until the economic storm passed. It provides employers with big payroll tax credits for qualified wages paid to employees.
It was originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act signed in 2020. It was extended in 2021 and again in 2022.
The amount of credit that a business can get is equal to the percentage of qualified wages that an employer pays its employees, which includes some health insurance costs. It has gone through several changes since its inception, but here are the current rates.
Employers can claim a refundable tax credit of up to 70% of the qualified wages paid by the employer. It can reach a maximum of $7,000 per employee per quarter.
Although the Act was sunset in 2021, eligible businesses can still create claims for the ERC through 2022.
The businesses that qualify for the ERC tax credit include almost all private-sector employers that lost a lot of business because of COVID-19.
IRS Taxpayer Services and Penalty Relief
The IRS is still severely backlogged with unprocessed tax returns and correspondences. There are also still issues when it comes to contacting the IRS.
Although it is good that the IRS has given a notice that they will provide penalty relief for last year’s tax returns, we still don’t know much about the scope of the relief or the due date.
Cryptocurrency continues to be a hot topic, particularly because of the volatility of that market. When it comes to cryptocurrency, there are some unique tax rules.
For those that don’t know, crypto or virtual currency is a digital representation of value that does not stay within the bounds of U.S. or foreign currency. People have turned to them for their security and encryption.
When it comes to taxes, the IRS has marked them as property in the IRS Notice 2014-21. Because of this, they are subject to capital gains and losses taxes.
There are some important things to note here. If you hold any form of this virtual currency for more than a year, the profits you make are considered long-term capital gains. This means you’ll be taxed as such. If you held them for less than a year, they are considered short-term capital gains and are taxed at the normal income rate.
In 2019, the IRS finally released new guidance on crypto in 2014. The tax laws regarding cryptocurrency are still vague, so if you have any questions regarding them, make sure to reach out to us.
Make Sure You’re Getting the Most Out of Your Taxes
We know better than anyone how confusing and time-consuming it can be to deal with the ever-changing nature of tax laws. But with new initiatives like the Inflation Reduction Act, Employee Retention Credit, Student Loan Forgiveness, and more, it’s crucial to know how they all affect you.
The good news is you never have to do it alone. If you’re a physician or healthcare professional, our innovative accounting model can help you get the most out of your taxes.
We provide full-service tax preparation, documentation, and proactive strategies so that busy professionals like you can save time while saving a significant amount. Start saving today and reach out to us now!