Tax happenings in 2022, and what to expect in 2023
Sunday, January 01, 2023
The tax year is over. Long live the tax year.
Taxes are, if nothing else, persistent. Sure, there are a few (or more) changes every year, even if it's only inflation adjustments. But even in years when the changes are negligible, they are back, starting to add up on the first of every January.
That's why 2023 is the first By the Numbers honoree of this new year.
The transition from an old to a new tax year is also the focus of this post. It's a look at six tax matters that affected or at least fascinated us in 2022, along with what they might bring us and our taxes in 2023.
2022: IRS operations. 2022 was the year we were supposed to get back to normal after the COVID-19 pandemic, both from health and tax perspectives. So much for that. The coronavirus effects lingered last year in both areas, and will do so for a while.
Yes, we did return to a pre-pandemic tax season. Tax Day was in April. The extension deadline was mid-October. But even though the Internal Revenue Service required us to get our tax material to them by then, the agency didn't always reciprocate.
A massive tax filing backlog, mostly of paper returns, remained through much of 2022. The IRS hired more people, doubled down with existing staff, and made some progress. It announced in December on its mission critical functions webpage that —
"We are opening mail within normal time frames, and we’ve processed all paper and electronic individual returns in the order received if they were received prior to April 2022 and the return had no errors or did not require further review.
As of December 9, 2022, we had 2.5 million unprocessed individual returns received this year. These include tax year 2021 returns and late filed prior year returns. Of these, 1.5 million returns require error correction or other special handling, and 1 million are paper returns waiting to be reviewed and processed. This work does not typically require us to correspond with taxpayers, but it does require special handling by an IRS employee so, in these instances, it is taking the IRS more than 21 days to issue any related refund."
In its annual financial report for the 2022 fiscal year that ended last Sept. 30, the IRS said it received more than $4.9 trillion in tax revenue, and distributed $642 billion in federal tax refunds and other outlays.
But a separate report from the Government Accountability Office (GAO) found continuing problems with tax refund delays, backlogs of unprocessed returns, and taxpayer service.
The GAO examination noted that the agency's focus last year on backlogs meant that its service operations, primarily its phone hotlines for taxpayers and tax professionals, suffered. Most of those phone calls went unanswered.
What to expect in 2023. The backlog issue is getting resolved. That will be helped by the $80 billion in added IRS funding approved last year, some of which will go to hiring (mostly tax examiners) and updating IRS systems. In addition, the pandemic has eased, or at least is no longer top of mind for Congress. That means we shouldn't see in 2023 any new economic impact payments or special delivery of tax credits, which added to, and disrupted, the IRS' normal work flow. Will that be enough for the IRS to fully staff its phone lines? My crystal ball is still hazy here.
2022: No tax extenders. The House and Senate followed their usual holiday schedules and waited until Christmas week to wrap up necessary legislation. They passed, and President Joe Biden signed, an $1.7 trillion omnibus measure that fund the federal government through fiscal year 2023, which ends this coming Sept. 30. While there were some additions to the bill, notable the retirement package that's later in this list, one notable tax component was missing. Congress did not pass any tax extenders.
At the end of each year, Congress usually agrees to a long list of tax provisions that technically are temporary. They must be extended, hence the name, of they will expire. The decision to let extenders lapse is not unheard of; it happened at the end of 2021. But it's still unusual, and has left some lawmakers, industries, and lobbyists a bit discombobulated.
True, many energy extenders, especially on the green or alternative energy front, were taken care of in last year's Inflation Reduction Act. And they were extended for five and even 10 years.
But some popular individual tax provisions, especially among Democrats on Capitol Hill, didn't get new life. They had hoped the American Rescue Plan Act's (ARPA) expansion of the Child Tax Credit (CTC), which was available to claim on 2021 taxes, would be renewed in an extenders bill for tax year 2022 and beyond.
Under that COVID-prompted expansion, the family friendly CTC was increased to $3,000 (and $3,600 for children younger than six) per child and was fully refundable. In 2022, it reverted to a maximum credit of $2,000 per child, with only $1,500 of that being refundable in 2022. The refundable amount goes up, thanks to inflation adjustments, to $1,600 in 2023.
Other COVID inspired individual tax breaks that were on supporters' extenders wish list were the larger Earned Income Tax Credit (EITC) and Child and Dependent Care tax credits, as well as a charitable tax deduction for nonitemizing taxpayers.
The expiration of 100 percent bonus depreciation option was high on many business taxpayers' and Republican policy makers' Christmas extenders legislative list. They got tax coal instead. It's now back to 80 percent depreciation of immediate assets, with the remainder spread across the asset's life.
They also had hoped that a couple extenders related to business expense deductions, notably research and development (R&D) expenditures, that expired at the end of 2021 might be reinstated in a 2022 extender package. Again, didn't happen.
What to expect in 2023. Republicans were the more enthusiastic about renewing the business tax provisions, but there was some bipartisan support. With the GOP in narrow control of the House, these expired tax breaks could get new life, even with the Senate still holding a Democratic majority.
The outlook for the individual expired extenders, however, is not as good. Again, the Republican House (and tax writing Ways and Means Committee) likely will not move such legislation. My prediction is that the CTC, EITC, and dependent care credits will stay at their lower levels for the next two years.
As for the larger tax extenders list, 2023 could be the year that this inefficient tax policy process ends. It's always been a budget trick, extending the breaks only for length of time that meets or keeps funding numbers as more acceptable level. It's generally easier to find resources to offset short-term extensions rather than long-term extensions or permanent laws.
OK, who am I kidding? Some of the expired extenders are pet projects of Congressional leaders. Note the depreciation schedule for racehorses, favored by Senate Minority Leader Mitch McConnell of Kentucky that expired at the end of 2021. There likely will be some sort of extenders bill in 2023. The biggest question is how soon it will come up in the new 118th Congress and how much give and take will come from each side.
2022: Retirement changes. We're all getting older. This fact has prompted alarm among those worried about how individuals and Uncle Sam will handle this growing demographic's post-work financial needs. That was address in part by the much anticipated, bipartisan SECURE 2.0 bill.
This latest SECURE — Setting Every Community Up for Retirement Enhancement — law was an expansion of a similar landmark measure (hence the 2.0 suffix) in 2019. The 2022 version was part of the omnibus bill and, among other things, —
- increases catch-up amounts for more retirement plan participants age 50 or older;
- expands workplace retirement plan automatic enrollment programs;
- streamlines workplace plan administration, especially for smaller companies;
- transforms (in 2027) the Saver's Credit to a Saver's Match; and
- bumps up the required minimum distribution (RMD) age even more, from 72 to 73 starting in 2023 and, via gradual increases over 10 years, to 75 by 2033.
But, as happens with all legislation, there is some dissent. The biggest complaint is that many of the changes will help folks who already are able to save for retirement. There is concern that millions of lower-income workers who already have little excess money after meeting necessary expenses still won't contribute to retirement accounts.
"The SECURE 2.0 bill, although well intentioned, is … being sold as a solution to the retirement crisis — but it is really a victory for brokers, with gaping holes leaving behind about 60 million workers," writes Teresa Ghilarducci in a Financial Advisor article. "But because it’s so hard to save any money on a low income, these changes will do little to help the working poor save more for retirement; they also seem unlikely to help manual laborers who often must retire earlier after a life of hard, physical work."
Ghilarducci also cites workplace plan portability and inefficiency issues. "After age 25, workers have, on average, six different employers. Women are twice as likely to cycle in and out of the labor force. Every move means withdrawing retirement money, juggling multiple accounts in old age, or risking switching to an employer without a plan," she writes.
What to expect in 2023. Ghilarducci supports another bill, the Retirement Savings for Americans Act of 2022 (RSSA). Its sponsors, Sen. John Wright Hickenlooper (D-Colorado), and Reps. Terri Sewell (D-Alabama) and Lloyd Smucker (R-Pennsylvania), can and likely will reintroduce their proposal in the new Congress. Don't expect it to go anywhere.
After two major retirement acts within four years, Congress won't be in a hurry to act further. They'll be content to let the SECURE provisions take effect over the years and if issues arise with some of the changes, make minor corrections.
Most lower-income individuals will continue to rely on Social Security for their post-work income. That raises the question of how long they, and all of us, can count on full federal retirement funds.
The 2022 Social Security Trustees report says that retirees will start receiving a reduced benefit in 2034 if Congress doesn't fix the program's funding issues. That means, per the report, retirees then will only receive 77 percent of their full benefits.
The Biden Administration supports increasing the amount of workers' income that is subject to the Social Security Federal Insurance Contributions Act payroll tax. For 2023, earnings up to $160,200 are subject to the 6.2 percent tax. The White House has proposed increasing this wage cap to $400,000.
Republicans, on the other hand, prefer limiting the growth of Social Security and other so-called entitlement programs.
While there's bipartisan agreement that action must be taken to shore up Social Security, there's no clear path, especially since Capitol Hill leadership is split between the GOP in the House and Democrats in the Senate. That means gridlock, at least in the near term.
Nothing will happen on the Social Security funding or benefits fronts for two years. But the delay could undermine Social Security's financial status even more, forcing more dramatic action when one party does have the votes to make its preferred changes.
2022: Student loan relief. The financial burden facing college students and their families came to a head in 2022. Biden took executive action in 2022 to forgive up to $10,000 in federal student debt for borrowers who earned less than $125,000 ($250,000 for households) in 2020 or 2021. The loan cancelation amount is $20,000 for Pell Grant recipients, who generally are from low-income households.
That relief, however, is on hold pending a Supreme Court review of one of the six lawsuits filed by conservative groups challenging the president's action. The country's highest court will hear oral arguments on Feb. 28.
So what's the tax connection? In most cases, forgiven debt is counted as federal taxable income. However, the ARPA included a provision that exempts Uncle Sam's cut of income taxes on student loan forgiveness when/if the Biden plan is implemented before 2025.
The state tax outlook is not as positive. Most tax income and some of those states are either undecided or plan to tax student loan forgiveness as earned income. So far, the state tax on canceled debt law still applies in Arkansas, California, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin.
What to expect in 2023. There's no way I'm predicting what the Supreme Court will decide when in the student loan forgiveness case.
I'm a little more secure in saying that state, always on the lookout for more revenue, will hold firm on their tax due on canceled student debt.
And there already is some help for students, regardless of the court ruling(s), who still owe and pay student loans. SECURE 2.0 says that beginning this year, employers can make contributions to employees' workplace provided retirement plans that match the workers' qualified student loan payments.
2022: State and local taxes limit. Taxpayers who face high income and/or real estate taxes were optimistic that with Biden in the White House and Democratic control of the Congress, the state and local taxes (SALT) $10,000 itemized deduction cap was on its way out.
Sure, lots of states have enacted workarounds, but those are for business filers. Individual taxpayers in many states — primarily residents of Democratic ones, but also those in some spots in conservative red states — still can't claim more than 10 grand in SALT on their federal Schedule A.
The cap remains. Its possible elimination or increase fell victim to legislative deals made to pass other pieces of Biden legislation, notably the Build Back Better bill that morphed into the Inflation Reduction Act, through Congress.
Anti-SALT cap folks also took a hit in the courts. On Tax Day 2022 (yeah, I love tax irony), the Supreme Court of the U.S. (SCOTUS) decided not to review an appellate case that upheld the $10,000 limit on individual federal income tax deductions.
New York, Connecticut, Maryland, and New Jersey officials had sued the United States, Treasury, and the IRS violated the Constitution's principles of federalism under the 10th and 16th amendments and exceeded Congress' taxing power. The four states also argued the SALT cap unlawfully impeded them and other states from exercising their sovereign powers.
Federal appeals courts rebuffed the states. SCOTUS, with its refusal to hear the states' appeal, left them and their taxed residents to deal with the cap until its expiration in 2025, unless Congress changes the law sooner.
What to expect in 2023. Full disclosure: I hate the SALT cap. I love my house, but my property taxes are horrific and the easing of the deduction limit would have helped lower my taxes in at least a couple of years since it became law as part of the Tax Cuts and Jobs Act (TCJA) of 2017.
But life and taxes aren't fair. And in 2023 all of us who might be able to use more itemized state and local tax write-offs will just have to deal with it. The GOP House is not going to act on any proposal that would undercut the party's landmark tax reform bill.
2022: Trump taxes are revealed. Another person who might have lost some tax savings due to the SALT cap was the man who signed it into law, then president Donald J. Trump. His federal tax returns from 2015 to 2020 were, after a lengthy court battle that also went to the SCOTUS, released to the public.
There are many things to be learned, or speculated about, in the filings. But one of them was that Trump paid at least $5 million in state and local taxes each of those six tax years. Starting with the 2018 return, his tax SALT deduction was, by the new tax law, capped at $10,000.
But, say experts who've looked at the returns, Trump may have been able to sidestep the SALT limit by using the aforementioned workaround for his business entities. Doing so would have given him a bigger federal tax break.
What to expect in 2023. The decision by the Democratic House Ways and Means Committee has turned us all into ad hoc tax auditors. We won't see any other years' returns in 2023, but our inspection of Trump's already revealed taxes will continue well into this new year.
So will the political ramifications. Republicans, set to take over House control this coming week, pledge to retaliate. Rep. Kevin Brady (R-Texas), the retiring W&M minority leader, called the publication of the former president's federal filings a "dangerous new precedent."
"Every American ought to be frightened by this precedent, because as I said, the enemy’s list is back, and you may well find yourself on it," Brady said, citing what he called lawmakers' now "nearly unlimited power to target private citizens." It could be used in the future, he warned, to embarrass or destroy someone politically.
Some of the more hardline rightwing GOP members are threatening to go after returns filed by Biden family members, specifically their favorite target, the president's son Hunter Biden.
Right now, however, that looks like just talk. Instead, once back in committee control, House Republicans most likely will use their subpoena power in various other investigations. The list includes examinations of U.S./Mexico border security, the withdrawal of troops from Afghanistan, COVID-19's origins, and Hunter Biden's business dealings (and laptop), if not specifically his taxes.
Some Democrats, who still control the Senate, say two can play that game. Possible inquiries on that side of Capitol Hill could focus on corporate fiscal inequality and corruption, cryptocurrency, and pharmaceutical companies' business and tax actions.
What does all this mean to us, as citizens and taxpayers? Nothing, in the sense that gridlock until the 2024 election will prevent much actual legislating by lawmakers. They'll be too busy pontificating and pointing fingers.
But that inaction might not be so bad.
As long as we can turn off (or at least down) our televisions and log out of social media, we might be able to make some of our own tax moves, unaffected by Congressional changes, and return to a relatively more normal place.
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