March 2022 Tax Updates and Tips

March 30th, 2022


Property taxes are a major source of revenue for local tax jurisdictions. These taxes are largely based on the appraisal of home values. Given the current real estate market, there is a refined focus in this area. Since taxing authorities set their own schedules for assessment, taxpayers in communities with frequent assessments may see gradual property tax increases while those who reside in communities with infrequent assessments may see sharper but less frequent changes. If you receive an unexpected increase in property tax, there are a few things you can do to appeal the assessor's computation. Instructions for the appeal process should be included in the notice of assessment. The data used to make the assessment is often available on the locality's website. If not, this information can be requested from the taxing authority. Confirm that characteristics such as the size, floorplan, and other details are correct. Review the values of similar homes in your community using online realty listings. Compare the value of the homes presented with the assessment of your property value. Since your analysis will be taking place after the property tax assessment, you have a stronger argument for tax reduction given that your information is more current and applicable. Assuming your findings support a reduction in your tax bill, this updated information should be presented in your appeal. 


IRC 121 allows exclusions of gain on sale of a primary residence in the amount of 250,000 for single taxpayers and 500,000 for those filing joint returns. Historically, this exclusion amount has been sufficient to keep many taxpayers from having to pay tax on the sale of their main homes. However, as home prices continue to skyrocket, so does the potential for gains exceeding the statutory exclusion amount. This is especially important for sellers of older homes that have increased significantly in value. Investment in home improvements can reduce the gain paid on the sale of a principal residence. While home improvement records may have not been previously useful, in the current housing market, proof of the money you put into your home could be very impactful.


During the 2021 calendar year, many taxpayers received prepayments of their 2021 child tax credit according to the American Rescue Plan of 2021. For this period, the credit increased from $2,000 to $3,000 for children over 6 and from $2,000 to $3,600 for children under the age of six. These prepayments will be reconciled on the 2021 tax return (filed in 2022), even for individuals who wouldn’t ordinarily file a tax return. The IRS mailed Letter 6419 to help taxpayers confirm the total amount of the prepayments they received. In some cases, some of the advance child tax credit payments will need to be repaid. Repayment protection is available for individuals under certain income levels. 


In a February session of the Senate Finance Committee, top officials from the IRS, Government Accountability Office, and the AICPA convened to discuss the current challenges faced by the IRS. In addition to staff shortages, the IRS acknowledged being further hampered by technology that is not modern enough to accommodate current needs. Budget cuts have further reduced the Service's ability to hire more staff or update equipment. The ambiguity surrounding the implementation of tax law changes has resulted in increased inquiry from the public, further straining an already distressed Service system. The IRS is currently looking into how to improve methods of communicating with taxpayers while maintaining security. The IRS has walked back its requirement for taxpayers to verify their identity using personal biometric data but has maintained the security of taxpayer data as a high priority. An online chat feature has been discussed, but secure methods of implementation are still being explored. 

The IRS has noted that a staff-supported automated callback system could help improve dialogue between the IRS and the public. Given that only 11% of incoming calls are currently being answered by the IRS, following up on outstanding tax notices has proven to provide significant challenges to taxpayers. The IRS has recommended that taxpayers take advantage of installment agreements and offers in compromise which can be applied for online. The Service continues to solicit funding from governmental agencies to improve operations. 


As business owners develop long-term strategies, several tools can be considered to achieve estate and income tax savings. Firms in certain industries may be able to benefit from the qualified small business stock exemption. Investors in QSBS entities may be able to exclude substantial amounts of gain upon disposition. There are also a variety of trusts that can help shelter the assets of small business owners from income and estate tax. Spousal Lifetime Access Trusts help reduce estate tax and provide benefits to the family member for whom a trust is set up. Irrevocable grantor trusts can also provide family benefits while shielding assets from income tax. Many wealthy families set up private foundations to direct their charitable endeavors. The initial funding of these private foundations is frequently generated through the disposition of business assets. For those who aren't interested in the administrative requirements of the private foundation, contributing to a donor-advised fund might be the best way to go. Donors are eligible for immediate tax deductions, even when the fund doesn't make charitable donations until much later. 

For additional information on these tips and strategies, please reach out to a member of the Siegfried team

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