Federal tax news for individuals

What's Happening in Congress with Proposed Tax Laws?

The $3.5 trillion "human infrastructure" bill is progressing through Congress. The House Ways and Means Committee voted September 15 to advance legislation that would raise taxes on wealthy Americans and corporations. The proposed law, called the Build Back Better Act, will help fund President Biden's plans for childcare, education, housing and green energy. Among the many provisions are an increase in the corporate tax rate to 26.5%, an extension of the temporary Child Tax Credit expansion and an increase in the top individual tax rate from 37% to 39.6%.

The next steps are House negotiations, a floor vote and further negotiations with the U.S Senate and the White House. However, the bill and the separate $1 trillion traditional infrastructure bill face challenges. Some House Democrats have insisted that members vote on both bills (infrastructure and human infrastructure) threatening they wouldn't vote for the infrastructure measure if both bills aren't taken up at the same time.

Separately, Senate Finance Committee Chair Ron Wyden (D-OR) unveiled draft tax legislation for proposals being discussed in Congress. According to a press release, the law would close loopholes that allow high-income investors and mega-corporations to use pass-through entities, primarily partnerships, to reduce their tax bills.

Wyden stated that "70% of partnership income accrues to the top 1%." He added that "current partnership tax rules are too complicated for the IRS to enforce, turning partnerships into a preferred tax avoidance strategy for wealthy investors and mega-corporations." The IRS audited about 0.03% of partnership returns for tax year 2018. To read the release click here.

Keep in mind that these proposals are subject to change and any proposal would have to be approved by both houses of Congress and signed by the President in order to be enacted.

COVID-19 Testing and PPE Are Eligible Medical Expenses

The IRS is reminding taxpayers that the cost of home testing for COVID-19 is an eligible medical expense. This means that the cost of at-home testing is potentially tax deductible or can be paid for or reimbursed under health Flexible Spending Arrangements (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) or Archer Medical Savings Accounts (Archer MSAs).

In addition, the costs of personal protective equipment (PPE), such as masks, hand sanitizer and sanitizing wipes, used for the primary purpose of preventing the spread of COVID-19, are also eligible medical expenses. Click here for more details.

Disaster Victims May Qualify for Tax Relief

Many Americans have become victims of weather-related disasters in recent months. In a tropical storm, wildfire, earthquake or other emergency, victims may need government help. When the damage from a sudden event warrants federal assistance, the U.S. President may classify it as a federally declared disaster.

That declaration gives the IRS the authority to let affected victims postpone certain time-sensitive tasks such as filing tax returns and making tax payments. In recent months, these victims include those in parts of Alabama, California, Kentucky, Louisiana, Michigan, Mississippi, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee and Texas. Click here for details about the specific relief in your area.

Taxpayers may also be able to claim a casualty loss on their tax returns. Who is an "affected taxpayer?" Generally, it's a taxpayer located within the disaster area, or whose necessary records or tax preparer's records are located within the area.

More Electric Vehicles Are Eligible for a Valuable Tax Break

The tax code provides a credit to purchasers of qualified plug-in electric-drive passenger vehicles and light trucks. For qualifying vehicles acquired after December 31, 2009, the credit is $2,500, plus an additional amount based on battery capacity that can't exceed $5,000. Therefore, the maximum credit amount is $7,500. This credit phases out over six quarters beginning when a manufacturer has sold at least 200,000 qualifying vehicles for use in the U.S. (determined cumulatively for sales after December 31, 2009).

The IRS has added more vehicles to its list of those eligible for a federal tax credit. Here are the new eligible vehicles, along with their credit amounts: the 2022 Audi e-tron Sportback, Audi e-tron, Audi A7 TFSI e Quattro, and Audi Q5 TFSI e Quattro ($7,500); the 2022 BMW 330e, BMW 330e xDrive, BMW 530e, BMW 530e xDrive, BMW 740e xDrive ($5,836); and the 2022 Lincoln Aviator Grand Touring ($6,534). For a list of all qualifying vehicles, click here.

Tax Court Rules an Ex-wife Is Entitled to "Innocent Spouse Relief"

In general, spouses filing a joint federal tax return are both liable for the tax owed. But they may qualify for "innocent spouse relief" from joint liability. In one case, the U.S. Tax Court found an ex-wife was entitled to innocent spouse relief even though she knew her joint return taxes weren't being paid while she was married.

The court cited several reasons including that she would suffer economic hardship if relief wasn't granted. In addition, she was no longer married to her ex-husband when the IRS issued its final determination. The ex-husband entered into multiple installment agreements with the IRS, but his ex-wife didn't know that he didn't make all the payments. (TC Summary Opinion 2021-29)