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If you, like me, assumed that the dog days of summer would mean a lull in tax news, you were proved wrong this week.
My family and I had just settled into a French café—I’m on vacation—when I got a notification that the Supreme Court had issued its decision in Moore v. U.S. (spoiler alert: they didn’t upset the tax code). (☆) My email lit up as a flurry of reactions followed—you can scroll down to read more about the decision and the reactions.
A few minutes later, the IRS announced plans to deny tens of thousands of improper high-risk Employee Retention Credit (ERC) claims. (☆) IRS Commissioner Danny Werfel said the extra looks “confirmed widespread concerns about a large number of improper claims.” Some of those claims turned criminal—as of May 31, 2024, IRS Criminal Investigation has initiated 450 criminal cases, with potentially fraudulent claims worth nearly $7 billion—while thousands of additional ERC claims are currently under audit. (You may want to hire a tax professional in an audit.)
In addition to those denials, the IRS confirmed that the moratorium on processing new claims will continue. The moratorium has raised the ire of many—and, in some instances, resulted in litigation.
As for those suspected abusive tax promoters and preparers who improperly promoted ERC claims? The IRS says it has received hundreds of referrals and plans to continue related civil and criminal enforcement efforts to follow up.
Of course, the IRS needs people to tackle these issues. The agency is putting a renewed emphasis on hiring, in contrast to previous years. In fiscal year 2023, the IRS used 82,990 full-time equivalent positions to conduct its work—the highest in a decade. Of those positions, 40.0% were dedicated to enforcement, and 44.8% were dedicated to taxpayer services. Now, the agency is updating its careers website. (☆)
That announcement came at an interesting time in our household. We’ve been talking a lot about jobs and salaries this week. I’ve reminded my kids that salary isn’t everything—those perks matter, too. The IRS recently updated its FAQs focused on section 127 of the tax code, which allows employers to pay employees up to $5,250 tax-free for educational assistance, including (for now) repaying student loan debt. (☆)
My daughter is earning some extra cash as a server while she’s in school. She’s good at it—and she’s enjoying her tips. That means that former President Trump’s proposal to exempt all tips from federal tax raised eyebrows in our house. Not everyone thinks it’s a good idea—or good tax policy. Tax-free tips might help a relatively small number of servers at high-end restaurants and they could reward hotel owners such as Trump by slowing efforts to raise the minimum wage for tipped workers. But many tipped workers make so little income that they already pay little or no income tax.
(More about tipping in the restaurant industry here (☆) and in the hair industry here. (☆))
My son, on the other hand, is an aspiring sports journalist and rabid soccer fan. That came in handy this week as he walked me through some of the nuances of the EURO 2024. It’s been fun to be in France while the tournament has been on—and to listen to the various politics at play. (☆) (Be sure to check out the tax rates chart highlighting the participating countries below.)
He’d happily pack up and move to Germany or Poland tomorrow to follow the beautiful game. But moving from country to country isn’t that easy—the same is true in the U.S. Many individuals either rush to obtain a U.S. green card, or continue to hold it unnecessarily, without thoroughly considering the U.S. tax consequences of permanent residency. Before taking the green card plunge, or continuing permanent residence status, it’s crucial to think through basic U.S. tax issues.
The same is true when it comes to estate planning. Not only can wills and trusts—and the related tax consequences—vary from country to country, they can change from state to state, too. Historical concepts like dower (the rights granted to a widow) and curtesy (a widower’s rights to his deceased wife’s property, not to be confused with a Regency move in “Bridgerton”—that’s a curtsy) can make an impact in modern planning.
Modernization is packing a punch in the digital age, too, as Nina Olson of the Center for Taxpayer Rights and the Tax Analysts board of directors recently discussed. Olson touched on ongoing concerns for taxpayer rights, including the IRS’s lack of transparency surrounding its implementation of artificial intelligence (AI) and the impact on taxpayers of tax preparation companies’ data sharing.
As tech grows, some taxpayers want to see tech companies pay more. USTelecom, a trade organization representing many major American telecommunication companies, including AT&T and Verizon, urged the Federal Communications Commission (FCC) to require major technology companies to contribute to the Universal Service Fund (USF). The USF is maintained by the FCC and funded by contributions from telecom companies, which generally pass that cost on to consumers, but USTelecom believes that tech companies that rely on infrastructure should contribute to its maintenance.
And finally, while tech is expanding everywhere, the result isn’t always as expected. A fintech intermediary recently filed for bankruptcy under Chapter 11, leaving 200,000 or so fintech customers without access to their “FDIC insured” accounts. The bankruptcy trustee in the case said there’s a $65 million to $96 million shortfall between the company’s records and the bank’s reports. If a bank fails, and a fintech (or other third party) has good records, customers should be able to collect their insured deposits fairly quickly. But if a nonbank fintech, particularly one with deficient records, implodes, all bets are off. As a person who has been clicking my way through apps while traveling, that’s a sobering thought.
I’ll be back in the U.S. next week with more tax and financial news—including an interview with IRS-CI Chief Guy Ficco. Until then, stay cool out there (I’ve heard it’s insanely hot).
Kelly Phillips Erb (Senior Writer, Tax)
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Taxes From A To Z: D Is For Deductions
It can be easy to confuse deductions and credits because we talk about them in the same breath, but they are very different. A deduction is a reduction in your income subject to tax, while a credit is a reduction in the tax you owe. Here’s an example. Let’s say you, as a single person, have $11,000 of taxable income. The federal income tax due on that income in 2024 would be $1,100 (10% of $11,000). A $1,000 deduction would lower your taxable income to $10,000 ($11,000-$1,000), resulting in a tax due of $1,000 (10% of $10,000). That’s a tax savings of $100.
But what if you had a $1,000 credit instead? That would lower your federal income tax due to $100 ($1,100-$1,000), a tax savings of $1,000.
That’s why tax professionals will tell you that credits are almost always more valuable to taxpayers than deductions.
That said, deductions are still desirable. They come in various flavors—you’ll find them tucked all over your income tax return—but most commonly, taxpayers think about itemized deductions. Those include deductions for medical expenses, state and local taxes, home mortgage interest, and charitable contributions. To claim those deductions, you’ll need to itemize, meaning that you must list them separately—and typically claim them on Schedule A if the amount is greater than your standard deduction (some taxpayers aren’t entitled to use the standard deduction).
The standard deduction amounts in 2024 are $14,600 for individuals and married couples filing separately, $29,200 for married couples filing jointly, and $21,900 for heads of household. The additional standard deduction for the aged or the blind is $1,550 per person, meaning $3,100 for a qualifying couple ($1,950 for unmarried taxpayers).
And, in 2024, the standard deduction for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,300 or the sum of $450, and the individual’s earned income (not to exceed the regular standard deduction amount).
Tax Statistics
The EURO 2024 tournament is in full swing, with the second round of matches underway. The tournament, which is being hosted this year by Germany, is held every four years, much like the World Cup—at a time when players and fans are talking about more than just soccer. This year, economics and taxes are finding their way onto the pitch.
There are 24 teams that have qualified. The table above is a look at how those countries with teams at the EURO 2024 measure up in terms of taxes—the U.S. national team is clearly not making an appearance (they’re at the COPA America), but I’ve included it in the chart for comparison.
Questions
This week, a reader asks:
My company isn’t requiring in-office days, so I’m still working from home. If I choose to stay home, can I deduct my home office on my taxes?
The home office deduction remains one of the more confusing changes from the 2017 tax reform. Prior to 2017, employees who worked from home and self-employed persons could claim the deduction. However, under the Tax Cuts and Jobs Act, you can only take the deduction if you’re self-employed.
If you’re an employee—meaning, in most cases, that you receive Form W-2—and you work remotely, you can’t deduct home office expenses. This is true even if you don’t have a physical office that you could otherwise go to. It doesn’t make a difference if it’s not your choice to stay home—the so-called “convenience of the employer” rule no longer applies to home offices.
A lot of the confusion can be traced back to the pandemic, when employees physically couldn’t go to the office or place of work. Despite rumors, there was never any “Covid exception” that allowed employees to claim the home office deduction.
(The provision is set to sunset in 2025, so there is a possibility that we could see a return of the home office deduction in the future. Stay tuned.)
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A Deeper Dive
A divided Supreme Court ruled that the mandatory repatriation tax (MRT)—which attributes the income of an American-controlled foreign corporation to the entity’s American shareholders and then taxes the American shareholders on their portions of that income—does not exceed Congress’s constitutional authority. (☆) The case had raised questions that could have shaken up the entire tax world.
The petitioners, Charles and Kathleen Moore, own a 13% stake in an Indian corporation. In 2018, the Moores learned they were subject to the MRT under the 2017 tax reform law. They had never paid tax on their earnings because previous tax law allowed income earned abroad to remain deferred until it was repatriated—they had never claimed their earnings. Under the new law, the Moores were subject to tax going back to their original investment at a 15.5% tax rate—netting them a tax bill of $14,729. The Moores paid the tax and sued for a refund, claiming the tax was unconstitutional.
(You can read more about the facts of the case and the MRT in my previous article here.)
During oral arguments, both sides raised several arguments based on existing case law, particularly Eisner v. Macomber. The Court addressed those cases at length in the majority, concurrence, and dissent opinions. (You can read a deep dive into the oral arguments here.)
Most tax practitioners assumed that the holding would be narrow—and it is. The Court found “the precise and narrow question in Moore” is whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income. The answer, the Court found, is yes.
And, as expected, the Court also found that the decision did not attempt to resolve the disagreement over whether realization is a constitutional requirement for an income tax. (That’s clearly a nod towards the proposed wealth tax.) Expect to see some of these questions again.
The ink was barely dry on the decision before taxpayers, tax policy groups, and tax professionals began weighing in. You can read some of those here. (☆)
This won’t be the last chatter you hear about tax and the Supreme Court. Earlier this summer, the Supreme Court issued a unanimous ruling in a federal estate tax matter (finding a corporation’s obligation to redeem shares is not necessarily a liability that reduces its value for estate tax purposes). (☆)
Days later, the Court asked the federal government to weigh in on another case taking a look at whether the Commerce Clause requires states to consider a taxpayer’s total tax burden when crediting a taxpayer’s out-of-state tax liability. (☆)
Important Dates
📅 July 31, 2024. Due date for individuals and businesses in parts of Massachusetts affected by severe storms and flooding that began on September 11, 2023. More info here.
📅 July-September, 2024. IRS has announced the continuing education (CE) agenda for the 2024 Nationwide Tax Forum. Attendees can earn up to 19 CE credits over three days by attending one of the five forums in Chicago (July 9-11), Orlando (July 30-August 1), Baltimore (August 13-15), Dallas (August 20-22), or San Diego (September 10-12). Registration required.
Positions and Guidance
The American Bar Association (ABA) Section of Taxation has submitted comments to the IRS on the Proposed Regulations under section 4501 concerning the 1% excise tax on certain stock repurchases by publicly traded corporations. The lengthy comments include refining definitions and offering transitional relief.
Noteworthy
The IRS is hiring for a new executive position: Associate Chief Counsel (Partnerships, S corporations, Trusts, and Estates). This position will lead a new office which will allow the Chief Counsel organization to focus more directly on this complex area of tax law, including by emphasizing the development of legal guidance and other priorities in the partnership arena.
TaxGlobal.com, a new tax technology company, has introduced an AI-powered platform designed to provide answers to tax-related questions. The platform will also connect taxpayers with accountants by industry and tax and accounting needs.
Accounting firm Ernst & Young LLP (EY US) announced an alliance with Docusign, an intelligent agreement company, to provide technology solutions to businesses. The alliance will offer intelligent agreement management solutions to help organizations connect and automate how agreements are created, committed to, and managed.
The American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA) have recognized Vernon J. Richardson, Ph.D., of the University of Arkansas with the Distinguished Achievement in Accounting Education Award. This annual award honors full-time college educators who are distinguished for excellence in teaching and have achieved national prominence in the accounting profession.
The American Bar Association (ABA) Section of Taxation is accepting applications for the next class of Loretta Collins Argrett Fellows. Applications are due by 11:59 pm ET on Sunday, June 30, 2024. The goals of the fellowship include supporting the expansion, diversification, and inclusiveness of the tax profession.
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Trivia
What was the amount of tax initially at stake in Moore v. U.S., which was recently decided at the U.S. Supreme Court?
A. $14,729
B. $147,290
C. $1,472,900
D. $14,729,000
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. This week, I asked our team: Who do you hope wins the EURO 2024?
Kelly Phillips Erb (Senior Writer, Tax): Since my beloved Wales didn’t qualify, I think I’m required by marriage to say Germany.
Virginia La Torre Jeker (Contributor, Tax): Of course I would have to say Switzerland… husband is Swiss, I married him and became Swiss… and our son is Swiss. I dare not say anything else.
Key Figures
That’s the amount of improper Employee Retention Credit (ERC) claims disclosed under the IRS voluntary disclosure program (VDP) for businesses that wanted to pay back the money they received after filing ERC claims in error.
Trivia Answer
The answer is (A) $14,729.
From the opinion: At the end of the 2017 tax year, the new mandatory repatriation tax (MRT) resulted in a tax bill of $14,729 on the Moores’ pro rata share of KisanKraft’s accumulated income from 2006 to 2017.
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