IRS Set to Initiate Complimentary Tax Filing Pilot Program in 2024 Tax Season
The Internal Revenue Service (IRS) is considering developing its own complimentary tax filing system and plans to initiate a pilot program accessible to a select group of taxpayers during the 2024 tax season.
This information was disclosed on Tuesday when the IRS presented a study assessing the cost and viability of establishing a free electronic tax filing system.
The study was necessitated by the Inflation Reduction Act, an extensive tax and climate measure ratified by Democrats without Republican support last year. The Act allotted $15 million to the IRS for the formation of a task force and the execution of the study within a nine-month timeframe.
During this initial phase of investigation, an in-house model was developed to help analyze taxpayer interaction with the Direct File program. Polls revealed that 72% of taxpayers expressed interest in a free electronic tax filing service provided by the IRS.
The report indicated that the program's operational cost could fluctuate between $64 million and $249 million per year. This cost differential is largely dependent on the demographics of taxpayers who would be permitted to use the new tax filing system.
IRS Commissioner Danny Werfel stated in a press call, "The report shows that a majority of taxpayers are interested in using an IRS-provided tool to prepare and file their taxes." He added, "It also shows that the IRS is technically capable of delivering Direct File, but that doing so would require additional resources and add complexity to IRS operations."
The agency is yet to determine the eligibility criteria for the pilot program. It may restrict the service to those with income below a certain level or those with specific tax circumstances.
Following the pilot program's execution next year, it will be the Treasury Department's responsibility to decide on the feasibility of expanding the program on a larger scale.
While a free filing service does exist, its usage is limited
At present, taxpayers earning $73,000 or less have the ability to file their federal tax returns at no cost, which encompasses approximately 70% of all taxpayers.
However, this complimentary filing service is not facilitated by the IRS. Rather, taxpayers are required to use a service provided by one of the seven private companies that constitute the Free File Program alliance.
Established in 2002, the program has seen various modifications, but consistently low utilization rates have persisted.
For the 2020 tax year, a mere 4% of eligible taxpayers, roughly 4.2 million individuals, took advantage of the Free File program, as stated in a report by the Government Accountability Office.
Democratic legislators have increasingly called for a free IRS-operated system, particularly after ProPublica issued a series of articles in 2019 accusing the private tax-filing firms of obscuring free filing options for taxpayers.
Two of the largest private tax preparation and filing service providers have exited the Free File Alliance. H&R Block departed in 2020, and Intuit followed suit in 2021. Combined, these two companies were responsible for about 70% of the returns filed through the Free File Program for the 2019 tax year, as per the Congressional Research Service.
TurboTax, a subsidiary of Intuit, is currently issuing settlement checks to approximately 4.4 million individuals in response to a lawsuit claiming that the company diverted millions of low-income Americans away from free tax filing services.
However, critics argue that it would be inappropriate for the IRS to simultaneously act as the tax preparer and the tax collector.
On Tuesday, Werfel confirmed that the Free File Program will remain accessible to low-income taxpayers next year, concurrent with the launch of the new IRS-led pilot program.
A major revamp is underway at the IRS
The free federal tax filing program is one of the numerous adjustments happening within the IRS in the wake of receiving a substantial funding boost of $80 billion over ten years from the Inflation Reduction Act.
Generally, this funding is intended to enhance the agency's ability to detect tax fraud and to improve services for taxpayers. As a consequence of these enhancements, the IRS anticipates an additional collection of over $100 billion in revenue over a decade.
Officials from the Biden administration have consistently stated that taxpayers earning under $400,000 annually will not experience a tax increase due to the additional funding. However, there remains some ambiguity regarding how the IRS will ensure this.
Republicans have expressed concerns over allocating such a large sum to the IRS and harbor doubts that this investment won't lead to increased audits of diligent Americans. A bill was passed earlier this year in the Republican-controlled House aiming to retract the majority of the new funding, though its chances of becoming law are virtually non-existent.
In addition to this, the IRS is striving to upgrade taxpayer services. So far, the agency has employed 5,000 new customer service agents following the passage of the Inflation Reduction Act last year.
Last month, Werfel stated that the IRS is now regularly addressing between 80% and 90% of incoming calls, a significant improvement from just 17% last year. The average waiting time has also decreased, with callers now waiting around four minutes compared to last year's average of 20 minutes.
New England States with Daunting "Death Taxes"
There's generally no need to fear the U.S. federal "death taxes." In 2023, the federal estate tax only comes into play for estates valued at $12.92 million or more, or $24.12 million for married couples, affecting just a minor portion of the U.S. population who reach this wealth level. Furthermore, there's no federal inheritance tax that might unsettle your beneficiaries. (The estate tax is levied on the total value of the estate and paid by the estate itself, while inheritance tax is paid by the individual beneficiary on the assets they receive.)
However, if your assets fall under the federal estate tax threshold, don't relax just yet. There might be a state tax bill waiting in the wings. While many states have decreased or abolished their death taxes in the last ten or so years to prevent affluent retirees from relocating to states with lower taxes, 12 states (along with the District of Columbia) continue to enforce an estate tax, five of these being in the New England region. If you're unaware of the implications of death taxes and reside in one of the five New England states mentioned below, it's crucial to pay attention: your beneficiaries could end up dealing with a state tax collector.
Maine
- Estate tax: Yes
- Level of estate tax exemption: $6.41 million
- Estate tax rates: 8-12%
- Inheritance tax: No
The estate tax in the Pine Tree State is less daunting, given that it only affects estates valued at $6.41 million or more for the year 2023 (this exemption limit is adjusted annually to account for inflation). As the majority of estates don't reach this worth, the tax in Maine does not capture many estates.
Furthermore, the estate tax rates in Maine are relatively moderate. The highest rate is only 12%, matching Connecticut for the nation's lowest peak rate.
Massachusetts
- Estate tax: Yes
- Level of estate tax exemption: $1 million
- Estate tax rates: 0.8-16%
- Inheritance tax: No
The Bay State is one of just two states where the exemption limit remains at $1 million, making it less accommodating to estates compared to many other states, including nearby northeastern states that also feature on our list, like Rhode Island and Connecticut.
However, it does provide an unlimited marital deduction for property bequeathed to a surviving spouse and an unrestricted charitable deduction for property donated to a recognized charity.
Vermont
- Estate tax: Yes
- Level of estate tax exemption: $5 million
- Estate tax rate: 16% (flat rate)
- Inheritance tax: No
In the Green Mountain State, Vermont, an estate tax applies with an exemption threshold of $5 million. The state levies a consistent estate tax rate of 16%.
Connecticut
- Estate tax: Yes
- Level of estate tax exemption: $12.92 million
- Estate tax rates: 11.6% or 12%
- Inheritance tax: No
For 2023, the estate tax exemption in the Constitution State aligns with the federal estate tax exemption at $12.92 million, with a maximum tax obligation capped at $15 million.
Connecticut stands unique as the only state imposing a gift tax on assets transferred while one is still living. Should you make any taxable gifts within the year, you are obligated under state law to report them by filing a Connecticut estate and gift tax return. However, any taxes owed in 2023 will only apply if the total value of gifts given since 2005 surpasses $12.92 million.
Both estate and gift taxes in the state are levied at a uniform rate of 12%.
Rhode Island
- Estate tax: Yes
- Level of estate tax exemption: $1,733,264
- Estate tax rates: 0.8-16%
- Inheritance tax: No
While the Ocean State annually revises its estate tax exemption to account for inflation, it retains a notably low benchmark. With an exemption amount of merely $1,733,264 for 2023, Rhode Island is among the only three states in the country with an exemption under $2 million. Its tax rates vary between 0.8% and 16%.
Unprecedented Tax Hikes Loom Over Maine Cities and Towns as Expenses Continue to Surge
Maine municipalities grapple with unprecedented tax hikes as expenses continue to soar. While Westbrook's city budget was being developed, it was evident that all costs would rise.
City officials proposed a "status quo" budget, excluding new positions or programs and reducing investments in streets, sidewalks, and public safety purchases. They also suggested transferring $1 million from the undesignated fund balance to counteract unavoidable expenses.
However, with a $3.2 million increase in school spending, residents could face an 8.8% tax hike, the largest in the city's history.
Mayor Michael Foley acknowledges the difficulty of the situation, noting that skyrocketing prices for housing, food, fuel, energy, and other essentials are already putting pressure on residents.
Municipalities throughout southern Maine are in the midst of the annual budget process, attempting to balance the escalating costs of goods and services with the goal of minimizing tax impact. Large school budgets are further straining finances.
In many communities, staff had to create proposals without knowledge of school budgets.
In South Portland, the $45 million budget is down almost 15% from the current year, largely due to a $10 million reduction in General Assistance. However, when combined with the school budget, overall city spending could lead to a 4% increase in the tax rate.
Rising costs are affecting other municipalities as well, with North Yarmouth's proposed $4.4 million budget potentially raising the tax rate by 3% or more.
In Portland, the proposed $261 million budget includes a 6.1% tax increase, which could have been much higher if staff had not worked to reduce it.
In addition to inflation, many municipalities face staffing challenges. To attract and retain employees in a competitive labor market, officials are prioritizing wage increases and other incentives.
For example, Westbrook's budget does not include new positions but will invest over $1 million in pay and benefits. In Brunswick, the cost of salaries and benefits for existing employees rose by nearly $1.8 million, the largest portion of the town's $4.1 million spending increase.
Municipalities are seeking ways to remain competitive and retain staff while trying to minimize the impact on taxpayers.
School budgets play a significant role in determining state tax rates, as they constitute a considerable portion of a state's annual expenditure. Funding for education primarily comes from local property taxes, state revenue sources, and federal grants. As school budgets increase, the demand for additional funding sources grows, which may result in higher tax rates or adjustments to existing tax allocations.
Rising school budgets can be attributed to various factors such as increasing student enrollment, higher teacher salaries, improved infrastructure, and expanded educational programs. Additionally, the inflation rate influences the cost of goods and services required by schools, such as textbooks, technology, and transportation.
When school budgets increase, state governments may be compelled to raise tax rates to accommodate the growing expenses. This can lead to an increase in property taxes, income taxes, or sales taxes. Alternatively, states may opt to reallocate funds from other areas of the budget to cover education expenses, potentially impacting public services or infrastructure projects.
The impact of school budgets on state tax rates may vary depending on the state's economic stability and revenue sources. In some cases, states with robust economies and diverse revenue streams may be able to absorb increased education costs without significantly affecting tax rates. However, in economically strained states, rising school budgets can lead to noticeable tax increases for residents.
Ultimately, the relationship between school budgets and state tax rates reflects the challenge that governments face in prioritizing and allocating resources to meet the needs of their constituents while maintaining fiscal responsibility.
Biden's Tax Proposals: Potential Impacts on Baby Boomer and Family-Owned Businesses
President Joe Biden's 2024 budget proposals include several tax changes that could significantly affect small businesses and their finances.
The proposed budget features increases in the top capital gains rate for incomes over $1 million, the elimination of the "step-up in basis" loophole, expansion of who must pay investment income tax and the rate at which it is paid, and an increase in the corporate tax rate.
NFIB President Brad Close warns that the $2.5 trillion in proposed tax hikes could hinder the growth and job creation potential of Main Street businesses. He also claims that some tax increases are being misrepresented as closing "tax loopholes" and would directly impact small businesses.
Despite the challenges faced by small businesses due to inflation, hiring pressures, and other adverse business conditions, tax experts remain skeptical about the likelihood of Biden's proposals passing as they currently stand. Many provisions have been previously suggested, and a divided Congress reduces the chances of their adoption without revisions.
The budget attempts to rebalance some of the cuts made by The Tax Cuts and Jobs Act of 2017, particularly for higher-income individuals, according to Eric Hylton, National Director of Compliance at Alliantgroup.
Biden's proposal includes raising the top individual tax rate from 37% to 39.6% and changing the income threshold to $400,000 for single taxpayers and $450,000 for married couples filing jointly. This change would be effective for taxable years beginning after December 31, 2022, potentially impacting more businesses.
Ray Beeman, leader of Ernst & Young's Washington Council, stresses the importance of small business owners staying informed about proposed tax changes, as they could resurface at a later time.
Five key provisions in Biden's budget that business owners should be aware of include:
- Higher capital gains tax rate: The proposed increase in the top marginal rate on long-term capital gains and qualified dividends to 44.6% for income over $1 million could negatively affect small business owners looking to sell, especially Baby Boomers approaching retirement.
- Elimination of the "step-up in basis" rule: The proposed change would impact family businesses passing assets to the next generation, as few exceptions exist for capital gains tax consequences. However, Biden's budget does partially address these concerns by exempting $5 million of unrealized gains per individual and $10 million per married couple.
- Loss of leverage in real estate transactions: The proposed elimination of 1031 like-kind exchanges over $500,000 for individual taxpayers and $1 million for married couples filing jointly could affect small businesses' ability to leverage their capital in real estate transactions.
- Higher corporate tax rate: While most small businesses are pass-through entities not subject to corporate income tax, Biden's proposal to raise the corporate tax rate from 21% to 28% would impact those that are. Congress will need to consider the implications for the U.S. compared to other developed countries.
- Potential increase in net investment income tax: The proposed increase of the 3.8% net investment income tax rate on small business income over $400,000 to 5% could lead to more small businesses paying this tax and at a higher rate than currently in place.