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Tax articles recently included many on developments at the IRS and tax advice and planning for retirement. We also take a look at inflation’s impact on tax brackets for 2023 taxes, and changes to some states’ income taxes. But we begin the update with a timely article given all of the huge lottery drawings this summer.
Lottery Winnings
This might be a good hook during your tax unit—How much will a jackpot winner pay in taxes?
The IRS will take 24% off the top immediately. Even the annual payment if you do not take the lump sum amount will put the winner into the 37% tax bracket, so the winner would turn over another 13% at tax time. And state taxes of course vary by state. Ohio would take 3.99% and New York would take 8.82%. This is when living in Florida, Texas or California would pay off, as those states do not tax lottery winnings! (People)
IRS
Recent news about the IRS included the announcement that the IRS will no longer make unannounced visits to homes and offices. The move was a big part of recent efforts to protect the IRS employees from threats by individuals and groups who intend to harm them. Taxpayers will be informed by mail of the need to a visit and given the opportunity to make an appointment. All communication from IRS employees will give limited information about the employee for their protection. This new policy will also protect taxpayers from scam artists who have been posing as IRS employees. (WCVB)
The pandemic saw an increase in refund and return processing times, and it was impossible to get anyone to answer a phone, but this year, the IRS has been working on these issues. The backlog has been reduced by 80% this year. And call answer rates have gone from 11% to 35%. This was made possible as the IRS hired more employees with the funds it received recently from Congress. It also used funding to increase its ability to identify tax dodgers and go after them. They brought in $38 million from 175 high earning tax dodgers. (AP) (AP2)
What is the most effective way to reduce the impact/ability of identity thieves? Get an IRS IP PIN. Without one of these PINs, an identity theft can’t post as you and file a false tax return for a refund. Everyone is now able to get one, and it is the best thing you can do to protect your self if your information has ever been compromised. You use the 6-digit PIN instead of your SSN. Remember that the IRS will never call/write/contact you for this PIN, so don’t share it with anyone but your tax preparer if you use one! Here is how to get a PIN. (Don’t Mess With Taxes1)
In other news, the IRS is hoping to test a new free-file platform next year, but companies with a vested interest (like H&R Block and Intuit, owner of TurboTax) in preventing this from happening are spending millions lobbying congress to stop the efforts. (AP3)
If you are interested in an assessment of AI’s potential role in helping the IRS do its job, check out this article from Don’t Mess with Taxes. The biggest concern with AI is safeguarding privacy, but AI has promise in terms of picking up on common mistakes and communicating the steps to fix the issue with taxpayers. It could also be helpful in identifying tax fraud and money laundering, and providing more helpful answers to taxpayer’s phoned-in questions.
Inflation and Tax Brackets
Inflation has had a significant impact on tax brackets for 2023, moving income levels up by about 7%. Here are just two tables—single and married filing jointly. See the IRS website or this NerdWallet article for the other tables.
Taxes and Retirement
A financial advisor responded to a question for Cincinnati.com about tax strategy in retirement, and contained some good basic advice. The time between when you stop working and the time you must take your RMD from your retirement accounts is a “tax sweet spot,” when your income (you may be using savings to get you through until you are 73) is lower and you are in a lower tax bracket than when you were working or when you will be taking RMDs. During this period, you might consider taking the following actions:
The Street explains how your social security benefits will be taxed. The thresholds for when you pay taxes on your benefits haven’t been changed since 1993, so it won’t take much to put you in the position where 85% of your Social Security Income will be taxed. Refer to the tables in the article and calculation examples for help in understanding the mechanics.
Money Magazine talks about ALL of the potential taxable components of your income in retirement as well as penalties for not complying with RMDs. This is another one worth reading if you are approaching retirement to be prepared.
Should everyone contribute to tradition IRAs and 401k’s, or are the Roth (after tax) versions preferable? Advisors debate this, but it really comes down to what you think your tax bracket will be in retirement compared to while you are earning. Investment News
State Taxes
For the third year in a row, many states have reduced their tax rates—individual, corporate, or both. To check on your state, consult this article from the Tax Foundation. This is a map they produced to sum up the changes.
International
It can be nice to put taxes in the US in perspective by looking at the ten countries with the highest income tax rates to see where the US falls. With a top Federal tax bracket of 37%, the US does not make the list. For the slideshow, check out WIONEWS.
Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
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