November Tax Updates

Educator expense deduction increased to $300 from $250

For the first time since its implementation in 2002, the educator deduction for out-of-pocket classroom expenses has been given a boost. Starting with tax year 2022, the educator deduction will increase from $250 to $300 and will subsequently “rise in $50 increments in future years based on inflation adjustments”. Couples where both educators are eligible for the benefit may deduct a total of $600 on jointly filed returns. Eligible educators are K-12 public or private school teachers, instructors, counselors, principals, and aides who work a minimum of 900 hours during the school year. 

Tax loss harvesting and capital gain planning

Tax loss harvesting is the process of strategically selling property that has dropped in value in order to benefit from the related tax deduction. This strategic planning can be an integral part of year-end tax planning. Stocks and other capital assets that are sold for less than their basis (cost plus tax adjustments) result in capital losses. Capital losses can be used to offset capital gains and an additional $3,000 per year of ordinary income. The offset of capital gains can also reduce the income subject to net investment income tax. Instead of selling appreciated securities to donate to tax exempt organizations, taxpayers can donate the securities directly and avoid including the capital gains on their personal returns. Taxpayers that have passive activities with suspended losses should plan for optimal timing of the disposal of that activity. If a taxpayer has a large amount of 2022 income, disposing of the passive activity in 2022 may be a preferred option. If income or tax rates are expected to be higher in future years, disposal of the activity in a future year may be preferred in order to offset the expected income with the suspended losses. 

Inflation Reduction Act leaves carried interest intact

Historically, recipients of carried interest have generally been able to treat their income as capital gains, resulting in preferred tax treatment. Politicians have been surveilling this benefit for a while, as changes to it have been estimated to net billions of dollars in federal revenue. Provisions to modify this benefit were included in preliminary versions of both the Build Back Better Plan and the Inflation Reduction Act of 2022. These provisions would have increased the holding period required (in most cases) for carried interest income to be treated as capital gains. Ultimately, this most recent attempt at revision was deemed ineffective, as under the new proposed regulations the income would retain its capital gain treatment, only with a delay in timing. As a result, the proposed change would not have resulted in useful reform and was omitted from the legislation. 

Philadelphia reminds new businesses of Voluntary Disclosure Program

Philadelphia’s Voluntary Disclosure Program allows individuals and businesses to come forward and declare their missed tax liabilities in exchange for limitation of audit exposure and a waiver of penalties. Once approved for the program, the Department will not audit or bill taxpayers for taxes disclosed for any years before the six-year disclosure period. They will also waive any penalties accrued within the disclosure period. Interested taxpayers should email [email protected] to make a request to join the program. Correspondence must contain a brief description of the taxpayer’s business activity in Philadelphia and the taxes involved. Taxpayers must also indicate that they are self-reporting their liabilities or unfulfilled tax obligations.

Reduction in PA corporate income tax rate starting 1/1/23

With the passing of Pennsylvania’s House Bill 1342, Pennsylvania’s corporate tax rate is on its way down. As of 1/1/23, the tax rate will be lowered to 8.99% and will be reduced annually through 2031 when the corporate will be 4.99%. It is expected to remain at the rate of 4.99% until further legislation is proposed. 

PA nexus for companies without a physical presence

Starting in 2023, corporations with no physical presence in Pennsylvania are deemed to have nexus in Pennsylvania when they have sales of $500,000 or more per year sourced to Pennsylvania. While this position was presented in a prior year revenue bulletin, House Bill 1342 codified this measure of economic nexus.