Improper ERC Claims, Tax Year 2023, and Student Loan Forgiveness
Tax Policy:
October 19: Employers warned to beware of third parties promoting improper Employee Retention Credit claims
The Internal Revenue Service today warned employers to be wary of third parties who are advising them to claim the Employee Retention Credit when they may not qualify. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit. These third parties often charge large upfront fees or a fee that is contingent on the amount of the refund and may not inform taxpayers that wage deductions claimed on the business's federal income tax return must be reduced by the amount of the credit.
If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
The ERC is a refundable tax credit designed for businesses that continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. For any quarter, eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits.
October 19: Five things to know about the IRS’s changes to next year’s taxes
The IRS announced on Tuesday inflation adjustments for more than 60 tax provisions for the tax year 2023, including the standard tax deduction and the designation of tax brackets, both of which affect the vast majority of taxpayers. These tax adjustments happen every year, but since inflation is at a nearly 40-year high of 8.2 percent, next year's adjustments will be particularly noticeable.
The changes allow taxpayers to break even: Just like the Social Security cost-of-living adjustment (COLA), which will provide an extra $140 a month to recipients on average, the extra money resulting from the tax code adjustments really isn’t extra money. It just allows taxpayers to break even, remaining where they were the year prior for the purposes of classification by the IRS.
Adjustments prevent “bracket creep”: If marginal tax rates were left alone each year, experts say that inflation, which the Federal Reserve tries to keep around 2 percent in normal conditions, would cause people's taxes to increase unfairly in what the Beltway set terms "Bracket creep."
Wages in the U.S. aren’t adjusted to keep up with inflation: Though tax brackets and some deductions are indexed to inflation, wages in the U.S. are not, meaning that employers in the U.S. are not required to offer a cost-of-living adjustment commensurate with the rising price of goods and services, though some labor unions may stipulate this in contracts with managers, experts say.
Tax credits for the rich are adjusted upward: Tax credits affecting wealthy people are also receiving upward adjustments. The foreign earned income exclusion is increasing to $120,000, up from $112,000 for the tax year 2022.
Not every tax credit will be revised upward: While the refundable portion of the child tax credit, which has been hailed as one of the most significant poverty reducers in U.S. tax policy, is being adjusted upward for inflation by 6.67 percent, the maximum credit of $2,000 will stay the same.
October 18: Inflation Adjustments Mean Lower Tax Rates for Some in 2023
The rapidly rising cost of food, energy, and other daily staples could allow many Americans to reduce their tax bills next year, the I.R.S. confirmed on Tuesday.
Tax rates are adjusted for inflation, which in typical times means incremental movements in the thresholds for what income is taxed at what rate. But after a year that brought America’s fastest price growth in four decades, the shift in rates is far more notable: an increase of about 7 percent. Beyond tax rates, a variety of other provisions in the code were affected by the inflation adjustments - with benefits up and down the income spectrum.
One of the government's primary anti-poverty efforts, the earned-income tax credit for low-income workers, will be worth as much as $7,430, up from $6,935 this year.
The I.R.S. move is just the latest government response to rapid inflation. Last week, the Social Security Administration announced an 8.7 percent increase in benefits for 2023, the largest raise since 1981.
That cost of living adjustment was accompanied by an increase in the amount of earnings subject to the Social Security payroll tax, which helps fund the safety net program. The maximum amount of earnings subject to what is known as the Federal Insurance Contributions Act - or FICA - tax will increase to $160,200 from $147,000 in 2023.
Student Loan Forgiveness:
October 25: Political, legal battle heats up over student loan forgiveness
The political and legal battle over President Biden's student loan forgiveness plan has hit its biggest roadblock yet with a temporary legal hold on the program leaving borrowers in further limbo. Biden had turned his attention last week to the student loan plan and other issues such as reproductive rights to attract young people, a voting bloc that typically has low voter turnout in midterm elections.
Jean-Pierre on Monday denied the notion that it was the White House’s goal to have borrowers see any loans forgiven prior to the midterms in light of the order stopping the program. Nonetheless, the order does cast a shadow over the plan.
The plan, which is set to forgive up to $10,000 in federal student loan debt for borrowers earning under $125,000 and as much as $20,000 for borrowers who received Pell Grants, has faced multiple legal challenges.
Last week, the Cato Institute sued the Department of Education over the plan, claiming the plan is illegal because Congress didn't authorize it. The midterm elections which are critical for Democrats fighting to hold onto their majority in Congress could be a huge factor in the future of the student loan plan. Republicans are continuing to slam the administration for the student loan plan, regardless of the order on Friday.
Economic News/Policy:
October 24: Global Economic Growth Is Weighed Down by Inflation, Rising Interest Rates
Fresh economic data pointed to a slowdown in U.S. and global growth, as higher prices and interest rates weigh on consumer demand, Europe enters a critical phase of its economic conflict with Russia, and China faces headwinds.
"There are significant global growth challenges," said Ryan Wang, U.S. economist at bank HSBC. S&P Global said its composite output index for the U.S., which includes services and manufacturing activity, fell to 47.3 in October from 49.5 in September, its second-fastest pace of decline since 2009 excluding early 2020 at the start of the Covid-19 pandemic.
"The U.S. economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply," said Chris Williamson, a chief business economist at S&P Global.
The combination of strong inflation and weakening growth presents global policymakers with difficult calls, but central banks for now are raising interest rates to lower inflation by slowing economic growth.
The business surveys are the latest sign that the global economy is slowing. Signs are emerging that some of the drivers behind the surge in global inflation rates are easing as the economy cools.
The pandemic continues to influence the global economy, with the survey of purchasing managers for Japan pointing to a pickup in growth as the country allowed regular tourism after a 2½-year ban.
October 23: Economy Week Ahead: U.S. GDP and Wages; Monetary Policy Abroad
Monday: S&P Global releases October business-activity surveys from around the world. The data firm’s U.S. composite purchasing managers index—which measures activity in both the manufacturing and services sectors—indicated that the U.S. economy contracted at a slower pace in September compared with the prior month.
Tuesday: S&P Global releases its S&P CoreLogic Case-Shiller National Home Price Index, which will show home-price trends across the country in August. The index showed that U.S. home prices fell 0.3% in July from June, the first month-over-month decline since January 2019.
The Conference Board releases its October consumer-confidence index, which measures Americans’ attitudes toward jobs and the economy. Consumer confidence improved in September for a second month in a row as gasoline prices fell and jobs remained plentiful.
Wednesday: The Commerce Department releases September sales of new homes, which account for about 10% of the housing market.
The Bank of Canada announces its latest monetary-policy decision after it delivered a 0.75-percentage-point increase at its previous meeting. The central bank has signaled more interest-rate hikes are likely amid high consumer inflation.
Thursday: The Commerce Department releases third-quarter U.S. gross domestic product—a broad measure of the goods and services produced in an economy. GDP contracted in the first half of the year following strong growth in 2021 as the economy bounced back from pandemic disruptions.
The European Central Bank announces its latest monetary-policy decision. The ECB in September raised interest rates by 0.75 percentage point, the largest amount since the early days of Europe’s currency union. The central bank has signaled that additional interest-rate increases are likely as the eurozone faces record inflation, driven in part by the bloc’s energy crisis.
The U.S. Labor Department reports the number of worker filings for unemployment benefits in the week ended Oct. 22. Initial jobless claims, a proxy for layoffs, have recently hovered near the 2019 weekly average of around 218,000, a sign that employers remain hesitant to layoff workers.
The Commerce Department releases September figures on orders of long-lasting goods. Overall new orders for durable goods declined for the second month in a row in August.
The Bank of Japan announces its latest monetary-policy decision after Japan’s most recent inflation report showed that consumer prices rose 3% in September from the year before, an eight-year high exceeding the central bank’s targeted 2% threshold.
Friday: The Labor Department releases its employment-cost index for the third quarter, which captures employers’ labor costs by measuring wages and benefits paid to workers. It also provides the Fed with evidence of labor-market pressures on inflation.
The Commerce Department releases figures on U.S. household spending and income in September. Consumer spending rose 0.4% in August from the prior month, rebounding from a July decline. The department also releases its personal-consumption expenditures price index, a gauge of inflation closely watched by the Fed. The PCE price index rose 6.2% in August from the same month a year earlier.
The University of Michigan publishes its final reading of consumer sentiment for October. Sentiment reached its highest level in six months in October as gasoline prices eased, according to a preliminary estimate released earlier in the month.
The National Association of Realtors reports pending sales of U.S. homes based on contract signings. Pending home sales fell in August for the third consecutive month as the housing market buckled under rising mortgage rates.
October 23: Debt ceiling showdowns are ready for comeback with GOP majority
House Minority Leader Kevin McCarthy, who is likely to become Speaker should the GOP take the lower chamber in November, is preparing for a battle with the Biden administration over curbing spending as a condition for a debt ceiling increase. Republicans have long sought spending concessions in exchange for voting to raise the debt limit or tried to force Democrats to raise the limit without help from the GOP. But Democrats have criticized the GOP for these efforts, noting that they voted to raise the debt ceiling under former President Trump.
"We will make sure the federal government pays its debts, but we will use the debt ceiling as it was intended - a lever to address our deficit and debt," said Rep. Adrian Smith. Exactly what spending Republicans would put on the chopping block in a future debt ceiling fight is not set in stone, but likely targets include spending key to President Biden's domestic agenda passed in the last year.
Democrats in midterm campaign messaging have warned that Republicans would use a debt ceiling fight to cut Social Security and Medicare.
Rep. Jim Banks, chairman of the Republican Study Committee and a contender for House GOP whip if Republicans win, said at a CBS News event on Wednesday that the debt ceiling could be used to call for spending caps, balanced budgets, or to cut discretionary spending - actions that would not include Social Security and Medicare.
In the midst of a dispute over raising the debt ceiling last year, Treasury Secretary Janet Yellen suggested abolishing the federal debt limit, calling it "Very destructive" to the credit of the U.S. Three killed, including gunman, in St. Louis school shooting Trump doubles down on threats to sue Pulitzer board at Texas rally.
October 21: Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes
The U.S. budget deficit narrowed last year, but a cooling economy and rising interest rates put it on track to widen in the coming years, setting the stage for new financial challenges for President Biden and Congress.
For nearly two decades, the U.S. government has had substantial leeway to keep borrowing to fund budget deficits, because inflation and borrowing costs were low. Among other things, this enabled aggressive federal interventions during crises in 2008 and 2020.
Among other things, this enabled aggressive federal interventions during crises in 2008 and 2020. In the U.K., recently, investors in government gilt bonds pushed back on the Tory government's plan for tax cuts to be paid for by borrowing. They sold bonds, pushing up their yields. In response, the government-backed off its plan, and Prime Minister Liz Truss said she would resign.
“At this point, we have longer-term issues that are important, but it is not leading to a crisis of confidence like you are seeing in the U.K.,” Mr. Crandall said. "There is a recognition that due to a confluence of factors, the U.S. government is going to right now need higher rates to pull money in." The U.S. budget deficit for the new fiscal year is forecast to be 3.8% of the gross domestic product, according to CBO. The agency projects the deficit will reach 6.1% of GDP in a decade.
The federal government spent $6.3 trillion in the 2022 fiscal year, down 8% from the prior year, Treasury said. Government revenue from taxes and other sources rose to $4.9 trillion last fiscal year, the highest annual level on record and up 21% from the year before. The government spent $718 billion on interest costs on the public debt in the fiscal year 2022, up 28% from the previous year, Treasury data show.
During his time in office, President Obama repeatedly clashed with Republican leaders over the government's self-imposed constraint on borrowing known as a debt ceiling, which freezes borrowing when certain debt levels are reached.
For Fun:
October 16: A Salt-Loving Nation Tries to Shake the Habit
Pickled squid innards and cucumbers in brine are among the foods that make Japanese meals strikingly salty. Rather than trying to remake Japanese cuisine, food researchers are working to sate salt lust without sodium's unsavory side effects.
Beer maker Kirin Holdings Co. has developed chopsticks that deliver an electric current to trick taste buds into tasting a lot of salt in foods that have only a little. Ai Sato, a Kirin researcher, is working on the high-tech chopsticks that enhance the saltiness of food.
One recipe for pickled Japanese plums, known as umeboshi, has gotten a makeover by century-old food maker Kishu Takada Kaen. A no-salt version of his shop's packaged curry drew an acid customer comment: "I ended up pouring sauce and ketchup over it." Shifting focus from low-salt foods to electronic taste-bud fooling implements began with a study at the National University of Singapore a few years ago. The effect doesn't last long once the chopsticks are removed from the food.