Accountable Blog for All
By David Peters, CPA, CFP, CLU, CPCU
Tax Legislation Providing Inflation Relief is Coming – But Not Until Next Filing Season
(Note from the author: The Accountable Blog and Podcasts are read and listened to by a variety of people with different backgrounds and experience levels in the world of finance, tax, and insurance. The “Accountable Blog For All” is for all audiences – including students and those who are just curious about what is going on in the financial world. The “Accountable Blog for Pros” is more for those who are seasoned tax preparers, financial advisors, or insurance agents. I hope whatever your background is, you find the blog helpful! Happy reading!)
While many concepts can be confusing for clients, perhaps the one that is most difficult to understand is the idea of an accounting period. Most people are calendar year taxpayers – meaning each tax return reflects a calendar year’s worth of activity. However, even for calendar year taxpayers, we break from the idea of a strict accounting period all the time. For example, IRA and HSA contributions can be made up until the due date of the tax return. In other words, a taxpayer can make a contribution to an HSA in February 2023 and count it on his/her 2022 return. SEP contributions may also be made well after the tax year is over (up until the extended due date of the return). Tax returns are supposed to cover the previous year’s activity. These items break the rules – and make deductions available even after the tax year is over!
Perhaps that is why there is so much confusion over why the IRS has stated that tax refunds will be lower this year. A few months ago, mainstream media was talking about the 8.7% increase in social security benefits and the big increase in the standard deduction. Yet now, the IRS is talking about smaller refunds. How is this possible?
Well, the answer has to do with accounting periods. The tax return is essentially a reconciliation of the prior year’s activity. We total up how much we made, take our deductions, and figure out our taxable income. We then compare the taxes we already paid in (through withholding or estimated tax payments) against the tax liability shown on the tax return. We then pay in any amount we owe, or receive any overpayment back in the form of a refund. The United States tax system is a “pay as you go” system. We pay taxes throughout the year through withholding or estimated tax payments. We then reconcile everything on the tax return.
I always compare it to the way that you might true up with a friend over who picks up the bill at lunch. For example, let’s say that you bought lunch for you and your friend for $25 on Monday. Then she bought you lunch on Tuesday for $30. You might give her $5 to square things up. That’s basically what you do on the tax return each year – you square up with the government to see who owes who.
For the tax year 2023, retirees will be seeing an increase in their social security benefits and taxpayers will see the standard deduction increase which may allow for less withholding out of their paychecks. However, since the tax return for 2023 will not be due until April 15, 2024, these changes do nothing to help us out in our current year filing. These changes will not be reflected until next year’s return. Right
now, we are worried about our 2022 tax return. That’s the one that will be due sometime before April 18, 2023.
So why will refunds be lower on the 2022 tax return? The simple answer is that many of the tax incentives that we had during COVID have now expired. During 2020 and 2021, many tax laws were passed that temporarily increased certain tax incentives. In many ways, the 2022 tax return goes back to the way things were pre-COVID. For example, the child tax credit was worth $3,000 for children ages 6 to 17 on the 2021 tax return ($3,600 per child if the child was under age 6). On the 2022 tax return, the credit is back to only being worth $2,000 per child – like it was before the COVID incentives were in place. The same is also true of the dependent care credit. That credit will once again only be worth $600 for one child and $1200 for two or more children in 2022 for most taxpayers. Finally, we no longer have a recovery rebate credit available in 2022 either. That was the one available for those who did not receive their stimulus checks. These changes essentially take us back to pre-COVID tax laws. For many people, their 2022 tax return will look more like their 2019 tax return – rather than 2021. Refunds will be lower because the COVID incentives simply are not there anymore.
What about all of those green energy credits for buying electric cars and installing energy-efficient doors and windows on your home? You guessed it. The expanded versions of those credits don’t come into play until tax year 2023 – so you will not see those until next year’s return. Changes are coming that will provide inflation relief – but they are simply not here yet.
If you are a tax practitioner, this concept is one that you need to make sure that you get across to your clients. In the last few years, the public has gotten bombarded with tax changes – and they need help sorting through what is in effect now and what is not available until next year. If you are just someone trying to figure out your own return, be careful on effective dates for tax laws. Just because you hear about something on the news does not mean it is effective right away.
In either case, accounting periods are one of the most important things we deal with when it comes to tax law. Pay attention to dates. It will help for planning purposes on this year’s return – and next year’s return!
Financial and Investment Advisory services offered through CFO Capital Management. Brokerage and Custodial Services offered through TD Ameritrade Institutional, member FINRA and SIPC. CFO-CM and TDA are not affiliated. Tax services are provided by Peters Tax Preparation & Consulting, PC and are not provided by CFO Capital Management.
About the Author
David Peters is the Founder and Owner of Peters Professional Education (petersprofessionaleducation.com) and Peters Tax Preparation & Consulting, PC. He is also a financial advisor for CFO Capital Management. He regularly teaches courses in accounting, finance, insurance, financial planning, and ethics throughout the United States, and regularly contributes regularly to various professional publications, including NCACPA’s Interim Report, SCACPA’s CPA Report, and VSCPA’s Disclosures.