Tax Update: Tax Law Changes

The purpose of our government-directed tax system and the intended and unintended consequences of tax law changes, along with the mechanics of the tax system itself and a particular tax-saving strategy are the focus of this issue’s Tax Update.

While large corporate or individual tax increases seem to be off the table at this time, it is worth reviewing the idea that tax rate decreases can actually increase government revenue and increase benefits to individuals even if the changes are made to other than their individual rates. A review of 2017’s tax reform effort, the 2017 Tax Cuts and Jobs Act which reduced the federal corporate tax rate to 21% from 35% and liberalized expensing of new equipment investing, shows that it actually delivered both average household real income gains and higher corporate tax revenue, both absolute and as a higher percentage of gross domestic product over the two-year period after passage.[1] The focus on domestic corporate business expansion enhanced worker bargaining power to provide a bigger increase in household real income in 2018 and 2019 than in the previous eight years of a weak recovery (from 2010 to 2017).

Correspondence Audits and Charitable Distributions

Collection of the federal individual income tax starts with the filing of an income tax return with payment and sometimes involves the IRS checking on the accuracy of that filing. This process may start with “computer-generated notices and letters that flag a discrepancy” on the return.[2] This process is called a “correspondence audit” and covers issues such as providing additional backup for certain deductions to taxable interest from a forgotten bank account.[3] More than 70% of what might be called “audits” are correspondence audits. Officially, audit statistics cover “office” audits, where you go to the IRS, or “field” audits, where they come to you. By including correspondence audits in statistics, “the audit rate for taxpayers making $1 million to $5 million in 2016 moved from an official 4.2% to 21.1%,” according to the National Taxpayer Advocate.[4]

Qualified charitable distributions from traditional IRAs have some great advantages to those charitably inclined. When combined with required minimum distributions, depending on the individual situation, they can be used to lower income recognition in any year, even when using the standard deduction, as well as “mitigating stealth taxes” based on adjusted gross income, such as Medicare surcharges.[5] Use of this benefit requires the gift to go directly to the charity (not, for example, to a donor-advised fund), be free of any quid pro quo (even a coffee mug), and because the required minimum distribution recognized is reduced by the gift, not taking an additional charitable gift deduction on the return.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, Chairman & CEO
Jeanne M. FitzGerald, CPA – Tax Manager

[1] Tyler Goodspeed and Kevin Hassett, “The 2017 Tax Reform Delivered as Promised,” Wall Street Journal, 5/9/22
[2] Lynnley Browning, “Client Under Audit? Here’s What Advisors Can Do,” Financial Planning, June 2022, p. 37.
[3] Ibid.
[4] Ibid.
[5] Leonard Sloane, “Tax Issues When Giving to Charity from an IRA,” Wall Street Journal, 7/5/22