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With the annual rite of filing a federal tax return in full swing, millions of Americans will need to adjust their expectations. Before the December holidays, the IRS warned taxpayers might receive a significantly smaller refund than the previous tax year. Generous credits for children and childcare and dependent expenses have shrunk to pre-pandemic levels. Steep losses from the stock market, which fell nearly 20% last year, have handed some mutual fund investors surprise distributions with a capital-gains tax bill, even as the funds lost money. Throw in spiking audit rates for higher earners, and the financial jolts of the 2023 filing season will hand many filers slimmed-down refunds or none. Some taxpayers won't get a tax form for payments from third-party vendors until the end of this month, which leaves less time to pull it all together, complicating things further. As usual, partnerships don't have to send investors statements of income and losses until March 15th, which makes filing for an extension the way to go for affluent taxpayers.

Some important dates to note are as follows:

● April 18th, 2023, the Federal returns are due. This is partly caused by a District of Columbia holiday that falls the day before.

● California storm victims have until May 15th to file their taxes.

● By April 18th, taxpayers may opt for an extension to file by October 16th, end of day.

Expect Less. During the pandemic, the federal government flooded American households with cash and credits to keep people's financial heads above water as businesses shuttered and the economy stumbled. Those $1,400-per-person stimulus checks in 2021 are now a distant memory. So, a family with three children who received $7,000 won't have that boost this year. Additionally, Families who received $3,600 per dependent under the age of 6 in 2021 will only receive the pre-pandemic amount of $2,000 for 2022. Those with dependents older than six but under age 18 who got $3,000 per child in 2021 are now faced with receiving an amount lower than $2,000, which stops if a child turned 17 last year. Likewise, the child and dependent care credit for 2022 dropped to a maximum of $2,100 from $8,000 in 2021.

The Gloss in a Loss. All of the losses in the market have a potential upside. Investors can participate in a technique known as tax-loss harvesting. The method involves selling poorly performing stocks and funds and using the losses to offset the profits from selling winning assets. The technique works when selling real estate and businesses, too. No investment profits to offset? You can use up to $3,000 to offset your taxable income, including salaries and wages. Any losses left over can be carried forward indefinitely to future years.

Reap What You Sowed. Unlike mutual funds bought through fund companies, exchange-traded funds trade on exchanges like stocks. And unlike mutual funds, ETFs tend not to throw off capital gains distributions, making them more tax efficient. Blindly harvesting losses can be counterproductive in the long term because when a repurchased stock or a replacement investment later appreciates and is sold, it faces capital gains tax that can outstrip the strategy's initial savings. However, they are subject to the wash-sale rule, designed to prevent investors from claiming a loss for tax purposes while not actually losing money. The rule says an investor has to wait 30 days before or after selling a security at a loss before repurchasing the same security or buying a "substantially identical" one.

Now and Later. This year may be a bit smoother when considering The National Taxpayer Advocate's annual report. The report stated to Congress on January 11th that the agency made considerable progress in reducing the volume of unprocessed returns and correspondence. The IRS has hired an additional 4,000 people to help with the phones during this tax season and aims to add another 1,000 by year's end.

A form known as Form 1099-K goes to taxpayers who sold goods or services through a digital platform such as Venmo or PayPal. Investors will receive the form if they made over 200 transactions totaling more than $20,000 last year. The thresholds were due to drop to $600 and a single transaction for 2022, but in late December, the IRS pushed back the requirement by a year. A copy of the form goes to the IRS, which warns that people with untaxed income on a 1099 that isn't reflected on the tax return they initially filed may owe taxes and need to file an amended return.

The Eyes Have It. Audit rates are a fraction of their historic levels. But after years of steady decline, they're doubling and, for one income threshold, more than quadrupling. In a notice published last May, the IRS released new data showing that those making between $500,000 and $1 million faced a 0.6% audit rate as of May 1st, 2022. That's equivalent to six people out of 1,000, double the 0.3% rate those taxpayers faced as of September 30th, 2021. The rate for those making between $1 million and $5 million more than doubled, to 1.3% from 0.6%. And for people making $10 million or more, the rate more than quadrupled, to 8.7% from 2%.

Talley's team of tax professionals provide comprehensive tax compliance and consulting services so you can preserve, enhance, and pass on your assets and wealth to the next generation. We welcome the opportunity to discuss the current options available for you. For more information, contact us today.


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