As teachers and students prepare to return to school this fall, the Internal Revenue Service reminded educators of the increased expense deduction available in 2022. In IR-2022-148, the IRS noted, "As the new school year begins, the Internal Revenue Service reminds teachers and other educators that they will be able to deduct up to $300 of out-of-pocket classroom expenses for 2022 when they file their federal income tax return next year."
The educator expense deduction had been $250 for tax years from 2002 through 2021. However, it is now going to increase in $50 increments based on inflation. As a result, an educator in 2022 may deduct up to $300 of qualifying expenses. If two educators are married, the potential joint return deduction is up to $600. The educator deduction is available for kindergarten through grade 12 teachers, counselors, principals or school aides who work at least 900 hours during the school year.
The $300 deduction may include books, supplies and classroom materials. Equipment such as computers and software or COVID–19 protective items are also deductible.
In some cases, a teacher may apply the $300 deduction towards a professional development course. However, the IRS notes that other educational tax benefits, such as the Lifetime Learning Credit, may provide greater benefit to the teacher.
There are some items that are not permitted as deductions. The cost of home schooling and nonathletic supplies for courses in health or physical education are not deductible. The IRS reminds educators to keep good records. The deduction should be supported by a receipt, canceled check or other documentation.
Inflation Reduction Act Tax Provisions
The Inflation Reduction Act (IRA) is the result of negotiations between Senator Joe Manchin (D-WV) and Majority Leader Chuck Schumer (D–NY). The IRA passed the Senate on August 7, 2022 by a 51 to 50 vote. It passed the House by a vote of 220 to 207, following debate on August 12, 2022.
The revenue raising provisions include a new corporate minimum tax, the Superfund Tax, a tax on stock buy–backs and increased IRS funding to raise revenue through enhanced compliance.
- Corporate Alternative Minimum Tax — There is a new 15% alternative minimum tax (AMT) on corporations with "adjusted financial statement income" (AFSI) of $1 billion or more. The profit is measured over a 3-year period. This AMT does not apply to S corporations, regulated investment companies and real estate investment trusts. The AFSI is typically determined under the audited financial statement. There may be adjustments for general business tax credits. The IRA was also amended to exclude private equity firm portfolios. The new AMT is estimated to raise $313 billion in revenue over a decade.
- Superfund Tax — The IRA restores a tax that was initially designed to clean up environmentally hazardous waste sites. The tax rate increases from 9.7 cents per barrel to 16.4 cents. This rate will be adjusted for inflation in future years.
- Stock Buy-Back Tax — The IRA establishes a 1% excise tax on stock repurchases by domestic corporations. The value will be determined by the value of stock repurchases less stock issuance during a year.
- Increased Internal Revenue Service Funding — The IRA provides $80 billion of increased IRS funding over the next decade. The amounts are approximately $3 billion for taxpayer services, $46 billion for enforcement, $25 billion for operations and $5 billion for computers and other business systems. The $80 billion is designed to permit hiring over 80,000 new staff during the next decade. The Congressional Budget Office estimates the increased enforcement provisions should raise $124 billion in revenue.
The second major tax section of the bill is designed to enhance energy security.
- Production Tax Credit — There is a credit for wind, geothermal and solar projects that commence construction by January 21, 2025. The projects generally receive a credit of 1.5 cents per kilowatt hour of future energy production.
- Investment Tax Credit — The IRA extends the 30% investment tax credit for wind, geothermal, solar and energy storage projects. Solar and wind facilities for low–income communities may also receive a 10% bonus credit, or 20% if the development is part of a low–income housing project.
- Clean Electricity Production Credit — There is a new technology credit for projects that generate electricity with a greenhouse gas emission rate of zero. This credit is phased out over four years.
- Clean Electricity Investment Credit — The IRA creates a new credit for energy storage technologies. This will typically cover battery installations.
- Nuclear Power Production Tax Credit — Certain existing nuclear facilities may qualify for a 1.5 cents per kilowatt hour credit.
- Carbon Capture and Sequestration Credit — There will be increased credits for carbon capture equipment placed in service in 2023 or subsequent years.
- Clean Vehicle Tax Credit — Consumers will be interested in the new credits for electric vehicles (EVs). If the majority of the vehicle is built in the U.S., there is a credit of up to $7,500. This credit is available for individuals within incomes up to $150,000 or couples filing jointly with incomes up to $300,000. The former 200,000 electric vehicle limit per manufacturer is also lifted. The new credit for large vehicles weighing over 14,000 pounds is up to $40,000 dollars. This appears to be intended to apply to trucks and buses with electric motors.
- Energy Efficient Homes Credit — The tax credit for home energy improvements is 30% and increases from $600 to $1,200.
- Residential Clean Energy Credit — A new credit until 2034 includes battery storage technology. Previously, this was only available for a combined solar system with batteries.
- New Energy Efficient Home Credit — New construction single–family homes that meet the ENERGY STAR requirement may receive a $2,500 tax credit. This may increase to a $5,000 tax credit if they qualify for the Department of Energy Zero Energy Ready Home Program.
While not a specific tax provision, the other significant part of the agreement between Senator Manchin and Majority Leader Schumer is there will be a comprehensive reform of the permitting laws. Senator Manchin received an assurance this will be passed by the end of 2022.
The potential permitting bill could have major impact on the nation and the environment. The IRA envisions many new developments that are designed to improve the energy efficiency of the nation. The U.S. is far behind Canada, Australia, and many European nations in streamlining the development and permit process. New permitting legislation would enhance the ability of developers to construct energy-efficient facilities. Your editor does not take a position on the provisions of IRA. This information is offered as a service to our readers.
Penalties Upheld For Failure to Report Foreign Trust
In Daphne Jeanette Rost v. United States
; No. 21-51064 (5th Cir. 2022), the Fifth Circuit upheld a District Court grant of summary judgment. The taxpayer had created a foreign trust and was subject to penalties for non-reporting.
John Rebold was an engineer who worked overseas in the oil and gas industry. In 2005, Rebold created the Enelre Foundation as a Stiftung under the laws of Liechtenstein. The Liechtenstein laws considered the entity a "foundation," but Rebold was the primary beneficiary and his children were the secondary beneficiaries. The Stiftung document prohibited "commercial trade" and was subject to filings in Liechtenstein. Rebold opened bank accounts in Switzerland and transferred approximately $3 million into the trust.
In 2010, UBS notified Rebold that the IRS had requested records from U.S. individuals who held funds in Switzerland. After reviewing the situation with counsel, Rebold was advised to participate in a voluntary disclosure program to limit penalties. In 2013, his daughter, Daphne Jeanette Rost, who held power of attorney, filed IRS Form 3520 and reported that in 2007 he held $3,116,898 in the trust.
The IRS assessed $1,380,252.35 in penalties under Section 6677(a) and required Rebold to file Forms 3520 and 3520–A for 2005, 2006 and 2007. The IRS Appeals Office reduced the penalties and they were paid in June of 2017. In 2019, Rost commenced the current action to recover the penalties.
The IRS moved for summary judgment that a Liechtenstein Stiftung was a foreign trust and the penalties were applicable. The District Court of West Texas in Rost v. United States, No. 1:19-CV-0607-RP, 2021 WL 5190875 (W.D. Tex. Sept. 22, 2021) sustained the IRS position that a Stiftung was a foreign trust.
A foreign entity may be a trust under Reg. 301.7701–4 or a business entity under Reg. 301.7701–2. If it is a trust, the court must determine whether it is a United States person (a domestic trust) or a foreign trust. See IRC Section 7701(a)(30)(B).
A trust is defined as an entity in which "trustees take title to property for the purpose of protecting or conserving it for the beneficiaries." The trust determination is based on the documents and the facts of each case. The court noted that Rebold and other trust grantors were "not at liberty to say that their purpose was other or narrower than that which they formally set forth in the instrument under which their activities were conducted."
The Rebold Stiftung clearly qualified as a trust. There was a familial purpose, no business objective and a ban on commercial activity. Therefore, the document terms classified it as a trust.
The second issue is whether a Stiftung in Lichtenstein is a domestic trust or a foreign trust. However, this trust was subject to the provisions of the Lichtenstein law. Rost showed no evidence that the trust constituted a domestic trust. Rost claimed that it could be considered a corporation, but did not support that claim with evidence.
Finally, Rost claimed that the penalties violated due process because there is not sufficient clarity in the foreign trust code and regulations. The court determined that the code and regulations "provide ample notice that the classification of an arrangement as a trust" and affirmed the judgment of the District Court.
Applicable Federal Rate of 3.8% for August -- Rev. Rul. 2022-14; 2022-31 IRB 1 (15 July 2022)
The IRS has announced the Applicable Federal Rate (AFR) for August of 2022. The AFR under Section 7520 for the month of August is 3.8%. The rates for July of 3.6% or June of 3.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.