American households have been feeling the full effects of inflation all year with rates at their highest since early 2008. To support a healthy U.S. economy, the Federal Reserve, also known as the Fed, has raised its federal funds rate. Put simply, the federal funds rate is a suggested interest rate for banks to use when lending money. The Fed raises and lowers the rate accordingly to control the money supply and help keep inflation under control.
Fed Rate Hikes in 2022
In 2022, the fed funds rate has increased seemingly every other month. So far, the Fed has made the following adjustments:
March 2022: The Fed raised its rate from 0.25% to 0.50%
May 2022: The Fed raised its target rate range between 0.75% and 1% and announced it was reducing its holdings of Treasury and mortgage-backed securities.
June 2022: The Fed raised its target rate range between 1.5% and 1.75%, the largest rate hike in nearly 20 years.
July 2022: The Fed raised its rate to a target range between 2.25% and 2.5%
September 2022: The Fed raised its target rate range between 3% and 3.25% and announced the anticipated rate by the end of 2022 to be 4.4%.
November 2022: The Fed raised its target rate range between 3.75% and 4%, the highest level since 2008.
What’s Next For the Fed?
In October 2022, the Consumer Price Index (CPI), which is used to measure inflation, showed some signs of cooling prices in some areas. While this may sound encouraging, the Fed has announced that it does not view the small change as a victory. The option of raising their rate range in the December policy meeting is very much a possibility that Americans should prepare for. In fact, several financial institutions have predicted a rate of over 5% by March 2023.
What The Fed Rate Hikes Mean for Americans
The Fed rate hikes impact anyone who uses or is seeking financing because of rising interest rates. Home buyers have experienced higher interest rates on mortgages, meaning less buying power. On the flipside, home sellers might see a decrease in demand because it’s more expensive to purchase a home right now. Credit card debt also becomes more expensive since consumer debt interest rates rise after rate hikes. One of the few positives of rate hikes is that rates on savings accounts have increased slowly. Putting money into a high-yield savings account or a CD during inflation can result in greater interest yields.
Tax Relief for Those Affected by Fed Rate Hikes
Just about everyone in the U.S. has been affected by fed rate hikes, either directly or indirectly. On the tax side of things, the IRS has increased their interest rates for overpayments and underpayments to 6% per year, compounded daily. This rate is up from July’s rate of 5%. Higher rates make it a worse time to fall behind on tax payments, so staying compliant is even more crucial during this time. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
President Biden has announced his three-part student loan forgiveness plan that aims to provide relief to student loan borrowers, especially those belonging to low– and mid-income levels.
Part I: Student Loan Forgiveness for Eligible Borrowers
Borrowers with individual incomes less than $125,000, or $250,000 for married couples, are eligible for student loan forgiveness up to $20,000. The Department of Education will cancel up to $20,000 in student loan debt to borrowers who received a Pell Grant and had loans held by the Department of Education. Those who did not receive a Pell Grant will receive up to $10,000 in debt cancellation. Since this plan will not benefit high-income households, the Biden administration has extended the pause on loan repayments once more until January 2023.
Part II: Manageable Loan System for All Borrowers
The Department of Education proposed a new repayment plan that will replace the current income-driven plan in place. It will prevent low-income borrowers from committing to monthly payments of more than 5% of their discretionary income, a drop from the current 10%. This would lead to an average savings of $1,000 per year for both current and future borrowers.
In addition, they will expand on the recent improvements to the Public Service Loan Forgiveness (PSLF) program. More than 175,000 public servants have had $10 billion in student loans canceled and the Department of Education expects these numbers to increase. Public servants include nonprofit workers, military members, and officials working in federal, state, local, or tribe level governments.
Part III: Reduced Cost of College
Earlier this year, President Biden approved the largest increase to Pell Grants since 2009, a bill that doubled the size of the maximum Pell Grant to $6,895. In addition to making tuition costs more manageable, the Biden administration has also taken steps to hold colleges accountable for keeping reasonable tuition costs, as well as ensuring students are receiving the value for their investments in higher education.
Assuming every eligible borrower takes advantage of this plan, it will completely cancel student loans for nearly 20 million borrowers, as well as partially cancel student loan debt for 43 million others.
Tax Debt Relief for Student Loan Borrowers
The debt relief in Biden’s Student Loan Forgiveness Plan will not be treated as taxable income for the federal income tax purposes. However, borrowers should remain mindful of available tax breaks and filing requirements. If you need tax help, give us a call at 800-536-0734 for a free consultation today.
We know that an increased budget for enforcement will lead to more audits. More audits mean more tax collection. The question that remains to be answered is exactly how much federal tax revenue the IRS expects to collect with the new Inflation Reduction Act.
How much taxes will be collected with the Inflation Reduction Act?
The Congressional Budget Office recently released a report that estimated the budgetary effects of the Inflation Reduction Act. They expect increased collections of about $203 billion over the next decade. This would raise federal revenue by almost $125 billion during that 10-year period after taking into account the $80 billion cost of the act.
Why is tougher enforcement necessary?
According to the IRS, most taxpayers pay their federal taxes willingly and on time. However, that still leaves nearly $400 billion in uncollected tax payments. They believe that tougher enforcement can help close the tax gap. In other words, stricter enforcement will help lessen the difference between the amount of taxes that is collected, and the amount taxpayers owe.
IRS enforcement, audits in particular, has been less frequent in the last decade. In fact, audit rates have dropped for all levels of income between 2010 and 2019. In fact, a tax return was three times more likely to be audited in 2010 than in 2019. However, this is not due to the IRS becoming more lenient or forgiving. The issue centers around staffing levels and funding. The IRS is expecting the new funding from the Inflation Reduction Act to help balance staffing levels in order to be able to collect more tax revenue.
Are you prepared for increased tax collection?
With increased IRS tax collection approaching, it’s important to be prepared. It’s never too late to seek tax debt relief. Get protected from the stress and burdens that come with IRS tax collection. Give us a call at 800-536-0734 for a free consultation.
More than half of the $80 billion Inflation Reduction Act will be spent on IRS enforcement. This specifically means collecting back taxes, conducting criminal investigations, monitoring digital assets, obtaining legal support and hiring thousands of new IRS auditors.
How many auditors will the IRS hire?
The IRS is looking to hire nearly 87,000 employees over the next 10 years. This is a major increase from its current 80,000 employees. A majority of the new hires will help bring IRS staffing levels back up to par to maintain efficiency. As of now, it remains to be seen exactly how many of the new hires will be responsible for auditing. The IRS will determine the number of enforcement agents they hire.
Who will be audited?
More auditors mean more audits, so understandably taxpayers are wondering if they will be impacted. The U.S. Treasury Department has said that the low and middle-class, as well as small businesses, will not be the focus of the upcoming increased enforcement activity. The IRS is to focus its auditing efforts on high-income taxpayers and large corporations. Specifically it will focus on those that earn more than $400,000 per year. The bill itself includes language that states the goal of the Inflation Reduction Act is not to increase taxes for any individual or entity earning less than $400,000 per year.
Are you prepared for an audit?
All in all, with increased IRS enforcement activity approaching, it’s important to be prepared. It’s never too late to seek tax relief. Let Optima’s team of experts help you get protected from the stress and burdens that come with IRS enforcement. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers.
Between the inflation, the pandemic, and the Inflation Reduction Act, now is a scary time to owe back taxes. The bill has passed, granting the IRS $80 billion dollars in funds for their activity. Consequently, we’re expecting a massive increase in the agency’s enforcement. Learn how the Inflation Reduction Act will affect IRS spending.
How will the Inflation Reduction Act will affect IRS spending?
Inflation Reduction Act funds will be added on to the annual money the IRS receives from Congress. This will be about $12.6 billion for 2022. Additionally, the 50% increase will be paid across four departments over the next ten years.
More than half of the funds are specifically going toward enforcement activity. IRS enforcement includes collecting back taxes, conducting criminal investigations, legal support, and monitoring digital assets. The other three areas that will also be supported include:
IRS operations- $25 billion for expenses such as rent, printing, postage, and telecommunications.
Customer service- $4.8 billion would be used for updating service technology. A callback service is in the talks.
Taxpayer assistance- $3 billion would go toward filing and account services or other taxpayer needs.
IRS Collections
With a large budget provided by the Inflation Reduction Act, the IRS is expecting to collect roughly $203 billion in federal tax revenue over the span of a decade. The net federal revenue would increase by more than $124 billion.
Government officials are also expecting the tax gap to close. So, the difference between the amount of taxes being collected and what taxpayers actually owe will be closer.
Tax Help for Taxpayers Who Owe
If you haven’t started the process of tax debt relief, it’s not too late. Preparing yourself with a team of professionals that are already working on your compliance could spare you from more penalties, stress, and possibly help you save some money. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
From a pandemic to inflation, American taxpayers haven’t been able to catch a break since 2020. To combat the current state of the economy, Senate has passed a new bill with a ten-year plan. The Inflation Reduction Act is being sent to President Biden’s desk, requesting nearly $80 billion to the IRS.
What is the Inflation Reduction Act?
While the funding will support the IRS, this will hopefully bring in more federal tax revenue to offset the cost of lowering prescription medicine and combating climate change. There are plans in motion to accomplish these goals, but federal funding to do so is lacking.
How will the IRS use these funds?
The IRS has been waiting for additional funding for years. In the last ten years, their activities have dwindled, and the agency’s budget decreased more than 15%. While IRS Commissioner Rettig has previously stated that the backlog will be complete by the end of 2022, there are still 11 million unprocessed tax returns.
The IRS will hire more staff and have access to more resources, such as legal representation for larger cases.
Cons
Naturally, more staff and resources for the IRS means more IRS enforcement. This act could trigger more audits for middle class businesses and individuals.
Outcome of the Inflation Reduction Act
Government officials have also stated that the goal is not to go after small businesses, but rather the large corporations and high net-worth individuals with high-end noncompliance.
Senior Fellow at the Urban-Brookings Tax Policy Center Janet Holzblatt was quoted as saying, “The goal should not only be to increase audits, but improve the productivity of audits. You want the IRS to select the businesses and people for audits who really have not been compliant.”
How the Inflation Reduction Act affects people who owe
With more IRS enforcement on the way, it’s better to be safe and get in compliance as soon as possible. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
