As a Trustee, you have a duty to the beneficiaries of the trust to be informed regarding tax planning, or at the very least hire qualified professionals to assist with appropriate tax planning on behalf of the trust.  This article will provide a brief overview of the provisions contained in The Inflation Reduction Act of 2022 (the “Act”) and how they might affect your beneficiaries, or you, in your fiduciary role as Trustee.   

There is good news and bad news in the new Act, as the federal government uses the U.S. Income Tax Code in two different ways. The first way (the bad news) is to collect taxes and then use those tax proceeds to fund the government. The second way (the good news) is through negative tax expenditures, in which the Tax Code provides taxpayers with a tax credit to encourage certain behavior. The Act constitutes a prime example of negative tax expenditures, as it seeks to foster certain behavior to accomplish its policy objectives, namely the “Green New Deal.”  

First, the bad news is that the Act increases government funding to the IRS by approximately $80 billion, with more than 50% of that amount ($45.6 billion) is specifically earmarked for tax enforcement.  This fact almost certainly means that the IRS will be conducting more audits over the next decade.  The Treasury Department estimates the difference between what is owed and what the IRS collects totaled $600 billion in 2019 and will rise to $7 trillion over the next decade. (Fortune Online, The IRS may get $80 billion from the Inflation Reduction Act, ALICIA ADAMCZYK, August 11, 2022).   

It is worth noting that the top 50% of all taxpayers paid 96.9% of federal income taxes collected for 2019. The top 1% paid 38.8% of taxes collected. (Tax Foundation, Summary of the Latest Federal Income Tax Data, 2022 Update, Erica York, January 20, 2022).  As a result, the remaining 49% of middle and upper middle-class taxpayers paid 58.1% of all the taxes collected for 2019. Ibid.  Generally, IRS auditors are not primarily seeking to audit the top 1% of earners, because they are already paying more than one-third of the total taxes collected.  Not to mention the legion of professional comptrollers, CPAs and tax attorneys employed by the top 1% are prepared to do battle with the IRS.   

Rather, IRS auditors more often seek weaker prey – medium size businesses that perhaps do not employ in-house CPAs and tax attorneys.  As Trustee, you may be managing such medium-size businesses for the beneficiaries of the trust.  Researchers at Syracuse University found that 46% of IRS audits in the most recent fiscal year were aimed at people who receive the Earned Income Tax Credit — a tax break designed to supplement the income of lower-wage workers. Meanwhile, the IRS audited a mere 2.2% of the tax returns of millionaires last year (NPR Online, The IRS just got $80 billion to beef up. A big goal? Going after rich tax dodgers, Scott Horsley, August 14, 2022).  Finally, if you are a W-2 employee, you face a smaller risk of audit than if you have rental properties, a small to medium size business, or work in any type of cash business.   

Now for the good news – which may be of interest to you or your beneficiaries, individually or in your role as Trustee, particularly in the realm of residential real estate, and include the following: 

The Act provides that for the tax years 2023 through 2032, the revised income tax credit will be equal to 30% of the costs for all eligible home improvements made during the year. It also expands to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. Under the existing law in 2022, there is a LIFETIME limit of $500 placed on this credit. Beginning in 2023, that is replaced by a $1,200 annual limit on this income tax credit. The annual limits for specific types of qualifying improvements will be as follows: 

  • $150 for home energy audits; 
  • $250 for an exterior door ($500 total for all exterior doors); 
  • $600 for exterior windows and skylights; central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; natural gas, propane, or oil furnaces or hot water boilers; and 
  • $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,200 annual limit may be exceeded). 
  • For eligible home improvements after 2024, no credit will be allowed unless the manufacturer of any purchased item creates a product identification number for the item, and the person claiming the credit includes the number on his or her tax return. 

Furthermore, the Act breathes new life into the Residential Clean Energy Credit by extending it until 2034, with a corresponding increase of the credit amount to 30% from 2022 through 2032. This credit pertains to the cost of installing qualifying systems that use solar, wind, geothermal, biomass or fuel cell power to produce electricity, heat water or regulate the temperature in your home (the credit for fuel cell equipment is limited to $500 for each one-half kilowatt of capacity). 

Another tax benefit of note is the High-Efficiency Electric Home Rebates program. This program provides rebates to low- and middle-income families who purchase energy-efficient electric appliances. To qualify for a rebate, your family’s total annual income must be less than 150% of the median income where you live. The benefits are as follows: 

Qualifying homeowners can get rebates as high as: 

  • $840 for a stove, cooktop, range, oven, or heat pump clothes dryer; 
  • $1,750 for a heat pump water heater; and 
  • $8,000 for a heat pump for space heating or cooling. 

Rebates for non-appliance upgrades will also be available up to the following amounts: 

  • $1,600 for insulation, air sealing, and ventilation; 
  • $2,500 for electric wiring; and 
  • $4,000 for an electric load service center upgrade. 

It should be noted that a rebate can’t exceed 50% of the cost of a qualified electrification project if the family’s annual income is between 80% and 150% of the area median income. Moreover, each qualifying family will also be limited to no more than $14,000 in total rebates under the program.  The $4.5 billion to be allocated for rebates will be distributed to families through state and tribal governments that establish their own qualifying programs and will be available through September 30, 2031.  Thus, the bottom line is to plan home improvement projects in advance, to maximize any potential tax credit and/or rebate in as many tax years as possible. 

Remember the adage is that tax evasion is a crime, but tax avoidance is your right.  Here we are inspired by one of our nation’s foremost jurists, Judge Learned Hand, who famously opined that “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Repeatedly, the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.” He also said “In America, there are two tax systems: one for the informed and one for the uninformed. Both are legal.”  

It is imperative that Trustees engage in proactive tax planning. If you are administering an income-producing trust, don’t wait until after the year’s end to determine what the profit and income to the trust may be.  As Trustee, if possible, you should hire tax professionals to gauge income tax projections for the trust in September for the current year, so you have time to do proactive and thoughtful income tax planning. Trustees must be diligent about tracking expenses and deductions. Trust business income statements should be reviewed monthly.  Being organized and keeping documentation to justify trust expenses is key to protecting yourself from liability as Trustee. An IRS audit will cost the trust a whole lot more than just money – it could very well open you as the Trustee to personal liability.   

Finally, for the reasons listed above and more, be sure to arm yourself as Trustee with the liability insurance exclusively offered to members of The Private Trust Consortium (PTC) in conjunction with Chubb Insurance.  When all else fails, our liability insurance can be the difference between serving happy beneficiaries or exposing yourself to liability and potential financial ruin in appreciation for your service as a trustee.