The Tax Advantage January 2023
With the passing of the Inflation Reduction Act and the expiration of many temporary tax breaks, this tax year brings numerous federal tax changes that could impact the amount of tax you will pay. Following are some of the highlights of the changes, along with other information that may prove helpful:
The deadlines for 2022 returns filed in 2023 are as follows:
January 31 – Businesses must provide W-2s and/or 1099-NECs to employees, other income recipients, and the IRS
February 28 – Businesses must provide 1099-MISCs to impacted parties
**March 15 – Partnership (1065) and S-corporation (1120-S) returns due. Also the deadline to make an S-corp election
**April 18 – Form 1040 deadline for individuals / Form 1120 deadline for regular corporations
September 15 – Deadline for Partnerships and S-corps where an extension was filed
October 16 - Deadline for individual 1040s where an extension was filed
** Extended to May 15 for those in the California counties that were designated as federal disaster areas due to the storms
The Child Tax Credit for 2022 has reverted back to pre-2021 amounts. The credit for most taxpayers will be $2,000 for each child 16 years old or less. The credit phases out for those making over $200,000 ($400,000 for married filing joint.) The credit is refundable up to $1,500 per child for lower income taxpayers making over $2,500. The “Credit for Other Dependents”, which covers children age 17 and older and other qualifying relatives, is $500.
If you took a Covid-related distribution from your retirement plan in 2020, you were able to spread the tax out over three years. The third year is now upon us, and you will pay one-third of that tax with your 2022 tax return. This will hit many taxpayers hard since you will have no withholding, unlike the first year when you received the distribution. If you want to reduce your tax, you can roll part or all of the money back into the plan within the three year period.
The tax break for adding solar panels to your personal residence was extended through 2034. The non-refundable credit is 30% until 2032, when it is scheduled to drop to 26% in 2033 and 22% in 2034. The credit expires after 2034.
You can also receive tax credits for other energy saving home improvements. Examples are external doors and windows, skylights, water heaters, HVAC systems, insulation, etc. The items must meet certain efficiency requirements, and not all include the accompanying labor costs. The 2022 credit remains at a lifetime max of $500, but that will increase for improvements done in 2023. The lifetime max will increase to $600 per year for most improvements, and you can take a credit for up to $150 for the cost of a home energy audit. Visit https://www.energystar.gov/about/federal_tax_credits for more information and the latest updates.
The credits for purchasing electric vehicles are revamped, starting in 2023. The maximum credit is still $7,500, but the 200,000 vehicle threshold limitation is removed. The revised credit will not be available for single taxpayers with over $150,000 of gross income (higher for other filing statuses.) The credits are not available for vehicles with retail prices over $55,000 for sedans or trucks, over $80,000 for vans and SUVs. Certain used electric vehicles will also be eligible for a tax credit beginning in tax year 2023. Beginning in 2024, there will be an option for the buyer to transfer the credit to the dealer at the time of the purchase, thus reducing the purchase price immediately.
Many changes to retirement plans take effect in 2023 and beyond, due to the SECURE 2.0 legislation. The age to start taking RMDs (required minimum distributions) increases to age 73 and to 75 in 2033. Starting in 2024 RMDs will no longer be required from employer-based Roth accounts. Starting in 2025, individuals age 60 through 63 will be able to make catch-up contributions up to $10,000 annually, up from the 2023 catch-up maximum of $7,500 for those over age 50. There are also numerous other changes for those years away from retirement, most of which basically increase opportunities to save for retirement.
Due to the rise in tax-related identity theft, the IRS recommends you apply for an identity-protection PIN at https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin . The IP PIN is a six digit number assigned to you to prevent someone else from filing a fraudulent tax return using your social. The PIN is valid for one year only. You must first apply for a “ID.ME” userid if you do not already have one. The ID.ME account does not expire, and is also useful in obtaining other information from the IRS, such as balances due and copies of your tax return transcripts.
Taxpayers age 72 and older must take distributions, referred to as RMDs, from their IRAs and 401Ks by 12/31 of each year to avoid a hefty penalty. Those who work past 72 can usually delay the RMD from their current employer’s 401K until they retire.
Use the Get Transcript tool at IRS.GOV if you need data from a lost tax return. You can immediately print a summary of key tax information. If you need a copy of the actual tax return, you must mail in Form 4506 and pay a $43 fee to the IRS. You can also set up a full online account to see what you owe, and to allow a tax professional to access your account. Users must go through security procedures to authenticate their identities.
Businesses can deduct 100% of qualifying meals paid for in 2022. The rule applies to only food and beverages purchased at a restaurant for takeout or dining at the establishment. The taxpayer or an employee must be at the meal, and the cost can not be lavish or extravagant. Prepackaged food or beverages bought at a store or similar facility do not qualify for the 100% write-off. Strict guidelines and documentation requirements should be followed to take a deduction.
Scammers have upped their efforts during the pandemic, using fake phone calls, emails, and other social media. The criminals many times impersonate IRS employees and try to trick you into providing personal information. The first IRS contact with taxpayers is almost always through the mail. If you receive such a call, email, or other scam, do not give out any information to them or send money. Report the incident to the Treasury Inspector General at www.tigta.gov, and to your local police.
If you are the charitable type, donations made directly to a qualified charity from a traditional IRA can save taxes. Taxpayers over 70 ½ can transfer up to $100K yearly from IRAs directly to the charity. The qualified charitable distributions can count as RMDs, but they are not taxable. You don’t get a deduction on Schedule A, but the strategy can be beneficial due to the higher standard deduction.
1099-K reporting rules have now changed. Third-party payment networks such as Paypal, Airbnb, Ebay and Amazon, must send 1099-Ks to payees who were paid more than $600 in a year, regardless of the number of transactions. This means more taxpayers than ever will receive the 1099-K forms, and will need them when filing their tax returns. This change was originally scheduled to take place for tax year 2022, however it was delayed at the last minute and will not be implemented until tax year 2023 filings. However, many companies were not able to pull the plug in time and will still be sending out the 1099’s for 2022.
Although the feds won’t penalize you for not having medical insurance, California will. The penalty for not having coverage for the entire year will be at least $800 per adult and $400 for dependents, unless you qualify for one of the limited exceptions. Many taxpayers receive full or partial subsidies by getting insurance through Covered California.
The sale of your primary home can be partially tax-free if you have owned and used the property as your principal residence for at least two out of the last five years before the sale. Individual taxpayers can exclude $250,000 of gain, while married filing joint can exclude up to $500,000. The gain is the difference between the net sales price (total sales price less commissions and other fees) and the basis (cost plus improvements). A gain greater than these amounts are taxed at capital gains rates. Losses from sales of primary home are not deductible, and there are different rules if you ever rented out or used the home for business purposes.
Beware of firms that promise to settle your IRS debts for pennies on the dollar. The IRS calls many of the firms that offer these types of tax debt relief plans “offer-in-compromise mills.” Many of them charge big upfront fees and churn out relief applications that most can’t even qualify for. If you are able to pay your tax debt, even a little each month, the IRS will rarely accept an offer-in-compromise.
Medical expenses can be deductible, however they must be significant enough to exceed both your standard deduction (see below) AND 7.5% of your income. Deductible expenses can not include expenses paid with any sort of tax-deferred plan, such as an HSA or FSA. Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They do not include expenses that are merely beneficial to general health, such as vitamins, health clubs, vacations, etc. Long-term care insurance premiums are deductible, subject to certain limitations. In some cases, the self-employed can deduct insurance premiums directly on Form 1040 without having to meet the rigid threshold requirements.
The rules regarding inherited IRAs recently changed. If you inherit an IRA from your spouse, you are still able to treat the IRA as your own and stretch the distributions over your lifetime. However, most non-spouse inherited IRAs must be distributed within ten years. Beneficiaries who are chronically ill, disabled, minor children, or those not more than ten years younger than the deceased IRA owner can use the more generous spousal rules.
The IRS and the Justice Department are serious about undisclosed foreign accounts. They are devoting more time and money to get taxpayers to report foreign accounts when the value exceeds $10,000 at any time during the year. The penalties for not reporting are steep - $10,000 apiece for non-willful violations, $100,000 for willful violations. Foreign banks are forced to provide the names of U.S. account owners to the US government.
Non-compliance regarding virtual currency and digital asset transactions are a growing concern to the IRS. More reporting requirements could be on the way for the virtual currency exchanges. Congress wants to treat digital currency trades the same as stock sales, requiring brokers to report the transactions. Businesses may soon be required to report crypto currency transactions the same as if it were cash.
Like many other businesses, the IRS has been negatively impacted by the pandemic. Along with the pandemic, the numerous law changes, new relief programs, years of budget cuts, antiquated computer systems, and a shrunken workforce, have all caused a huge decline in service. There are still millions of tax returns currently at the IRS that require processing, mostly amended and prior year returns. Getting through to the IRS by phone is rarely successful. They are hiring thousands of new employees to assist in the backlog, and also to perform more audits. Callback technology could be coming to the IRS soon that would allow callers to leave a phone number for a call back, instead of waiting on hold, or being asked to call back later.
The standard mileage rate for business driving has increased for tax year 2022. The rate for the first half of the year is 58 ½ cents per mile, 62 ½ cents for the second half. To audit-proof your tax return, you must keep a contemporaneous and detailed log of the miles driven. The rate for medical mileage is 18 cents per mile for January through June, and 22 cents for the second half. The charitable driving rate remains at 14 cents.
Tax breaks for upper education continue to benefit many taxpayers. The American Opportunity Tax Credit (AOTC) is worth up to $2,500 per student for each of the first four years of college. The AOTC phases out if your income is over $80,000 for single and head of household filers, $160,000 for married filing jointly. The Lifetime Learning Credit can benefit part time students and those that have exhausted the AOTC. Other educational tax breaks include 529 plans, student loan interest deductions, and the savings bonds interest exclusion.
Inflation does have a positive influence on the tax system – you can make more and remain in the lower tax brackets. A single taxpayer can have taxable income of up to $41,775 before moving into a 22% tax bracket. Taxable income is calculated based on your gross income, and then subtracting the higher of your actual deductions or the standard deduction. Married filing joint taxpayers can have taxable income twice that amount ($83,550) and remain in the lower tax brackets.
Standard deductions are also higher for 2022. Singles get $12,950, plus $1,750 if age 65 and up. Married couples can claim $25,900 plus $1,400 for each spouse 65 or over. Those qualifying for Head of Household status get $19,400 plus $1,750 when 65. Blind people receive another $1,400 more towards their standard deduction.
The “kiddie tax” is still around, but it does have less bite for 2022. The first $1,150 of unearned income of a child under age 19 (or under age 24 if a full-time student) is tax free. The next $1,150 is taxed at the child’s rate. Anything over that is taxed at the parents’ rate. Unearned income includes interest and dividends, unemployment income, capital gains, etc.
The annual gift tax exclusion has increased to $16,000 per donee in 2022. That means you can give up to $16,000 ($32,000 if your spouse agrees) to each person without having to file a gift tax return or have it go against your lifetime estate and gift tax exemption. Special rules apply to money gifted for tuition and medical expenses.
The 2022 contribution limits for traditional and Roth IRAs remains at $6,000, plus an additional $1,000 for those age 50 and up. If you have a retirement plan through your work, your contribution limit is reduced for a traditional IRA if your adjusted gross income (AGI) is over $68,000 ($109,000 if married filing joint). To contribute the full amount towards a Roth, your AGI must be less than $129,000, or $204,000 if married. For 2023, the $6,000 increases to $6,500. The rules and limits are complex, so I would recommend consulting with us before contributing.
The maximum contribution limits for a 401(k), 403(b) and 457 retirement plans has increased. For 2022, the maximum amount is $20,500 plus another $6,500 for those 50 and up. For 2023, the maximum goes up to $22,500 plus $7,500 in “catch up” contributions.
If your income is less than $68,000, you could be eligible for the little known “Savers Credit”. The credit can be worth up to $2,000 if you are married filing a joint return and contribute towards a retirement account, either through your employer or an outside IRA. If you are single, your income must be less than $34,000 / less than $51,000 for those qualifying for head of household filing status.
If you are confused about capital gains taxes, you are not alone. Capital gains tax rates are actually a good thing – they are lower than ordinary income tax rates. The rates, which apply to gains on investments held for at least one year, range from 0-20%, compared to ordinary tax rates which range from 0-37%. The 3.8% net investment tax will increase the tax rates for those with income over $200,000.
I am often asked the question, how long should I keep my records? The answer, like most tax questions, is “it depends”. You want to keep all records for at least 4 years after filing, since that is the audit limitation period for most returns in California. However, if you have records pertaining to an asset or improving an asset, you should keep those records for four years after you dispose of that asset. An asset could include your personal residence, a rental property, investments, or business property. I would recommend you keep the actual tax return itself indefinitely, since you can probably fit a whole lifetime of returns in one box. If your tax situation is complicated or you just don’t have the space for one more box, digital storage is always an option – but be sure you use some sort of encrypted storage media.
Other items to note:
- An adoption tax credit is available for the expenses of adopting a child.
- Up to $2,500 in student loan interest may be deductible if your income is not too high
- Eligible educators can deduct up to $300 in classroom expenses incurred in 2022
- The $300/$600 “above the line” deduction for charitable contributions has expired for 2022
- Employers can provide employees up to $280 per month in parking or mass transit benefits, tax free
- U.S. taxpayers working abroad may be able to exclude up to $112,000 per year from their income in 2022
- The social security wage base for 2023 will increase to $160,200
- You can now purchase up to $5,000 in US Savings I Bonds with your federal tax refund
- The child day care credit is allowed on up to $3,000 in expenses for one child / $6,000 for two or more children
- Alternative Minimum Tax (AMT) exemptions went up for 2022, meaning very few people pay AMT anymore
- The deduction for mortgage insurance premiums has expired
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