With the continued changes to taxes, it's hard enough for CPAs and EAs to keep up, let alone taxpayers.
In the off-season, we as tax preparers are working diligently to read through endless bulletins, attend classes and webinars and find solutions for the upcoming changes.
It is our job to keep on top of it, but also to inform our clients as well.
Here are some, by no way a complete list, but some of the new changes to taxes that we want to highlight going into effect in 2023 that we think you should know about.
Note that some of these credits have much more detail and qualifiers not listed, but we've tried to simplify the numbers and are only mentioning the highlights. If you are interested in a complete list of all details, the IRS website has endless resources.
Individuals
1. Electric and hybrid vehicles - new rules and the removal of manufacturer limits
This is #1 as it's our most popular credit, question and inquiry from clients.
New rules apply for clean vehicles purchased in 2023. Unfortunately, these do not retroactively apply for 2022 purchases. Note that separate rules apply for the first half of 2022 and the second half, just to complicate things.
Here is a quick update for 2023.
In the past, EV vehicle credit rules disqualified taxpayers for claiming the credit on vehicles purchased from manufacturers after they sold 200,000 cars.
The 200,000 per-manufacturer limit goes away on January 1, 2023. While many Tesla owners were surprised that their purchases didn't qualify for the credit in prior years, Tesla is back in the mix.
We actually foresee many more taxpayers not qualifying for the energy efficient vehicle tax credit and here is why.
The new credit rules come with stringent qualifiers for both the vehicles and the taxpayer.
Vehicle MSRP price caps now apply and the battery and/or assembly of vehicles must take place in the US. This makes the list of qualifying vehicles ALOT shorter.
In addition to the vehicle limitations, in 2023, there is now a disqualifier in place for taxpayers who make above a certain income level. If you are married filing jointly (MFJ) and make $300k, $225k Head of Household or $150k filing Single, you are no longer eligible for the credit at all.
Pre-owned "Used" energy efficient vehicles have their own tax credit starting in 2023 as well for $4,000 or 30% purchase price, but only for taxpayers filing jointly making less than $150k or single taxpayers with adjusted gross income less than $75k. Oh and only for vehicles with prices less than $25k.
While these new credits "seem" at first to expand the options, they actually significantly restrict the allowable cars and taxpayers who will ever see this credit on their tax return.
If buying a vehicle in 2023 and looking for energy tax credit, first check the list here or search by VIN and then see if your income allows you to qualify for the credit.
2. Charitable Contributions above the line ended in 2021
In 2021, if you made charitable contributions, you were able to deduct $300/taxpayer "above the line" even if you took the standard deduction.
Don't expect to see this deduction on your 2022 tax return unless you itemize. In 2022 and on, charitable contributions will only be allowed for taxpayers who itemize.
3. Solar credit back to 30% in 2023, 26% in 2022
Installing solar seems to be a norm. We are not going to talk ROI here, but just recommend you run the numbers!
The solar credit used to be 30% of the purchase price. The credit decreased to 26% for solar installed in 2022.
If you placed solar in service in 2022, you may qualify for the 26% credit.
Note that the date the rules apply depends on when the solar installation was completed!
The IRS has said that solar installed in 2023 goes back to 30% credit, but did not retroactively increase the previous decreased credit. So 2022 installs still only qualify for 26%.
4. Energy efficient install of windows and doors from moves from 10% in 2022 to 30% in 2023.
Here's another great credit, different rules apply for 2022 and 2023. Installation of energy-efficient windows, doors, heat pumps, HVAC, water heaters and other qualifying home energy improvements is limited to 10% or a per-item value credit limit by type in 2022.
In 2023, new rules apply that includes a 30% total spent credit with a maximum of up to $1200 per year, with the exception of water heaters that are limited to $2000 per year.
5. Payroll and Self-Employment tax changes
If you receive social security, you saw a 5.9% inflation increase in 2022 and will see 8.7% inflation adjustment in 2023. Who pays for this increase? The workers...
Employers, employees and self-employed may see an increase in their social security taxes in 2023.
There is no change in the tax rate percentage, but the maximum social security tax base is increasing to $160,200 for 2023 (up from $147,000 for 2022). If you are self-employed, you may also see this increase on your self-employment taxes when you file your 2023 return.
6. Dependent Care for employer-provided assistance decreases by half
If this applies to you, this benefit drops back to $5k for MFJ in 2022. In 2021, up to $10,500 was allowed.
7. Student loan forgiveness... on hold
Student loan forgiveness has been all the buzz... but payments to forgive loans came to a screeching halt in 2022.
Student loan forgiveness "may" be coming - but it is currently tied up in court and on hold.
8. Child tax credit drops back to $2k per child in 2022
The pandemic $3,000-$3,600 child tax credit and advanced child tax credit payments are gone and this credit has reverted back to $2k per qualifying child for 2022.
You may be able to claim the credit for children who have not turned 17 by the end of the calendar year.
Eligibility starts being reduced or phased out for MFJ taxpayers with adjusted gross income of $400k and $200k for single taxpayers.
9. Unemployment benefits are fully taxed in 2022
If you collect unemployment benefits, expect to report the full amount and pay taxes on that amount. The first $10,200 exclusion from 2021 is gone.
10. Standard deduction increases
Single (under 65) standard deductions increases from $12,550 in 2021 to $12,950 in 2022 and $13.850 in 2023.
11. Retirement limits
The annual Roth IRA contribution maximum has remained at $6,000 (under 50) and $7,000 (50+) for the past few years but increases to $6,500 (under 50) and $7,500 (50 and over) in 2023.
Eligibility to contribute to Roths in 2022 starts phasing out at adjusted gross incomes for married filing jointly (MFJ) at $204k and $129k for single. Those minimum limits increase to start phaseout in 2023 to $218k for MFJ and $138k for single.
401k/403b limits max out at $20,500 (under 50) and $27k (50+) in 2022 and increase to $22,500 (under 50) and $30k (50+) in 2023.
If you are a business owner, consider opening a small business, owner 401k plan to increase your retirement contribution limits.
Businesses
1. Meals back to 50% deductibility
Business meals made a change during the pandemic and were deductible at 100% in 2021 and 2022 if they were purchased in restaurants.
All business meals are returning to 50% deductibility in 2023 regardless of where they were purchased.
2. Basis reporting is required
If your tax preparer is asking you for balance sheets and historic contributions to your business, this is due to new basis reporting requirements.
Basis is equivalent to the net investment value of your ownership in your business. Basis has always been something you were responsible for tracking personally, although most have not done so in the past. It is now an annual reporting requirement with tax returns.
Basis is important if and when you sell or dissolve your business, but can also cause taxable gains in any given tax year if you withdraw MORE than your basis.
3. Bonus depreciation falls to 80% in 2023 from 100% in 2022
Bonus depreciation was previously allowed for up to 100% of qualifying items. This maximum percentage drops to 80% in 2023.
4. Retirement plans are required in California
By June 30, 2022, California businesses with 5 or more employees were required to offer a retirement plan to their employees.
Note that in 2025, this will extend to businesses with 1 employee.
Estates and Trusts
1. Estate and gift tax exclusion to $12.06M
The Estate and Gift tax exclusion increases from $11.7M in 2021 to $12.06M in 2022, with an increase to $12.92M planned for 2023. While we see these increases in effect with current tax code, keep in mind this is likely to be reduced.
There are talks, bills in progress and plans to reduce this limit. We have heard plans to reduce it by 50%!
If a taxpayer is in a situation where this reduction would make your estate or a part of your estate taxable, discuss tax strategies with your tax preparer. The following may be items to ask about:
- Filing for portability options when one spouse passes to lock in their higher estate exclusion rate at today's rates
- Gifting amounts under the annual gift tax reporting limit of ($16k in 2022 and $17k in 2023) per person
- Making direct payments to universities for tuition and making direct payments to medical providers to pay for medical bills, as these are excluded from gift tax reporting
The strategies above can be implemented in advance as ways to lock in a higher exclusion limit OR to transfer wealth in advance, in effect reducing the estate's net worth.
SUMMARY
Many of the pandemic relief tax credits are either expiring or being revised in 2023. You also may see some changes being retroactively applied in 2022.
The best advice we can give is to have an ongoing relationship with your tax preparer. Tax strategy does not happen at tax filing, but throughout the tax year, all year long.
Note that the information above is published at the time of this blog and future tax changes can and will occur.
Many tax credits are subject to phaseout limits based on AGI.
What does that mean? If you make over a certain amount on your "Adjusted Gross Income" (AGI) line item on your tax return, either you are not eligible for the credit at all or the allowable credit is reduced based on the percentage your AGI exceeds the minimum phaseout limit, and goes to zero when you surpass the maximum AGI limit for the credit.
