More and more tax updates continue to roll in. Every year, I attend countless webinars to get details on the ever-changing tax code. My goal is to summarize and highlight the big updates and changes to you in a single place.
Here are some, by no way a complete list, but some of the new changes to 2023 taxes that will affect your next tax return filing plus additional changes going into effect in 2024 that we think you should know about for Individuals, Businesses and Estates and Trusts.
Individuals
1. Electric and hybrid vehicle credits - new rules
This is such a popular topic that we wrote another blog about it. You can read it here.
The basics are the following:
- Income limits now apply to the taxpayer, if you are a higher income earner, you are disqualified for the credit
- Used cars are added to the list
- Restrictions on cars have increased
- Starting in 2024, you can transfer the credit to the dealer at purchase and get a reduction in purchase price instead of waiting until you file your tax return.
Read more about it here. Tax Credits for Electric or Hybrid Vehicles in 2023/2024 - SIMPLIFIED
4. Payroll and Self-Employment tax changes
If you receive social security, you saw an 8.7% increase in 2023 for inflation. In 2024, you'll see another increase but for 3.2%.
Who pays for this increase? The workers and business owners.
There is no change in the Social Security tax rate percentage, but the maximum Social Security tax base was increased from $147,000 to $160,200 in 2023 and will increase to $168,600 in 2024. If you are self-employed, you may also see this increase on your self-employment taxes when you file your 2023 return.
7. FSA and HSA limits increase
As the cost of medical expenses continues to rise, so do the annual limits for FSA and HSAs. The annual limit on HSA contributions increases to $8,300 for families ($4,150 for singles) in 2024, up from 2023 limits of $7,750 for families ($3,850 for singles).
The annual limit on contributions for healthcare FSAs will increase to $3,200 in 2024, up from $3,050 in 2023.
If you don't have an FSA or HSA, time to look into one. It's a great way to reduce your taxable income by contributing pre-tax funds to use toward those rising medical out-of-pocket costs.
7. Child tax credit stays at $2k per child in 2023
If you have children under the age of 17, you still can get a child tax credit...if your income isn't over the threshold mentioned below.
Some of us saw nice checks in the mail during the pandemic, but those pandemic-inflated child tax credits are no longer. In 2023, the child tax credit is worth up to $2,000 and $1,600 of that is refundable. In 2024 the refundable portion of the credit increases to $1,700 with the tax credit staying at $2,000.
You may be able to claim the credit for children who have not turned 17 by the end of the calendar year. Once your child turns 17, you can only get a $500 credit as they are classified as an other dependent.
Eligibility starts being reduced or phased out for MFJ taxpayers with adjusted gross income of $400k and $200k for single taxpayers.
8. 529 Conversions to ROTH
Have 529 plan accounts with funds not used for education? This is NEW starting January 1, 2024! Unused 529 plan balances can be converted to ROTH IRAs for the same beneficiary. There are some qualifiers.
- The 529 plan must have been open for 15 years
- The lifetime limit for the rollover is $35,000
- The ROTH IRA must be in the name of the beneficiary of the 529 plan
- Any contributions made within the past five years, and earnings on those contributions, are ineligible to be moved into the Roth IRA.
Note that some states like California do not yet conform. As such, you may incur state tax or penalties for this conversion.
9. Standard deduction increases
Single (under 65) standard deductions increase to $13,850 for 2023 tax returns and will increase even more for 2024 tax filings to $14,600.
This can be reduced significantly in 2025 if the Tax Cuts and Jobs Act isn't renewed and expires. We still have another year before we get there.
10. Retirement contribution limits
The annual Roth IRA contribution maximum has increased in recent years. In 2024, it increases to $7,000 (under 50) up from $6,500 in 2023 and $8,000 (50 and over) up from $7,500 in 2023.
Eligibility to contribute to Roths has also increased with increased Modified Adjusted Gross Income (MAGI) limits. For single taxpayers, you must have under $153,000 in MAGI in 2023 (increasing to $161,000 in 2024) and for married filing joint taxpayers, you must have under $228,000 in MAGI in 2023, (increasing to $240,000 in 2024) to be allowed or eligible to contribute to a ROTH.
401k/403b limits max out at $22,500 (under 50) and $30k (50+) in 2023 and increase to $23,000 (under 50) and $30,500 (50+) in 2024.
11. Retirement - Required Minimum Distributions (RMDs)
If you are between the ages of 70 and 75, you have been in the mix of the annual IRS changes for the age in which you are required to start taking money out of your IRA or retirement accounts.
In 2023, the age for the required date of mandatory distributions increased from 72 to 73. We saw similar increases in the prior years. Taxpayers turning 72 in 2023 can delay RMDs until 2024 when they turn 73. If you turned 73 in 2023, you were required to start your RMDs in 2023.
12. California Franchise Tax Boards allowing SMS text alerts - Beware
The California Franchise Tax Board is asking taxpayers to elect to receive texts. We recommend against doing this for the very reason that so many texts sent are scam and fraudulent and it will be very difficult to differentiate between what is valid and what is a scam. The IRS will never text you or call you. They will always notify by mail.
Businesses
1. Meals back to 50% deductibility
Business meals made a change during the pandemic and were deductible at 100%.
All business meals are returning to 50% deductibility in 2023 regardless of where they were purchased.
2. Increase in mileage rate
If you use your vehicle for business, you should be tracking your miles. We recommend an app like MileIQ. These miles drive your tax deduction for your vehicle.
If you are using the standard per-mile deduction, the 2023 rate is 65.5 cents per mile, and increases again to 67 cents per mile in 2024.
3. Bonus depreciation falls to 60% in 2024 from 80% in 2023 and 100% in 2022.
Bonus depreciation was previously allowed for up to 100% of qualifying items. This maximum percentage drops to 80% in 2023 and drops again in 2024 to 60%.
4. Retirement plan credits and California requirements to provide retirement plans to employees
Eligible employers may claim a tax credit of up to $5,000 in start-up costs for 3 years for costs of setting up a SEP, SIMPLE IRA or 401k plan for its employees.
In 2024, you can receive a 100% credit for new plans that cover the cost of the admin of the plan AND the employer matching, up to $1,000 per employee.
To qualify, you must meet all of the following requirements:
- Less than 100 employees who received at least $5k in compensation for the preceding year are eligible for 50% credit and less than 50 employees are eligible for 100% credit
- At least 1 participant who was not a highly compensated employee (under $150k in 2023 and 2024)
- This is a new benefit. In the past 3 years, you did not have another plan sponsored by you, a controlled group that includes you or a predecessor of either
California businesses with 5 or more employees NOW require businesses to offer a retirement plan to their employees. If you do not already have a plan in place, it's time to look into one.
Note that in 2025, this will extend to businesses with 1 employee. So we recommend looking into implementing a plan in 2024 before it is required in 2025.
All businesses that fall within these guidelines are ALSO required to register with CalSavers. If you already have a retirement plan set up, you simply specify that you are exempt and that you already have a plan in place.
5. Beneficial Ownership reporting required in 2024
New mandatory business reporting is coming!
Many are aware of the FinCEN reporting requirements for foreign bank accounts. Entity ownership reporting is coming in 2024!
Qualified new entities in 2024 will be subject to initial Beneficial Ownership Information (BOI) filings. Existing entities, formed prior to January 1, 2024 have until 2025 to be subject to reporting requirements.
ALL beneficial owners must be reported along with an unexpired identification document and address. This can include individuals outside of the CEO, CFO and who we typically think of being as the owner.
And ANYTIME an address changes or an identification document expires for one of the beneficial owners, it must be reported within 30 days to FINCEN.
As you can imagine, we are waiting to see how this plays out. Large companies with over $5 million in revenue and 100 employees are exempt.
Find out more in the article: BOI - New FinCEN Mandatory Reporting for Businesses
6. New CA Business personal property taxes for short-term rentals in 2024
Starting in 2024, owners of short-term rentals (Airbnb) in California will need to complete a new tax form to declare their personal property (think couches, plates, linens, etc) that are part of the rental property AND pay a tax on that value.
If you are renting out a separate property as a short-term rental OR a room or portion of your primary residence, this also applies to you.
If you receive a notice, you will need to respond to declare the value of your property that may have an annual tax assessed to it.
Find out more in the article: California now taxing the ASSETS of short-term rental Businesses
7. 1099-K reporting
Once again, the IRS has delayed the 1099-K requirements and is moving to make the threshold $5,000 instead of $600.
If you receive a 1099-K, upload it with your tax return documents.
Tip: As a business best practice, if you take payment via Venmo, open a business Venmo in addition to your personal Venmo. This way you won't receive a 1099-K for ALL transactions you received via your personal Venmo account that we then have to split between personal and business and fix on your tax return.
8. Increase in payroll taxes
In addition to the increase in the Social Security limit mentioned above, California businesses will also see an increase in SDI and FUTA rates in 2024.
Estates and Trusts
1. Estate and gift tax exclusion to $12.92M
The Estate and Gift tax exclusion increased to $12.92 M in 2023, up from $12.06M in 2022, with an increase to $13.61M planned for 2024. While we see these increases in effect with current tax code, keep in mind this is likely to be reduced.
It is planned to reduce this limit by 50% in 2025!
If you have a larger estate, you can take action to take advantage of current levels and lock those in even if they decline in 2025.
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 ($17k in 2023 and $18k in 2024) 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. Increases to limits and decreases to credits continue... but many of these tax code changes are set to expire in 2025 unless they are extended.
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.
