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Anh Le, CPA, CGMA, EA, MBA

 

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2023 Tax Planning Guide

New and Noteworthy

New and Noteworthy

Because of an annual inflation rate that soared higher than any time since 1981, a number of tax features that are indexed to inflation will change in 2023. These increases affect everything from retirement and estate planning to personal and corporate income tax brackets. We’ll mention a few of them along with some of the more common tax features, while you can find further details throughout this booklet.


SOCIAL SECURITY
The good news?


Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans will increase 8.7 % in 2023. The average Social Security payment will increase $140 per month. In addition, while not a tax, the monthly premium for Medicare Part B enrollees drops to $164.90 in 2023, a decrease of $5.20, while the annual deductible will also fall slightly.


The bad news?


The maximum amount of earnings subject to the Social Security tax will also increase. See page 11 for the details.


DEDUCTIONS, BRACKETS AND LIMITS RISE
Inflation soared in 2022, increasing dozens of federal income tax deductions and limits that are indexed to inflation. According to the IRS, there are more than 60 tax adjustments for 2023.


While you can see the details on the following pages, a few of the highlights for tax year 2023 include an $1,800 increase in the standard deduction to $27,700, an increase in all marginal tax brackets (where rates remain the same) and a bump up in the foreign earned income exclusion to $120,000 from $112,000 in 2022.


Also, the federal estate tax exclusion amount of $12,920,000 is up from $12,060,000 in 2022, while the annual exclusion for gifts rises to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.

CLEAN VEHICLE CREDIT
The Inflation Reduction Act features credits for green vehicles. The Act extends the Clean Vehicle Credit until the end of 2032, while changing some eligibility rules and creating new credits for previously-owned clean vehicles and qualified commercial clean vehicles.


Tax credits include up to:

  • $7,500 for the purchase of new, qualified clean vehicles;

  • $40,000 for vehicles over 14,000 pounds;

  • Up to 30% of a used electric vehicle’s cost or $4,000, whichever is greater.


Limits apply on the suggested retail price of the vehicle and the adjusted gross income (AGI) of buyers. For single or married taxpayers filing separately, the AGI limit is $150,000. Heads of household have a $225,000 limit, and taxpayers who are married filing jointly and surviving spouses have a $300,000 AGI limit. Used vehicle buyers receive a tax credit based on smaller income limits.


These new tax credits are generally available only for qualifying electric vehicles whose final assembly occurred in North America and purchased after August 16, 2022. Different rules apply for clean vehicle purchases, typically for plug-in vehicles, made before this date. You can learn if your purchase qualifies for the new credit by searching for manufacturing sites using the vehicle identification number (VIN) at www.nhtsa.gov/vin-decoder.


Starting in 2024, the Inflation Reduction Act will allow dealers to directly reduce the purchase price of a vehicle by the amount of the buyer tax credit, making buying a clean vehicle easier for consumers.


RELIEF AFTER NATURAL DISASTERS
Drought and other disasters can create havoc for businesses and individuals alike, and the IRS periodically gives extra time to take care of taxes in these situations. Farmers and ranchers living in designated drought areas who were forced to sell livestock between 2015 and 2021 were given four years instead of two years to replace livestock from a forced sale. A one-year extension due to the 2022 drought conditions is now included, maintaining the provision until the end of their first tax year after the first drought-free year to replace the sold livestock.


Taxpayers may also receive extra time to file taxes in areas affected by Hurricanes Ian and Fiona and other storm conditions across the nation in 2022. If you live in an area affected by natural disaster, talk to your tax professional to learn if you qualified for a penalty-free extension to file.


TEACHERS AND EDUCATORS
Teachers can use the educator expense deduction to deduct up to $300 ($600 for a married couple) in qualified unreimbursed education expenses, including certain COVID-19 protective items, from 2022 income. You don’t need to itemize to deduct these expenses.


MEDICAL EXPENSES
Taxpayers who itemize generally can deduct unreimbursed medical expenses exceeding 7.5% of adjusted gross income. Travel expenses related to medical care, such as parking, mileage and public transportation costs, can also be included among those expenses. Typically, taxpayers may want to itemize medical expenses if they total more than the standard deduction.


DIGITAL ASSET REPORTING
Digital assets will require informational reporting for the 2023 tax year, starting January 1, 2024. The provision will require taxpayers who own cryptocurrency to receive a tax document from their broker summarizing their digital activity for the tax year.


ABLE ACCOUNTS
Achieving a Better Life Experience (ABLE) accounts are designed to help people with disabilities save and pay for disability-related expenses. Now through 2025, eligible individuals can roll over money from a qualified 529 plan into their ABLE account. The annual contribution limit is $16,000 for 2022 and $17,000 for 2023.


EDUCATIONAL EXPENSE DEDUCTION
Taxpayers who itemize may receive a tax deduction for tuition, fees, books and supplies when attending an eligible educational institution. Students who attend school at least half-time may also deduct certain room and board expenses.


WASH SALES
Equity markets were volatile in 2022, but taxpayers who experienced investment losses may see lower capital gains taxes. However, keep the wash sale rules in mind. These rules prevent you from taking a loss on a security if you buy a substantially identical security within 30 days of the sale.


You can avoid triggering the wash sale rules while maintaining the same portfolio allocations by selling the security and waiting at least 31 days before repurchasing it or selling the security and buying shares in a mutual fund that holds similar securities.


Currently, the wash sale rules don’t apply to digital assets, including cryptocurrency. But that could change in the future.


ADDITIONAL INCOME-TRIGGERED TAXES
If your modified adjusted gross income (MAGI) exceeds certain levels that included investment gains, you may owe a 3.8% net investment income tax above and beyond any capital gains tax paid. Taxpayers who are married and file jointly and widowed spouses pay the tax if their MAGI exceeds $250,000. Single individuals and heads of household owe the tax after $200,000 in MAGI, while the threshold for married taxpayers filing separately is $125,000.


You will also owe an extra 0.9% for the Additional Medicare Tax if you earned more than $200,000 in a calendar year, regardless of filing status. Employers are typically responsible for withholding the extra tax.


TELECOMMUTING EMPLOYEES
While many people returned to their employers’ offices in 2022, a large number of Americans still work from home. Beware, however, that you may be subject to additional taxes if you worked remotely from home located in a state outside of your company's primary office location.


With COVID-era rules expiring, watch for states that tax income to the employer’s office location and not the state where you work from home. Talk to your tax professional to learn if you are affected.


NEW 1099-K REQUIREMENTS
Taxpayers earning income from selling goods or providing services may receive Form 1099-K for payment card transactions and third-party payment network transactions of more than $600 beginning in tax year 2023.


Previously, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. Now a single transaction exceeding $600 in 2023 can trigger a 1099-K.

Earnings from part-time work, side jobs and the sale of goods, is still taxable and must be reported as income unless it is excluded by law.


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