Tax Refunds May Be Smaller This Year

Plan now to learn these 2023 tax tips avoid surprises in the future! If you’re expecting a tax refund in 2023, it may be smaller than last year, according to the IRS. Your annual balance is based on taxable income, calculated by subtracting the greater of the standard or itemized deductions from adjusted gross income.

How Does Tax Planning Work?

Effective tax planning can accomplish much more than just saving income taxes for the current and future years. If done properly, effective tax planning can maximize the amount of funds you will have available for retirement, reduce the cost of financing your children’s education, reduce eventual estate taxes, and assist you in managing your cash flow to help you meet your financial objectives. For professional help, don’t hesitate to reach out to Molen & Associates at 281-440-6279. 

Tax Tips for 2023 – New Laws and Updates

In the last couple of years, there have been many legislative changes: the SECURE Act, Inflation Reduction Act, American Rescue Plan Act, Consolidated Appropriations Act and the CARES Act are just a few. Below is a summary of a few changes that will help you in your tax planning process.

• Starting January 1, 2023, the standard business mileage rate used for vehicles used in business is 65.5 cents per mile. This is an increase of 3 cents from the second half of 2022 (62.5 cents) which had already gone up 4 cents from the first half of 2022 (58.5 cents). Guess what? This rate even applies to hybrid and electric vehicles, not just gas and diesel powered vehicles.

• While 100% bonus depreciation will be ending in 2022, it will phase down 20% annually. This means you will still be allowed to use bonus depreciation for first year qualified assets, it will just be a smaller amount in year one. This may apply to vehicles, computers, software, machinery, equipment or even office furniture.

• The child tax credit and the child and dependent care tax credit have been reduced for 2022. While both tax credits received a temporary boost through the American Rescue Plan of 2021, the enhanced tax breaks were not extended to this year. In 2021, the enhanced child tax credit meant that taxpayers with children ages 6 to 17 could get a credit of up to $3,000. For children under 6, the amount jumped to $3,600. For 2022, that amount reverted to $2,000 per child dependent 16 and younger.

• The IRS has announced that they are delaying the $600 1099-K reporting requirement. Instead of CashApp, Venmo and Paypal sending you a 1099-K for $600 of transactions, this limit will be $20,000. This does not mean you should not report any business income received via these apps, it just changes their reporting requirement.

• Repealed the maximum age for traditional IRA contributions for tax years 2020 and later. An individual at any age may contribute to a traditional IRA if compensation is received.

• The required minimum distribution (“RMD”) age increased from 70½ to 72 beginning in 2020.

• An IRC Sec. 529 Plan that has unused funds after a beneficiary graduated can now be used to repay student loans of the beneficiary plus his/her siblings up to $10,000 each. Additionally, it can also be used toward apprenticeship programs, private elementary and secondary school costs as well as homeschooling and religious schools.

• Starting in 2024, you will be able to rollover a 529 Plan into a Roth IRA. Here are the limitations… $35,000 Cap on lifetime transfers, Rollovers are subject to annual Roth contribution limits, Rollovers are for beneficiaries of Roth IRA, and 529 Plan must have been open for 15 years.

• In 2021, taxpayers that did not itemize their deductions were entitled to an above-the-line charitable deduction of $300 ($600 for married couples filing jointly) to qualified charities. This has not been extended to 2022.

• For tax years 2021 and 2022 only, business meals provided by a restaurant were fully deductible. In 2023, all business-related restaurant meals will go back to the regular rate of 50% deductibility.

• Student loan debt forgiveness is not taxable from 2021 through 2025.

• Changes expanding the Earned Income Tax Credit for 2021 and future years including more workers and working families who also have investment income can get the credit. Starting in 2022, the limit on investment income is increased to $ 10,300 and indexed for inflation each year.

• The clean vehicles credit was enhanced and the rules related to the purchase of electric vehicles changed. For vehicles purchased and possession taken after August 16, 2022, the final assembly of the vehicles must occur in North America. For years beginning in 2023 and 2024 additional restrictions are implemented.

• The Energy Efficient Home Improvement Tax Credit was renewed and upgraded, allowing consumers to get 30% back for energy-saving renovations, up to $1,200 per year (up from the previous $500 lifetime maximum). This change applies to projects completed between January 1, 2022 and December 31, 2032.

• The “HOMES” (Homeowner managing energy savings) Rebate program offers rebates up to $8,000 and the “High-Efficient Electric Home Rebate Act” offers rebates of $14,000 to qualified taxpayers. These rebates begin in 2023 and run until September 30, 2031.

• Retirement account contribution limits have increased 

• New tax brackets for 2022 have increased – https://molentax.com/2022-vs-2021-tax-brackets/

General Tax Tips:

1. File on Time

If you don’t file federal taxes or file for an extension by April 18, 2023, you may face hefty fines. State tax filing deadlines vary, so check with your state’s department of revenue.

Tax deduction: reduces the total income your taxes are based on.

Example: $50,000 taxable income – $2,000 tax deduction = $48,000 new taxable income

Tax credit: reduces the total income tax you owe.

Example: $10,000 owed in federal income tax – $2,000 tax credit = $8,000 new total owed

2. Increase retirement account contributions to reduce taxable income.

Traditional IRA and 401(k) or 403(b) contributions are typically made with pre-tax dollars, so adding to either can result in tax savings by reducing taxable income.

4 strategies that help you save for retirement and save on taxes

• Self-employed or a business owner? SEP or Simple IRA
• 50 or older? Catch-up contributions (if allowed by your plan) to a 401(k) or 403(b) (an additional $7,500 for 2022) or IRA (an additional $1,000). 
• Tax-free retirement withdrawals? A Roth IRA or Roth contributions to a 401(k) (if available): Set up with post-tax dollars now so you can make qualified tax-free withdrawals later. 
• More retirement savings dollars? 401(k) or 403(b): Boost contribution levels.

3. Add to 529 college savings.

529s offer potential tax savings in two ways: While contributions are made with after-tax dollars, earnings are tax-deferred while invested—and money you use for qualified educational expenses isn’t taxed. Those 529 contributions may also qualify for state income tax deductions or credits. (add snippet about 529 conversion to IRAs)

4. Contribute to your health savings account (HSA).

If you’re on a high deductible health plan (HDHP) through your employer, you may have access to an HSA to save for out-of-pocket medical expenses. These are tax-advantaged in three ways: Payroll HSA deductions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses aren’t taxed. (talk about triple threat of HSAs – week of 11/21)

5. Fine tune your paycheck withholdings.

The average tax refund in 2022 was $3,039—an increase of more than 7% and about $250 a month. But on the flip side, withhold too little taxes from your paycheck and you could end up owing money (maybe even be charged a penalty). You can change your payroll tax withholdings at any time; check with your human resources department for information.

6. Take all the tax credits and deductions you’re eligible for.

Both are able to reduce what you owe on your tax bill at the end of the year, but they accomplish that goal in different ways. Tax credits directly reduce the amount owed on taxes by granting a dollar-for-dollar reduction on your tax bill. Tax deductions, on the other hand, lower how much of your income is subject to taxes at your highest tax bracket percentage. So a $1,000 tax deduction at the 32% tax bracket will save you $320 on your final tax bill. A $1,000 tax credit, however, will reduce whatever your final bill is by $1,000– saving you that amount dollar for dollar. Once you understand what tax credits and tax deductions are, you can leverage them during your tax preparation by taking advantage of specific credits and deductions you qualify for. The more tax credits and deductions you claim, the less money you will have to spend at the end of the year.

How Do I Find Available Tax Credits and Tax Deductions, or other 2023 Tax Tips?

There is a wide range of tax credits and tax deductions available for individuals of all filing statuses. Some are well known and obvious, like the Child or Dependent Care Credit, while others are more obscure and complicated, like the Income in Respect of a Decedent deduction. The IRS keeps a list of available credits and deductions; however, this list is ever-changing, so it is beneficial to seek tax advice from a tax professional who can tell you what individual credits and individual deductions you qualify for.

A few of credits and deductions may include:

• Home mortgage and a portion of home property taxes. Whether you itemize or take a standard deduction will depend on your situation. A tax professional can help.
• Home energy efficiency improvements, covering everything from windows to solar hot water. Use guidelines on energy tax credits from the IRS.
• An expanded child tax credit (CTC) for any dependent under the age of 18. Learn all the details on CTC eligibility.
• An electric-powered vehicle. Check on tax credit amounts and eligibility for specific cars.