2023 Tax Preparations and Updates

With the 2024 filing season approaching, taxpayers should be aware of federal tax law changes and updates that will affect individual 2023 income tax returns.

 

While the tax rates remain the same for the 2023 tax year, the income thresholds for all tax brackets increased in 2023 to reflect the rise in inflation.

 

2023 Marginal Income Tax Rates and Brackets
Tax RatesSingle Tax BracketMarried Filing Jointly
Tax Bracket
Head of Household
Tax Bracket
Married Filing Separately
Tax Bracket
10%$0 – 11,000$0 – 22,000$0 – 15,700$0 – 11,000
12%$11,001 – 44,725$22,001 – 89,450$15,701 – 59,850$11,001 – 44,725
22%$44,726 – 95,375$89,451 – 190,750$59,851 – 95,350$44,726 – 95,375
24%$95,376 – 182,100$190,751 – 364,200$95,351 – 182,100$95,376 – 182,100
32%$182,101 – 231,250$364,201 – 462,500$182,201 – 231,250$182,101 – 231,250
35%$231,251 – 578,125$462,501 – 693,750$231,251 – 578,100$231,251 – 346,875
37%Over $578,125Over $693,750Over $578,100Over $346,875


Standard Deductions in 2023

 

The IRS released new standard deductions for 2023 to adjust for inflation.

 

Standard Deduction
Filing Status

2023

2022

Single$13,850$12,950
Married Filing Jointly and qualifying widow(er)$27,700$25,900
Married Filing Separately$13,850$12,950
Head of Household$20,800$19,400


Health Savings Accounts

 

The IRS also announced new Health Savings Account (HSA) contribution limits for 2023, with amounts increasing to adjust for inflation.

 

HSA Inflation-Adjusted Limitations
 

2023

2022

 Self-Only CoverageFamilySelf-Only CoverageFamily
Contribution Limit$3,850$7,750$3,650$7,300
Additional catch-up contribution for taxpayer age 55 or older$1,000$1,000 per qualifying spouse$1,000$1,000 per qualifying spouse
Minimum health insurance deductible$1,500$3,000$1,400$2,800
Maximum out-of-pocket$7,500$15,000$7,050$14,100

 

Retirement Savings

 

The SECURE 2.0 Act was passed as part of the Consolidated Appropriations Act of 2023 and was signed into law by President Biden on December 29, 2022. The SECURE 2.0 Act is a retirement bill with the stated purpose of encouraging more employers to offer retirement plan benefits to employees, and more employees to participate in investing in saving for their future. The SECURE Act, passed into law in December 2019, and the SECURE 2.0 Act combine to create some of the most sweeping changes to the retirement provisions of the Internal Revenue Code.

 

In going forward, before the above mentioned amendments can start advantaging workers and retirees, retirement plan service providers and employers will need to reconstruct and reconfigure the operational foundation that makes our nation’s retirement savings system possible. This effort will require substantial coordination among employers, record keepers, payroll providers, and other service providers. The IRS has acknowledged the difficulty many plan administrators and other payors are having complying with changes, made by the SECURE 2.0 Act, to certain required minimum distribution (RMD) rules. In response, the IRS issued Notice 2023-54 granting the following relief:

 

  • Taxpayers who were born in 1951 and received RMDs prior to August 31, 2023, but shouldn’t have because the RMD age requirement was increased to age 73, were able to roll these distributions back into their retirement accounts even if the 60-day period had lapsed, provided the rollover was completed by September 30, 2023;
  • The proposed inherited IRA rules requiring payments throughout the 10-year mandatory distribution period has been delayed again. These RMDs will not be required to be distributed in 2023 under the proposed rules; and
  • The SECURE 2.0 Act proposed regulations issued by the IRS will apply no earlier than the 2024 distribution calendar year.

The SECURE 2.0 Act made a number of changes to retirement distributions, including increasing the age for taxpayers required to take RMDs from age 72 to 73 for those who turn age 72 after 2022. The age requirement then creeps up again to 75 beginning in 2033.

 

Clean Vehicle Credit

 

The Inflation Reduction Act (IRA) of 2022 renamed, and significantly modified, was originally enacted by §205(a) of the Energy Improvement and Extension Act of 2008. The act was to provide a credit for the purchase and placing in the service of new qualified plug-in electric drive motor vehicles. The IRA made a number of amendments to the plug-in car credit under IRC §30D. The purpose of these amendments is to:

 

  • Elevate the purchase and use of new clean vehicles by lower and middle-income Americans,
  • Advance enduring supply chains and domestic manufacturing,
  • Protect against inapt credit claims, and
  • Achieve significant carbon emissions reductions.

Under §30D, there shall be allowed as a credit, now known simply as the Clean Vehicle Credit, which generally applies to new, four-wheeled vehicles placed in service after December 31, 2022. The Clean Vehicle Credit is claimed in the tax year that the vehicle is placed in service, which, more specifically, is the tax year that includes the date the taxpayer takes delivery of the vehicle. Beginning January 1, 2023, taxpayers who purchase a qualified, used electric vehicle from a licensed dealer for $25,000 or less may be eligible for a used clean vehicle tax credit (referred to as a previously owned clean vehicle credit). The credit equals 30% of the sale price, up to a maximum credit of $4,000.

 

The Clean Vehicle Credit can only be claimed once per vehicle, but taxpayers can claim a Clean Vehicle Credit for every eligible, new vehicle purchased, even if multiple vehicles are purchased in the same year. The IRS has limited the amount of advanced credits taxpayers can claim at a dealership to two vehicles per year.

 

The Clean Vehicle Credit amount is capped at $7,500 per qualified vehicle if the vehicle’s critical materials and battery components are manufactured, processed, extracted, or produced in the United States, or in countries with which the United States has entered into a free trade agreement. However, this new limitation only applies to vehicles for which the taxpayer takes delivery of after April 17, 2023.

 

If the vehicle only meets one of the requirements, the credit is limited to $3,750 per qualified vehicle.

 

For more information about the Clean Vehicle Credit and tax benefits from the Inflation Reduction Act, review the clean vehicle credit information located on the IRS website.

 

Energy-Efficient Home Improvement Credit

 

The nonrefundable, Nonbusiness Energy Property Credit under IRC §25C was renamed the Energy Efficient Home Improvement Credit by the Inflation Reduction Act, and was extended through 2032.

 

The Inflation Reduction Act retroactively extended the Energy Efficient Home Improvement Credit under IRC §25C, but it did so by extending the credit through 2022 and then expanding the credit for taxable years 2023 through 2032. Qualified, energy-efficient improvements made to a home after January 1, 2023 may qualify for a tax credit up to $3,200. Taxpayers can claim the credit for improvements made through 2032.

 

There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenses. The credit is allowed for qualifying property placed in service on or after January 1, 2023, and before January 1, 2033.

 

The maximum credit that can be claimed each year is:

  • $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
  • $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers

It is important for taxpayers to know that:

  • The credit has no lifetime dollar limit,
  • The maximum annual credit can be claimed every year that eligible improvements are made until 2033, and
  • The credit is nonrefundable, meaning a taxpayer cannot:
    • get back more on the credit than what is owned in taxes, and
    • apply any excess credit to future tax years.

For more information about home energy credits and tax benefits from the Inflation Reduction Act, visit the Energy Efficient Home Improvement Credits page on the IRS website.

 

Self-Employed Individuals

 

Sole proprietorships and owners of limited liability companies, S corporations, and other pass-through entities can continue to deduct up to 20% of their qualified business income (QBI) on their tax returns. With the QBI deduction, most self-employed taxpayers and small business owners can exclude up to 20% of their qualified business income from federal income tax (but not self-employment tax) whether they itemize or not. Once the 2023 taxable income reaches or exceeds $182,100 ($364,200 if filing jointly), the type of business also comes into play.

 

Other changes include:

 

  • The standard mileage rate for business driving increased to 65.5¢ per mile.
  • The Tax Cuts and Jobs Act (TCJA) of 2017 100% bonus depreciation starts to phase out after 2022. For the 2022 tax year, businesses could deduct the full cost of new and used qualifying business assets with lives of 20 years or less. For tax year 2023, the 100% deduction phases out to 80%.
  • The Section 179 deduction limit for the expensing of business assets has increased to $1,160,000 for the 223 tax year, up from $1,080,000 in 2022. The deduction begins to phase out on a dollar-for-dollar basis after $2,890,000 is spent. As such, the entire deduction goes away once $4,050,000 in purchases has been reached.
  • The temporary, 100% write-off for business meals has expired. For 2021 and 2022, businesses, including self-employed people, were able to deduct 100% of business restaurant meals, provided the cost was not lavish. This COVID-related easing was temporary. Starting with the 2023 tax year, 50% of the cost of most business meals is deductible, reverting to the rules that were in place before 2021.

Other Provisions

 

The IRS announced annual inflation adjustments for over 60 tax provisions in tax year 2024, including tax rate brackets, deductions, annual gift tax limitation, alternative minimum tax exemption, and retirement contribution limitations. For more information about tax rate schedules and other tax changes, see Rev. Proc. 2023-24.

 

The 2024 benefit and contribution limits for qualified retirement plans, including contributions limits for Sec. 401(k) plans and individual retirement arrangements (IRAs), are both increasing by $500. Notice 2023-75 includes updates to dollar limits for a range of qualified retirement plans and accounts, including traditional and Roth IRAs.

 

For more information on changes to tax laws, visit the IRS website and/or consult with a tax professional.

 

 

Author, Susie Ng

Tax Supervising Senior

Spiegel Accountancy

 

 

 

 

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.