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The Internal Revenue Service has announced the tax year 2023 annual inflation adjustments for many tax provisions, including the tax rate schedules and other tax changes. Below are some of the highlights of these changes.

Highlights

The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.

The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

• The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

• Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

  The other rates are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

• The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).

• The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.

• For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.

• For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.

• For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.

• For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.

• Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

• The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.

• The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.

Items unaffected by indexing

By statute, certain items that were indexed for inflation in the past are currently not adjusted.

• The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.

• For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.

• The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).

Even people who are familiar with the Child Tax Credit (CTC), might not realize that you don’t necessarily have to be the parent of a child in order to qualify. If you are a grandparent, foster parent, sibling, or someone else who cares for a child, you might qualify, depending on your circumstances.

What is the Child Tax Credit expansion?

The Child Tax Credit expansion, which is a part of the American Rescue Plan, increased the amount of money per child families can receive and expanded who can receive the payments. The CTC has been increased from $2,000 to $3,600 per child for children under the age of six, from $2,000 to $3,000 for children at least age 6 and raised the age limit from 16 to 17 years old. But these amounts have been increased only for 2021.

Who qualifies for the Child Tax Credit?

You can claim the Child Tax Credit for each qualifying child who has a Social Security number before the due date of your tax return (including extensions).

To be a qualifying child for the 2021 tax year, your dependent generally must:

• Be under age 18 at the end of the year.
• Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister or a descendant of one of these (for example, a grandchild, niece, or nephew).
• Provide no more than half of their own financial support during the year.
• Have lived with you for more than half the year.
• Be properly claimed as your dependent on your tax return.
• Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid.
• Have been a U.S. citizen, U.S. national or U.S. resident alien.

What are the eligibility factors?

You qualify for the full amount of the 2021 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than:

• $150,000 if you’re married and filing a joint return, or if you’re filing as a qualifying widow or widower.
• $112,500 if you’re filing as a head of household.
• $75,000 if you’re a single filer or are married and filing a separate return.

The Inflation Reduction Act (IRA) signed by President Biden in August 2022 includes a variety of tax provisions that will impact U.S. businesses and individuals. While some of the changes have received a great deal of media attention, others may come as a surprise to those who have not been following the legislative process closely.

Generally, the changes implemented in the IRA fall into one of eight broad categories:

• Extending the health insurance premium tax credit provisions of the American Rescue Plan Act of 2021 through 2025
• Changing the tax credits for electricity produced from some renewable resources, the energy tax credit and certain fuels
• Extending state and local tax (SALT) limitations
• Adding research credit flexibility
• Extending excess business losses (EBLs)
• Increasing IRS appropriations by $80 billion to improve taxpayer services, increase enforcement and fund other activities
• Establishing a 15% corporate alternative minimum tax
• Imposing a 1% excise tax on corporate stock repurchases

Extension of expanded eligibility for the premium tax credit

The American Rescue Plan Act of 2021 (ARPA) expanded eligibility for the premium tax credit (PTC) by eliminating the phaseout for households with annual incomes of more than 400% of the federal poverty line for 2021 and 2022. The PTC is a refundable credit that helps you pay your premiums for health insurance purchased through the Health Insurance Marketplace. The IRA allows you to take advantage of the expanded PTC eligibility until 2025.

Clean energy and efficiency provisions

The IRA includes 30 provisions that implement a broad range of tax incentives to encourage the use of clean energy and improve energy efficiency. Some of the more notable incentives include:

• A tax credit of up to $7,500 for buyers of qualifying plug-in electric and fuel cell vehicles
• A new tax credit of up to $4,000 for buyers of used plug-in and fuel cell vehicles
• A new tax credit of up to $7,500 for qualified commercial clean vehicles
• Increasing the 10% tax credit for qualified energy efficiency improvements for residential property to 30%
• Extending the residential clean energy credit through 2024

SALT limitation extension

The IRA extended the $10,000 ($5,000 MFS) state and local tax (SALT) limitation through 2026. The $10,000 cap on the SALT deduction that was included in the Tax Cuts and Jobs Act was set to expire Dec. 31, 2025.

Minimum corporate tax

The IRA creates a new 15% alternative minimum tax on the adjusted financial statement income (book income) of corporations with income of at least $1 billion during the previous three years. Corporations that have existed for fewer than three years will be taxed based on their book income in the years they have been in existence. The tax will apply to taxable years beginning after Dec. 31, 2022.

The tax will not apply to subchapter S corporations, real estate investment trusts (REITs) and regulated investment companies (RICs). The new tax will apply to large private equity firms organized as partnerships, but not portfolio companies owned by those firms.

Buying a home a is a big step for many people, but lots of times it comes with a big learning curve. If you’re a homeowner, you should familiarize yourself with the deductions, housing allowances, and other programs that that are available to people who own their own home.

When it comes to home ownership, the IRS considers a home to be a house, condominium, cooperative apartment, mobile home, houseboat or house trailer that contains a sleeping space, toilet and cooking facilities.

Most home buyers take out a mortgage to buy their home and then make monthly payments on the mortgage. This payment often includes several different costs of owning a home, but only some of those costs are deductible. These costs are deductible:

• state and local real estate taxes (subject to the $10,000 limit)
• home mortgage interest (within the allowed limits)
• mortgage insurance premiums

These expenses of home ownership cannot be deducted:

• Insurance, other than mortgage insurance, including fire and comprehensive coverage, and title insurance
• The amount applied to reduce the principal of the mortgage
• Wages you pay for domestic help
• Depreciation
• The cost of utilities, such as gas, electricity, or water
• Most settlement or closing costs
• Forfeited deposits, down payments, or earnest money
• Internet or Wi-Fi system or service
• Homeowners’ association fees, condominium association fees, or common charges
• Home repairs

Mortgage interest credit

The mortgage interest credit is meant to help people with lower incomes afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay.

You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate from your state or local government. An MCC is issued only for a new mortgage for the purchase of a main home. The MCC will show the certificate credit rate you should use to figure your credit. It will also show the certified indebtedness amount and only the interest on that amount qualifies for the credit.

Homeowners Assistance Fund

The Homeowners Assistance Fund program provides financial assistance to eligible homeowners for paying some expenses related to their principal residence to prevent mortgage delinquencies, defaults, foreclosures, loss of utilities or home energy services, and also displacements of homeowners experiencing financial hardship after January 21, 2020.

Minister’s or military housing allowance

Ministers and members of the uniformed services who receive a nontaxable housing allowance can still deduct their real estate taxes and home mortgage interest. They don’t have to reduce their deductions based on the allowance.

School is back in session in most areas, and students and teachers are again returning to the classroom. It’s unfortunate, but many teachers find themselves having to pay for necessary classroom supplies our of their own pocket. The educator expense deduction allows these eligible teachers and administrators to deduct part of the cost of technology, supplies and training from their taxes. They can only claim this deduction for expenses that weren’t reimbursed by their employer, a grant or other source.

Eligible educators

To be eligible for the educator expense deduction, you must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. You must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

Deduction limits

Starting on tax returns for 2022, educators can deduct up to $300 of trade or business expenses that weren’t reimbursed. If two married educators are filing a joint return, the limit rises to $600.

For 2021 returns, the limit is $250, or $500 for married educators filing jointly. If you are a teacher preparing for the school year, you should remember to keep receipts after making any purchase to support claiming this deduction.

Qualified expenses are amounts the educator paid himself or herself during the tax year.

Examples of expenses an educator can deduct include:

• Professional development course fees
• Books and supplies
• COVID-19 protective items to stop the spread of the disease in the classroom
• Computer equipment, including related software and services
• Other equipment and materials used in the classroom

As a business owner, you might pay an independent contractor and an employee for similar – or even the same – work, but there are key legal differences between the two. If you hire workers, it’s critical that you correctly determine whether these workers are employees or independent contractors. Here’s some information to help you avoid misclassifying workers and all the problems that can come from that.

An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.

Independent contractor vs. employee

Whether your worker is an independent contractor, or an employee depends on the relationship between the worker and your business. Generally, there are three categories to consider:

1. Behavioral control − Does your company control or have the right to control what the worker does and how the worker does the job?
2. Financial control − Does your business direct or control the financial and business aspects of the worker’s job? Are the business aspects of the worker’s job controlled by you? Things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies all influence this determination.
3. Relationship of the parties − Does your worker have a written contracts or have employee type benefits such as pension plan, insurance, vacation pay? Is the work relationship ongoing? Is the work performed a key aspect of your business?

Misclassified worker

Misclassifying a worker as an independent contractor hurts the worker because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If your business misclassifies an employee, you or your business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

Who is self-employed?

Generally, someone is self-employed if any of the following apply to them:

• They carry on a trade or business as a sole proprietor or an independent contractor.
• They are a member of a partnership that carries on a trade or business.
• They are otherwise in business for themselves, including a part-time business.

People who are self-employed, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax.

Sometimes it can be tricky to determine if your worker is your employee, or if the worker is a self-employed independent contractor. If you need help with this, please contact our office. We can help you evaluate your circumstances, come into compliance (if necessary), and prevent misclassifying workers in the future.

There are many ways people plan for retirement. Individual Retirement Arrangements, or IRAs, are a common one. IRAs provide tax incentives for you to make investments that can provide financial security for you and your family once you retire. These accounts can be with a bank or other financial institution, a life insurance company, mutual fund, or a stockbroker.

Traditional IRAs

Here are some things you should know about traditional IRAs:

• A traditional IRA is a tax-advantaged personal savings plan where contributions may be tax deductible.
• Generally, the money in a traditional IRA isn’t taxed until it’s withdrawn.
• There are annual limits to contributions depending on your age and the type of IRA.
• When you’re planning when to withdraw money from an IRA, you should know that:
  • You may face a 10% penalty and a tax bill if you withdraw money before age 59½, unless you qualify for an exception.
  • Usually, you must start taking withdrawals from your IRA when you reach age 72. For tax years 2019 and earlier, that age was 70½.
  • Special distribution rules apply for IRA beneficiaries.

Roth IRAs

A Roth IRA is another tax-advantaged personal savings plan with many of the same rules as a traditional IRA but there are exceptions:

• A taxpayer can’t deduct contributions to a Roth IRA.
• Qualified distributions are tax-free.
• Roth IRAs don’t require withdrawals until after the death of the owner.

Other Types of IRAs

Although Traditional IRAs and Roth IRAs are the most commonly used types of IRAs, there are a few other types of IRAs that you might encounter:

• Savings Incentive Match Plan for Employees. A SIMPLE IRA allows employees and employers to contribute to traditional IRAs set up for employees. It is suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.
• Simplified Employee Pension. A SEP IRA is set up by an employer. The employer makes contributions directly to an IRA set up for each employee.
• Rollover IRA. This is when the IRA owner receives a payment from his or her retirement plan and deposits it into a different IRA within 60 days.

So there you have it – some of the most common types of IRAs that you might run into. If you have questions about using an IRA to save for retirement, or about setting one up, please contact our office. We would be happy to help.

Business travel can be costly. Hotel bills, airfare or train tickets, cab fare, public transportation – it can all add up fast. The good news is that if you travel for business, you may be able off-set some of those costs by claiming business travel deductions when you file your taxes. Here’s what you need to know.

Business travel deductions are available when employees must travel away from their tax home or main place of work for business reasons. The travel period must be substantially longer than an ordinary day’s work and a need for sleep or rest to meet the demands the work while away.

Travel expenses must be "ordinary and necessary." That means that expenses that are lavish, extravagant, or for personal purposes can’t be deducted.

Employers can deduct travel expenses paid or incurred during a temporary work assignment if the assignment length does not exceed one year.

Travel expenses for conventions are deductible if attendance benefits the business and there are special rules for conventions held outside North America.

Deductible travel expenses while away from home include the costs of:

• Travel by airplane, train, bus or car between your home and your business destination.
• Fares for taxis or other types of transportation between an airport or train station to a hotel, from a hotel to a work location.
• Shipping of baggage and sample or display material between regular and temporary work locations.
• Using a personally owned car for business which can include an increase in mileage rates.
• Lodging and non-entertainment-related meals.
• Dry cleaning and laundry.
• Business calls and communication.
• Tips paid for services related to any of these expenses.
• Other similar ordinary and necessary expenses related to the business travel.

Finally, don’t forget to keep records to substantiate your deductions. Records such as receipts, canceled checks, credit card statements, and other similar documents will allow your tax preparer to get you the maximum deduction that you are entitled to.

The Internal Revenue Service announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes.

For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022, taxpayers should use the rates announced earlier.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The 14 cents per mile rate for charitable organizations remains unchanged as it is set by law.

A lot of young people find themselves going into business each summer. Jobs like babysitting, lawn mowing, and dog walking teach responsibility and the value of hard work. But they also might come with an unexpected tax bill, because – whether they realize it or not – many of these young entrepreneurs are self-employed, and their income may be taxable.

What you need to know

Things to keep in mind:

• Everyone, including minors, must file a tax return if they had net earnings from self-employment of at least $400.
• If they owe taxes, teens and young adults should file their own tax return, even if their parent or guardian claims them as a dependent.
• Teens and young adults can prepare and sign their own tax return. There is no minimum age to sign a tax return.
• Parents can’t claim a dependent’s earned income on their own tax return.
• In addition to income tax, people who are self-employed are generally responsible for self-employment tax as well. It’s like the Social Security and Medicare taxes withheld from the pay of most wage earners.
• Teens and young adults can lower the amount of tax they owe by deducting certain expenses.

What to do

Here’s what young entrepreneurs can do to keep on top of their tax responsibilities:

Keep records. It’s good to make and keep financial records and receipts during the year. Recordkeeping can help track income and deductible expenses and provide the information needed for a tax return.

Pay estimated tax, if required. If a teen being claimed as a dependent expects to owe at least $1,000 in tax for 2022, they must make estimated payments on a quarterly basis. They should be sure to pay enough tax on time to avoid a penalty.

File a tax return. When tax season rolls around, young taxpayers can review the information and forms, gather their records and e-file their tax return. When preparing to file a tax return, they should make sure to review all their records, including estimated tax they’ve already paid.