Tax changes have implications and it’s a good idea to get an early start on tax planning for 2023. Understanding some of the new rules can help you as you go through the year.
Here are some of the major tax changes for 2023.
Beneficial 2023 Tax Items
First, there are some beneficial tax items that have been in place that continue in 2023. The required age for retirement plan distributions is still 72. If you have earned income, there is no age limit to contribute to an IRA.
Some employer deductions for paid family and medical leave and work opportunity credits have been extended through 2025.
Student loan forgiveness remains non-taxable through 2025.
The Earned Income Tax Credit was increased to $10,300 in 2022 and will be indexed for inflation going forward.
Clean Energy Incentives in Inflation Reduction Act
The Inflation Reduction Act was signed into law in August 2022.
Several incentives for clean energy were put into place. Credits and or rebates for electric vehicles, energy-efficient home improvements, and electrification of heating systems are available. It’s important to understand the various rules as there are various restrictions and limits.
Gifting Remains an Important Estate-Tax Reducing Strategy
Gifting is an important estate-tax-reducing strategy.
The amount an individual can gift in a year goes from $16,000 in 2022 to $17,000 in 2023. These gifts are not subject to the gift tax. The basic exclusion amount for an estate is $12.92 million in 2023 and will be indexed to inflation going forward.
Capital Gains Tax Remains Unchanged
Capital gains tax remains largely unchanged in 2023.
The top long-term capital gains tax rate is 20% plus, if applicable, the additional 3.8% Medicare contribution can bring the rate to 23.8%.
The top short-term capital gains rate can be as high as 40.8%.
From a tax perspective, it pays to be a long-term investor and hold positions with gains for at least a year.
Deductions That No Longer Apply in 2023
Just as there are some beneficial rules still in place, there are some deductions that will no longer apply in 2023.
Charitable Deduction Reduction
For tax years 2022 and beyond, you can no longer take a $300 ($600 if married filing jointly) reduction of income for charitable deductions regardless of whether you itemize.
Business Meals Expense
In 2021 and 2022, businesses could deduct 100% of meals expense as a deduction. Now only 50% of meal expenses will be deductible.
Business Equipment Purchases
Business equipment purchases were 100% depreciable in the current year. Beginning in 2023, the 100% now becomes 80% and each year it will be reduced until the old depreciation rules return in 2027.
The Importance of Tax Implications on Financial Decisions
What has been mentioned so far is not a complete list but is meant to illustrate the importance of considering the tax implications of your financial decisions.
Smart tax planning can help you keep more of the income, gains, and profits you earn or make.
Other Often-Overlooked Tax-Saving Tips
Some other general tax-saving tips that are often overlooked include:
- If taking a required minimum distribution from your IRA, you can contribute the money directly from the retirement account to a charity. This lowers your taxable income, allowing taxpayers who do not itemize the ability to benefit from charitable giving.
- Offset securities gains with losses. There is a complex netting procedure so make sure you are not having your long-term gains taxed at short-term rates.
- If you have a year with “low” income, consider converting some or all of your traditional IRA to a Roth IRA. The conversion is taxable but if you have less income than you will in the future, it might make sense.
- Avoid penalties by withholding enough from salary, paying estimated tax on time and, if taking IRA distributions, consider having withholding taken out.
- Don’t forget about your capital gains tax loss carryforwards. If you have a carryforward, remember you can use it to offset gains.
Thinking about the future means you should maximize your deductible retirement plan contributions. Also, make sure to take advantage of company 401K matching.
Donating to charity appreciated securities held for a year is often a tax-efficient way to make charitable contributions.
For additional perspective, check out 2023 Personal Tax Guide: Year-End Tax Strategies for 2022 (eisneramper.com).
Start Early So You Can Take Into Account Tax Changes and Their Implications
Again, taxes are complicated. This blog is for informational purposes. Each person or family has different needs and is impacted by the tax code in different ways.
It is important to seek advice from a qualified tax professional. You should check with a tax advisor before entering a transaction or embarking on a particular strategy or tactic. Taxes need to be considered before you do it. Once done it is likely you cannot change or fix the tax implications.
Thanks for reading.
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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.
Image credit: Office of the Tax Administration (Biccherna) of Siena, anonymous, 1451 – 1452, Rijks Museum