Tax planning for the future can be daunting, but it doesn't have to be. As changes in deductions and credits emerge, it is crucial to stay ahead of the game to ensure that you take advantage of all available tax breaks. There are many factors that cannot be predicted, but one thing is sure: new tax deductions and credits may alter the realm of tax planning beyond 2023.
In this article, we'll look at what these new changes are, how they could affect taxpayers in the future, and what steps you should take now to minimize your tax burden. We will explore existing and upcoming credits and deductions that could become even more advantageous and new ones that could benefit you in the coming years.
Tax planning starts with understanding how deductions, credits, and other tax strategies are helping to reduce your tax burden. Every year, taking advantage of deductions and credits can put money back in your pocket.
There are several options to help you reduce your taxes:
Tax planning has become an increasingly important part of financial planning and budgeting, especially with the ever-changing landscape of tax law.
When it comes to lowering taxes, you can take two paths: reduce your income or increase your tax deductions. Tax planning strategies can help with retirement contributions, business deductions, and more.
Plus, the recent changes to the law have introduced new ways to offset taxes dollar-for-dollar. Tax credits are great for this, as they reduce your tax liability directly instead of indirectly through a reduction in taxable income. In some cases, you may even be able to combine credits and deductions for a double benefit.
Overall, understanding these changes—and weighing them against any other financial decisions you might be making—will be critical when it comes to tax planning in the future.
Before we go into the upcoming tax deductions and credits, let's understand what they are. The amount of your taxable income subject to taxes can be decreased by taking advantage of tax deductions, which may also lower your overall tax rate. In contrast, a tax credit that works on a dollar-for-dollar basis directly reduces your tax liability. If you have a tax credit worth $500, for instance, that will result in a $500 discount.
The American tax system is highly complex and often changes from year to year. However, the Inflation Reduction Act of 2022 could have an even more lasting impact on tax planning for individuals, businesses, and tax-exempt entities. The Inflation Reduction Act is a 10-year plan, so the effects will not be instantaneous. Quick but methodical action is being taken to implement the new tax laws.
Here are a few tax credits being implemented:
Tax credits are beneficial for reducing taxes owed dollar for dollar and can be either refundable or nonrefundable. The child tax credit, earned income tax credits, and the education credit are all common types of credits.
With the child tax credit, or CTC, you could get up to $2,000 per child, and up to $1,500 of that could be refunded.
If you have a child under 13 years old, a spouse or parent who cannot care for themselves, or another dependent, you may be eligible for a tax credit called the child and dependent care credit (CDCC) to help offset some of the costs of providing care for them while you work. For one dependent, the maximum reimbursement is $3,000; for two or more dependents, the maximum is $6,000.
The American Opportunity Credit (AOC) allows you to deduct the total amount of the first $2,000 you spend on qualifying education expenses (including tuition, books, equipment, and fees; however, it does not cover living or transportation costs).
The lifetime learning credit allows you to get back up to $2,000, or 20% of the first $10,000 you spent on tuition and fees. Living expenses and transportation costs are not considered when calculating the lifetime learning or American opportunity tax credit. You can get free textbooks and other school materials.
This tax credit pays up to $14,890 per child in adoption costs. If your modified adjusted gross income in 2022 is more than $263,410, the credit will begin to phase out and be eliminated.
Depending on one's family situation, marital status, and annual income, the Earned Income Tax Credit (EITC) could be worth anywhere from $560 to $6,935. If taxpayers' adjusted gross income is less than $59,000, they might want to look into this.
The credit ranges from 10% to 50% of the first $2,000 (up to $4,000 if filing jointly) contributed to an IRA, 401(k), 403(b), or specific other retirement plans. The percentage is based on your filing and income status.
Solar energy systems, such as solar panels and water heaters, are eligible for a 30% tax credit through the federal government's "residential clean energy credit" program.
For the tax year 2022, the nonrefundable electric vehicle tax credit is between $2,500 and $7,500, depending on the vehicle's weight, the manufacturer, and if you own the car. The credit was greatly expanded and now includes used vehicles for the tax year 2023 (taxes filed in 2024).
A tax deduction differs because it reduces taxable income rather than taxes owed. Standard deductions include charitable, student loan interest, and home office deductions. It is vital to stay up-to-date on changing legislation, as emerging deductions and credits could impact your bottom line in 2023 and beyond.
Here are a few tax deductions to look out for:
If you have paid interest on your student loans, you can deduct up to $2,500 of that amount from your taxable income.
Suppose you file your taxes using the itemized method. In that case, you may be able to deduct the value of your charitable contributions, whether monetary or in-kind, like a car or a wardrobe. As the IRS allows, you can take a standard deduction of 60% of your AGI.
You can generally deduct the amount of your eligible, unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.
If you pay state and local income taxes or sales taxes, you can deduct up to $10,000 (or $5,000 if filing separately) from your federal tax return.
A tax break for mortgage interest is often cited as a way to lower entry prices for property ownership. All homeowners who qualify can reduce their federal income tax liability by deducting mortgage interest payments.
If you or your spouse don't have coverage under an employer-sponsored retirement plan, contributions to a traditional IRA may be tax deductible up to a specific limit.
Donations to a 401(k) plan made directly from your paycheck are not subject to income tax. The maximum contribution for 2022 was $20,500 ($27,000.00 for those 50 or older). 401(k)s are a type of retirement account typically provided by employers, though self-employed individuals are free to open their accounts if they choose.
All HSA contributions are tax-deductible; withdrawals for eligible medical costs are also tax-free.
Freelancers, contractors, and the self-employed are generally eligible for tax breaks.
The Internal Revenue Service (IRS) allows certain self-employment deductions for rent, utilities, real estate tax, repairs, maintenance, and the like if a portion of your home is used regularly and exclusively for business-related activity.
In 2022, teachers and other qualified educators can deduct up to $300 from their income taxes for materials purchased for the classroom.
As the tax landscape evolves, small businesses must stay ahead of the curve by planning for possible deductions and credits in 2023 and beyond.
By utilizing existing tax deductions to reduce income taxes dollar for dollar, businesses can gain an edge over their competition while individuals can maximize their returns. By taking advantage of these potential changes now, optimizing the tax benefits one may receive on income earned in future years is possible.
For businesses, planning with emerging deductions and credits means they can make the most of their investments while enabling more funds to be reinvested into future operations and receive better capital gains. This could have a long-term effect on economic growth.
With this in mind, let's go through some of the tax changes for small businesses:
This year's tax bill significantly changes the criteria for claiming a net operating loss. When expenses exceed revenues, the result is a loss in net operating income. In most cases, losses can be carried over to future tax years and used to reduce taxable income. The maximum allowable deduction is 80% of taxable income.
However, the 80 percent of the taxable income cap does not apply to a net operating loss generated in 2018, 2019, or 2020 and is being carried forward. Net operating losses after 2020 are once again limited to 80% of taxable income.
The CAMT was established by the Inflation Reduction Act and mandates that large corporations pay a minimum tax of 15% on their adjusted income statement income for tax years beginning after December 31, 2022. Big businesses, defined as those with a high income and an annual average net income of over $1 billion according to their financial statements, are subject to the CAMT. In order to prepare taxpayers for the implementation of the CAMT, the Treasury Department and the IRS have issued Notice 2023-7.
A qualified business income (QBI) deduction, also known as the Section 199A deduction, may be available for many sole proprietors, partners, S corporations, and even some trusts and estates. Eligible taxpayers can deduct up to 20% of their QBI plus another 20% of any dividends or interest payments received from a real estate investment trust (REIT) or publicly traded partnership (PTP) that fulfills certain requirements. This deduction does not apply to income received through a C corporation or for services rendered as an employee.
Qualified business income (QBI) is the after-tax profit or loss, capital gains, and deductions from all eligible activities, including those conducted by a partnership, S corporation, sole proprietorship, or trust. In most cases, this will include things like the share of self-employment tax that is tax deductible, health insurance premiums, and eligible retirement plan contributions.
The deduction is available to all filers, not just those who use Schedule A to itemize. Eligible taxpayers can take advantage of the deduction for the tax years starting after December 31, 2017, and ending on or before December 31, 2025.
For tax purposes, interest paid during the year is generally only deductible up to the sum of the following, as outlined by the interest limitation rule:
This tax regulation was put on hold during the pandemic but was enforced again in 2022.
During the 2023 tax year, C corporations and individuals will no longer be able to take advantage of a deduction that allows a higher percentage of their income to be allocated to charitable contributions.
Form 1099-K was supposed to be sent out to small business owners and freelancers who make more than $600 from using third-party digital platforms starting with the 2022 tax year as required by the American Rescue Plan Act of 2021. The internal revenue service also expected revenue from sites like Amazon, Etsy, and eBay to be reported by these marketplaces.
The provision has been postponed for a year following opposition from taxpayers and businesses. If your company qualifies, you will receive a Form 1099-K in 2024 to report income from the tax year 2023.
Since 2020, taxpayers have had a cap of $10,000 on state and local income and property taxes they can deduct. Both individuals and married couples can take advantage of this deduction. Many pass-through entity owners in high-tax states find that SALT rules limit their ability to deduct state and local taxes paid by their businesses.
Everyone who owns a business needs to know about this limit. The SALT cap will significantly impact small businesses operating in high-tax states because these companies typically file their taxes as personal taxes.
Both pass-through business owners and corporations can now take advantage of a sizeable deduction thanks to the new tax law. Small businesses that operate as S corporations, limited liability companies (LLCs), sole proprietorships, or partnerships are examples of pass-through businesses.
Roughly 95% of all American companies are pass-throughs. Those companies can now deduct 20% thanks to the new law. Incomes between $170,050 and $220,050 (or $340,100 and $440,100 for joint filers or married taxpayers) in 2022 will begin the deduction phase-out. These thresholds will be increased in 2023 to account for inflation. This tax break will end at the beginning of 2027.
The Tax Cuts and Jobs Act also gave C corporations a lot of tax breaks. To entice major corporations to return to the United States, where they can contribute to job creation and economic growth, it reduced the corporate tax rate from 35% to 21%.
From now until the end of 2022, the first-year bonus depreciation deduction is set at 100%. Instead of writing off a percentage of the cost of qualifying equipment and property each year, eligible businesses could deduct the entire purchase price. More money was made available to companies up front, expecting it to be used for expansion or to increase employment.
The bonus depreciation of 100% is expected to decrease annually, beginning with the 2023 tax year. This allows companies to deduct the total cost of capital purchases immediately.
A business can write off the total cost of its investments in things like vehicles, computers, and equipment.
Tax planning is vital to ensure you take advantage of the most potential tax benefits available. Even though we are just starting a new year and preparing for our federal taxes for 2022, those in the financial industry will often advise their clients to think ahead to 2023 and devise a tax plan. Putting off tax planning until the end of the year is a bad idea because it may be too late to make meaningful tax choices and reduce your tax liability by then.
Here are five tax advice strategies to help you save money on taxes in 2023:
The high inflationary climate of 2022 necessitated adjustments to the standard deduction, which was implemented.
According to the Internal Revenue Service, the standard deduction for married couples filing jointly in 2023 is $27,700, an increase of $1,800 from the previous year. In 2023, the standard deduction for unmarried and divorced taxpayers will increase by $900, reaching $13,850. For heads of households, the standard deduction increases to $20,800 in 2023, up $1,400 from the amount in 2022.
An additional $1,500 for single filers and $3,000 for married couples is available if either spouse is 65 or older. The gist is that a married couple over 65 can withdraw $30,700 of income without incurring any income tax consequences.
Taking into account your tax brackets when planning your retirement income for the coming year is essential. The other significant opportunity for tax planning is determining how much income you could earn before moving from the 10% tax bracket to the 12% tax bracket. Following this reasoning, estimate how much money you could make before your tax rate jumped from 12% to 22.9%.
The reason is that a 65-year-old married couple can make $89,450 before entering the higher tax bracket of 22%. With an additional $30,700 in standard deductions and nearly $90,000 in income, they could make around $120,000 and still fall within the 12% tax bracket. They could make an extra $40,000 before hitting the next tax bracket, even if they were only making $80,000. That might be useful for figuring out how much money to take out of retirement accounts.
If you are in the 22% or 24% tax bracket, you may wish to convert as much as possible to a Roth in order to maximize your tax savings. Consult your advisor if you fall into a high income or low-income category and have some wiggle room.
“Contributions to traditional retirement accounts are made on a pre-tax basis, meaning they are deducted from taxable income in the year they are made.” says Isaac Robertson, Fitness Trainer, and Co-Founder Total Shape. “This reduces the income subject to taxation and can cause a lower tax bill.”
Taxes on traditional IRA contributions are deferred until the funds are withdrawn from the account. Because Roth IRA contributions are made after taxes have already been taken out, both the funds grow tax-free, and any withdrawals taken out are free of taxation. One common financial strategy is to switch from traditional IRAs to Roth IRAs and pay the taxes now to avoid paying them in retirement.
Issac also mentions, “Roth retirement account contributions come through on an after-tax basis, meaning they don't provide an immediate tax deduction.” “However, qualified withdrawals from Roth accounts are tax-free, making them a valuable tax planning tool for those expecting to be in a higher tax bracket during retirement.”
In 2023, the maximum contribution to a health savings account will be $7,750 for a family and $3,850 for an individual. Individuals aged 55 and up continue to receive the same $1,000 catch-up.
Those are great because you can deduct the contribution amount from your taxable income before taxes are taken out, the money grows tax-free, and you don't have to pay taxes on the profit as long as you use it to pay for qualified medical expenses.
As part of the massive appropriations bill, Congress approved the Secure Act 2.0, providing some relief for retirees. By law, the minimum age for retirees to begin taking money out of their accounts has risen from 72 to 73.
However, qualified charitable distributions may be the answer for those who are required to withdraw but don't have an immediate financial need for the funds. Account holders can avoid paying taxes on the RMD by donating it directly from their account to a charity they choose.
If you plan on giving for the next five years, consider making all of your contributions in the first year so that you can claim a larger deduction. You and your advisor can determine if this strategy will help you save money on taxes and increase your deductions.
As we look ahead to 2023, it's wise to be aware of the possible changes to deductions and credits that could significantly affect your finances and act accordingly.
If you keep up with the news, talk to an expert, and learn about the upcoming deductions and credits, you'll be better prepared to face whatever the future brings. You can minimize your tax burden, reduce tax filing mistakes and increase your after-tax earnings by optimizing your deductions and credits. For your long-term financial security, it's a win-win situation.