Over the summer the Inflation Reduction Act was passed by Congress and signed into law by the current administration. Although most of the provisions affect business taxpayers, there are some items of interest to the individual tax payer.
- Extension of the Affordable Care Act (ACA) premium tax credit (PTC) through 2025, this credit was set to expire at the end of 2022. The PTC is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace.
- Nonbusiness energy property credit is now called energy-efficient home improvement credit and has been extended through December 31, 2032.
- For 2022 the credit follows the old rules and is capped at a $500 lifetime limit.
- For 2023 the credit has an annual limit of the lesser of $1,200 or 30% of the costs for eligible home improvements made during the year such as storm door, insulation and windows.
- Residential energy efficient property credit is now called residential clean energy credit and has been extended through December 31, 2034. This credit generally applies to the installation of solar, wind or geothermal heating and cooling systems.
- For 2022 through 2032 this credit jumps to 30% of the cost of installing qualifying systems.
- For 2033 the credit drops to 26%
- For 2034 the credit drops to 24% before expiring.
- Electric vehicle (EV) tax credits now called Clean vehicle credits and expires after 2032
- For 2022 any vehicle purchased or entered into a written binding contract before August 16th follow the existing rules and may be eligible for a non-refundable tax credit of up to $7,500.
- For any EV purchased after August 16th but before December 31, 2022 the same rules apply with one major exception – only EVs for which final assembly occurred in North America are eligible.
- For any vehicle purchased after December 31, 2022 new credit requirements apply. These requirements are beyond the scope of this article.
The IRS annually adjusts many items based on inflation. Among those items are the standard deduction for individual taxpayers and the annual gift exclusion. The following adjustments for the 2023 tax year
have just been released.
- Standard deduction for married couples filing jointly increases to $27,700 up $1,800 from the 2022 amount of $25,900.
- Standard deduction for single taxpayers increases to $13,850 up $900 from the 2022 mount of $12,950.
- In addition taxpayers over the age of 65 can claim an additional deduction of $1,500 up $100 from the 2022 amount of $1,400.
- The annual exclusion for gifts increases to $17,000 for calendar year 2023, up $1,000 from the 2022 amount of $16,000.
Tax planning considerations for 2022 and beyond.
- Deferring/Accelerating Income
- If you expect your income to be higher in 2022 than in 2023, you may benefit by deferring the receipt of income until 2023. Deferring income is advantageous as long as the deferred income doesn’t put you in a higher tax bracket in the succeeding year. An example would be taking a year-end bonus in January vs December if your employer would allow.
- In some limited circumstances, you may benefit by accelerating income into 2022. If you think your 2023 income will be substantially higher or if you currently have a large loss deduction that could offset additional income it may make sense to accelerate the receipt of income. Some examples include taking distributions from retirement accounts if you have reached age 59 ½ or by making a Roth IRA conversion.
- Roth IRA Conversions
- Traditional IRAs are not tax free, only tax deferred. You will pay tax at ordinary income tax rates when you make withdrawals. Your heirs will also pay tax on traditional IRA distributions. Roth IRA distributions are tax free to both you and your heirs. If you have a low income year or a year with larger than normal deductions or losses you may consider a Roth conversion. Funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) or §457 government plan may be rolled over into a Roth IRA. No penalties will apply if all the requirements are satisfied. You will pay income tax at the ordinary rates on the conversion amounts. With proper planning these rates could be lower than future rates. All future distributions from the Roth IRA will be tax free.
- Bunching Itemized Deductions
- If itemized deductions are relatively constant and are close to the standard deduction amount it may be beneficial to “bunch” your deductions in alternating years. To maximize the benefits of the standard deduction and itemized deductions consider adjusting the timing of deductible expenses so that they are higher in one year and lower the next. This can be accomplished by paying expenses in 2022 vs 2023 such as January’s mortgage payment or state estimated tax payments due January 15, 2023. Also consider doubling up on charitable contributions every other year.
- Required Minimum Distributions(RMD) / Qualified Charitable Distributions(QCD)
- Taxpayers that turn 72 during 2022 are required to begin withdrawing RMDs from their IRAs and other qualified plans. This first RMD must be made by April 1, 2023 and subsequent years RMDs must be made by December 31st. Beware – if you wait until April 1, 2023 you will have two withdrawals for 2023 (April 1 and December 31) which could result in a larger tax liability in 2023. You can begin your RMDs any time after turning 72.
- One way to satisfy your RMD requirement is to make a direct contribution from your IRA to a charity, otherwise known as a QCD. If you are 70 ½ you can make a QCD of up to $100,000. The QCD is not counted as a charitable contribution deduction however, the amount is not included in your taxable income. This can be especially beneficial to taxpayers that don’t typically itemize their deductions.
If you are interested in learning more about any of the topics listed above, please contact your Financial Advisor and we can connect you with our Mason + Rich accounting team. Together we can what makes the most sense for you and your family's financial situation.
Dana R. Bull
Mason + Rich