Going into 2023, President Biden enacted a new law called the SECURE Act 2.0 that makes changes to retirement savings accounts and employee benefit plans. This law goes into effect January 1, 2023.
Required Minimum Distributions (RMD)
Prior to the enactment, plan participants needed to receive a required minimum distribution by April 1st following the year the participant reaches the age of 72. The new law changed the age from 72 to 73, which directly affects plan participates who reached the age of 73 after December 31, 2022. In 2033 the RMD age increases from 73 to 75. The SECURE Act 2.0 also reduced the penalty for failure to receive an RMD from 50% to 25%. With the new act, Roth accounts will be excluded from RMDs whereas previously Roth accounts in a 401(k) or 403(b) plan were subject to the RMD rules.
Small Business Plan Startup Costs Modification
In previous years, there was a 3-year small business startup credit of 50% of administrative costs with an annual cap of $5,000. The SECURE Act 2.0 increases the startup credit from 50% to 100% for all employers with up to 50 employees. This does not apply to a defined benefit plan where instead an additional credit is provided. This additional credit is a percentage of the amount contributed by the employer for the employee with a cap of $1,000 per employee. This additional credit is limited to employers with 50 or fewer employees and is phased out for employers with 51 to 100 employees. The percentage of the additional credit is 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. Once the fifth year is reached, there is no credit for tax years thereafter.
New Treatment of Employer Matching or Nonelective Contributions as Roth
Before the enactment of the SECURE Act 2.0 a retirement plan could only provide company contributions as pre-tax contributions, but now both matching contributions and nonelective contributions can be provided on a Roth basis provided the participant is 100% vested.
Effect on Catch-up Contributions and Limits
The SECURE Act 2.0 now states that if a participant’s wages in the prior year paid by the employer sponsoring the plan is greater than $145,000 then the participant may only contribute the catch-up as a Roth contribution whereas previously anyone 50 or older could contribute a catch-up contribution of $7,500 to a 401(k) plan as pre-tax or Roth. Before the enactment of the SECURE Act 2.0 anyone age 50 or older could contribute a catch-up of $7,500 to a 401(k) plan, but with the new plan, the catch-up limit was increased to either the greater of $10,000 or 50% more than the regular age 50 catch-up amount in 2025.
Treatment of Student Loan Payments as 401(k) Contributions to Match Contributions
This is intended to assist employees who may not be able to save for retirement because they are overwhelmed with student debt and thus are missing out on their employers’ matching contributions to retirement plans. With the new act, employers are now allowed to make matching contributions under a 401(k) or 403(b) plan for “qualified student loan payments”.
Long-Term Part-Time Employees
Previously, retirement plans were allowed to be excluded for part-time employees working less than 1,000 hours during a plan year, but now 401(k) plans will be required to cover long-term part-time employees. A long-term part-time employee is considered to be someone who works two consecutive 12 month periods with more than 500 hours of service each year. The employee must still meet the plan’s age requirement and contribute their own money to the 401(k) plan, and the company is not required to provide any company contributions. Be advised that service hours prior to January 1, 2023, are excluded when determining the two consecutive years of at least 500 hours.
The new act requires that participants be automatically enrolled in 401(k) and 403(b) plans upon becoming eligible. This allows for the employees to opt out of the coverage. The initial enrollment is at least 3% but no more than 10% and each year after the enrollment the amount is increased by 1% until it reaches 10% but not more than 15%. Current 401(k) and 403(b) plans are grandfathered and do not need to comply with this rule if the plan was set up prior to January 1, 2023. This also includes an exemption for small businesses with 10 or fewer employees and new businesses that have only been in business for less than 3 years.
As we approach the end of 2022, it is the perfect time to get organized for the upcoming tax season by being informed of significant tax law changes in addition to learning some potential tax saving strategies.
We will be covering new tax law changes which could result in a smaller refund or a higher tax bill compared to 2021 as well as general tax planning strategies which could benefit your 2022 tax return.
Child Tax Credit Changes
There were significant changes to the Child Tax Credit which were exclusive to the 2021 tax year as a result of the American Rescue Plan such as a higher credit amount of up to $3,600 per child and expanded eligibility age limits to include children up to 17 years old.
However, these changes were temporary, and the credit has now been restored to the original amount of $2,000 per child and the previous age limitations are in effect meaning only children under 17 years of age are eligible for the credit. Dependents who do not qualify for the Child Tax Credit may be eligible for a $500 non-refundable Credit for Other Dependents (ODC). Additionally, unlike the 2021 Child Tax Credit, the IRS did NOT issue advanced payments during the year; therefore, the full credit amount will be claimed on your 2022 tax return.
Lastly, as in previous years, phase-out rules apply to high income taxpayers meaning the credit amount is subject to reduction and could potentially also be reduced to zero for joint filers with an AGI of $400,000 or more and other filers with an AGI of $200,000 or more.
Child and Dependent Care Tax Credit Changes
The American Rescue Plan also introduced significant changes to the child and dependent care credit – which again were exclusive to the 2021 tax year and are no longer applicable. Child and dependent care expenses include costs incurred for the care of any dependent children under the age of 13 or a qualifying disabled dependent or spouse that lived with you during the year.
Under 2021 tax law, the credit was fully refundable, and the maximum credit percentage was increased from 35% to 50% meaning the maximum credit was $4,000 for one child/disabled person and $8,000 for two or more.
For the 2022 tax year, the credit is non-refundable, and the maximum credit percentage is reduced to the previous 35% limit. As a result, the maximum credit in 2022 is $1,050 for one child/disabled person and $2,100 for two or more. Evidently, this can result in a significantly lower refund on your 2022 tax return if you were eligible to claim the maximum credit in the previous year.
Lastly, the previous phase-out rules are also in effect meaning the credit starts being reduced once AGI exceeds $15,000 – as opposed to $125,000 in comparison to 2021.
Charitable Deductions Changes
During the 2021 tax year, a temporary provision allowed for a $300 charitable deduction per person meaning married couples could deduct up to $600 of charitable cash contributions if filing a joint return. This provision has expired for the 2022 tax year and charitable deductions of any amount are only allowed for taxpayers with itemized deductions.
Another rule allowed taxpayers to claim tax deductions for cash contributions to public charities and operating foundations up to 100% of their AGI. For 2022, this is no longer the rule as charitable contribution deductions will again be limited to 60% of the taxpayer’s AGI since Congress elected to not renew this provision as well.
1099-K Reporting Requirements Changes
Starting in 2022, third-party payment providers such as PayPal, Venmo and Zelle began reporting payment activity to the IRS and will be required to issue a Form 1099-K to any taxpayer who receives over $600. The previous threshold required this form to be issued only if there were more than 200 transactions totaling over $20,000. Under the updated guidance, a single transaction can trigger a Form 1099-K.
A Form 1099-K can be issued in a variety of scenarios which might seem insignificant at first glance. For example, reselling sporting event/concert tickets on an online platform such as Ticketmaster or selling items on eBay can cause a Form 1099-K to be issued which is required to be reported as taxable income on your tax return. Keep in mind, you are able to deduct any expenses incurred to offset the income received meaning you will only be taxed on the profits of each transaction as opposed to the gross payments reported on the Form 1099-K.
The IRS has explained a Form 1099-K should NOT be issued for personal transfers to friends, family and coworkers intended as reimbursements for splitting meals, gifts, or allowances. However, if you receive a Form 1099-K for personal transactions, the IRS instructs to contact the issuer for a correction. If the issuer doesn’t fix the error, you can attach an explanation to your tax return while reporting your income correctly.
Capital Gains Distributions
Review your portfolio to see if you have any stocks, bonds, or mutual funds that have declined in value since their initial purchase. Selling them before year-end will create losses to offset any potential capital gains. Remember, long-term capital gains are taxed at 0%, 15% and 20% tax rates depending on your taxable income and filing status.
Taxpayers are eligible to claim up to $3,000 in capital losses each year, any unused losses in that year are then carried forward to the next year. Short-term capital gains are taxed at the same rate as your ordinary income. Capital gains are netted as follows:
Short-term losses are netted against short-term gains.
Long-term losses are netted against long-term gains.
If either of the preceding two is a net gain while the other is a net loss, they are netted together
Pre-tax Retirement Savings
You can contribute up to $20,500 to a 401(k), 403(b), or federal Thrift Savings Plan in 2022, plus an additional $6,500 in catch-up contributions if you’re 50 or older. These contributions will reduce your take-home pay, therefore reducing your overall tax bill. As these contributions must be made through payroll deductions, the sooner this change is made, the better.
It is important to note that you have until the tax deadline – April 18th, 2023 – if you are contributing to a traditional or Roth IRA for 2022. Also, be careful not to exceed contribution limits, as the excess contribution will be both taxable now, and once again when it is eventually withdrawn from the account.
For those who are self-employed with no employees, consider opening up a solo 401(k) plan. You can contribute up to $20,500 (plus an additional $6,500 if you’re 50 or older) to the plan, less any contributions made to an employer’s 401(k) plan for the year. You can also contribute up to 25% of your own net self-employment income to the plan, capping at $61,000 in 2022 ($67,500 if 50 or older). Similarly, a Simplified Employee Pension (SEP) account allows one to contribute 25% of net self-employment income, up to $61,000.
It is possible to convert some money from a traditional IRA to a Roth IRA, up to the top end of your income tax bracket. Taxes will be paid on the conversion, but the money will be able to grow tax-free in the Roth account after that. Converting your entire traditional IRA balance can push you into a higher tax bracket but spreading the conversions over several years can be a great tax saving strategy.
Required Minimum Distributions (RMDs)
You must begin making required minimum distributions from your traditional IRA by April 1st of the year after the year you turn 72. Prior to 2020, required minimum distributions began after turning 70 ½ years old. Failing to withdraw RMDs as required could expose you to an excise tax equaling 50% of the excess of the amount you should have withdrawn over the amount actually withdrawn. If you turned 72 in 2022, you make take your first RMD any time before April 1st, 2023. However, this doesn’t necessarily mean to wait until 2023 – if you take your 2022 RMD in 2023, you will still be required to take your 2023 RMD by the end of 2023. This will mean two IRA distributions in the same year, which will be included in your taxable income for a single year. There are situations where this may be beneficial, but it is an important consideration to make. Although you are required to withdraw at least the required minimum distribution amount, you are entitled to withdraw funds exceeding that amount without incurring any penalties. The distributions will be taxed at the same rate RMDs are currently taxed – as ordinary income. All distributions, including the RMD, are reported on Form 1099-R.
If you are eligible or become eligible to make HSA contributions in December, you can make a full year’s worth of deductible contributions in 2022. The maximum contribution for 2022 is $3,650 for individual coverage, and $7,300 for family coverage. If you are 55 years or older, you can contribute an additional catch-up contribution of $1,000 per year. There are no income limits to be eligible to contribute to an HSA, and withdrawals used for qualified medical expenses are never taxed.
If a family member has special needs, up to $16,000 can be contributed this year to an ABLE account, allowing people with qualifying disabilities to save money without interfering with government benefits. If you are a resident of one of the states that does offer a tax break for these kinds of accounts, your contribution can be deducted. Check out https://www.ablenrc.org/ for further information.
Annual Gift Exclusion
If you are interested in making a gift of a check and would like it to qualify for the $15,000 annual gift tax exclusion for 2022, there are two requirements that must be satisfied:
The donee must deposit the check in 2022
The check must clear in the ordinary course of business (which can happen in January)
Also, the $15,000 limit is for each individual giving a gift to the donee. This means each parent could give a gift of $15,000 to a child for a total of $30,000 per child. A holiday gift of a check that is not deposited until after New Year’s is considered a gift in 2023, however a cashier’s check can avoid this problem.
As with all of the above strategies, we highly encourage you to discuss any strategies with your accountant before implementation. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult with your own tax, legal, or accounting advisor before engaging in any transaction.