Tax-Saving Strategies for 2023 Tax Year Filings

tax-savings-strategies-2023

By Jaclyn Martello

With the upcoming tax season, it’s our objective to equip you with an understanding of recent tax law changes that may provide a tax savings compared to the previous year, as well as tax strategies that can prove advantageous for your 2023 tax return.

Student Loan Interest Deduction

October 2023 marked the end of the Cares Act deferral of student loan payments and federal student loan payments resumed for borrowers.  It’s important to keep student loan interest deductions in mind. 

Borrowers are eligible to deduct the lesser of $2,500 or the amount of interest paid on a qualified student loan during 2023. To qualify, a borrower must be legally obligated to pay interest on the loan, neither the student nor spouse are claimed as a dependent on another return; you cannot use the filing status married filing separately. Further, the modified adjusted gross income (MAGI) is less than $75,000 if single, head of household, or less than $150,000 for qualifying surviving spouse or married filing jointly. The phase-out begins if MAGI exceeds these amounts, and ends at $90,000 and $180,000 per filing status, respectively. 

IRA, 401(k), and SIMPLE Retirement Account Savings

Maximizing your contributions through these retirement account not only increase your retirement savings, but also potentially qualify for a tax deduction.

For the tax year 2023, individuals had the option to increase their contributions to a 401(k), 403(b), and most 457 plans to $22,500. This is an increase from the previous year’s limit of $20,500. In addition, individuals who are 50 years and older can now take advantage of the catch-up contribution, allowing them to contribute up to $7,500.

It is also worth noting that the annual contributions to an Individual Retirement Account (IRA) have been increased from $6,000 to $6,500. However, the catch-up contribution for IRAs remains unchanged at $1,000. The limit for SIMPLE IRA plans has been raised to $15,500, with the catch-up contribution now standing at $3,500.

Health Savings Account (HSA)

By contributing to a HSA, individuals can make contributions to cover healthcare costs, withdraw contributions tax-free, and qualify for a deduction. The contribution limits for 2023 are $3,850 for self-only HDHP and $7,750 for families with HDHP coverage. In addition, individuals aged 55 and older can take advantage of an extra $1,000 catch-up contribution.

Child Tax Credit 

There are no changes to the child tax credit for 2023, but it’s still important to keep limitations in mind. For individuals with an annual income below $200,000 and $400,000 (if filing a joint return), the child tax credit remains at $2,000 per qualifying dependent under the age of 17. Up to $1,600 of the Child Tax Credit is refundable through the Additional Child Tax Credit.

Energy Efficient Home Improvement Credit

Individuals who made energy-efficient home improvements in 2023 may qualify for a nonrefundable credit of the lesser of 30% of expenses or $3,200. This credit can only be applied to taxes owed and not received in a return nor applied to future years. These improvements include energy efficiency installations, residential energy property expenses, and home energy audits. The credit is broken down below:

  • $1,200 – energy property costs & energy efficient home improvements 
  • $2,000 – qualified heat pumps, biomass stoves, & biomass boilers 

Residential Clean Energy Credit (RCE)

The RCE can apply to both homeowners and renters who made energy-saving improvements in their main home at some point throughout the year. Property owners who do not live in the home cannot claim the credit. Like the Energy Efficient Home Improvement Credit, qualified expenses related to energy-saving improvements can qualify for a 30% credit and the credit is nonrefundable. Qualified expenses are limited to only new (not used) clean energy properties and include the following: solar electric panels, solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology (which is new to 2023).

Clean Vehicle Credits 

New electric vehicles bought prior to 2023 were eligible for clean vehicle tax credits with a maximum of $7,500, consisting of a $2,917 cap for vehicles with a battery capacity of at least 5 kWh and an additional $417 for each kWh above this cap. In 2023, the credit is the same, however, The Inflation Reduction Act of 2022 made a few changes:

For the tax year of 2023, fuel cell vehicles were added to the existing tax credit and a new credit was introduced for used electric vehicles, which includes a credit up to 30% of the sale price with a maximum of $4,000.

529 Account Limits

529 accounts are a great, tax-free way to contribute to a child’s future education expenses while taking advantage of compounded returns and potential state deductions. Since 529 accounts are state mandated, the state also determines contribution limits. However, federal law deems what education expenses are qualified to be paid for through a 529 account. Qualified expenses include tuition, books, supplies, fees, electronics, and room/board. Interestingly, 529 account contributions are considered gifts by the IRS, and therefore, gift limitations relating to the lifetime gift tax exemption apply. For the year 2023, individuals could gift up to $17,000 and $34,000 (if filing jointly) without this amount going towards their lifetime gift tax exemption of $12.92 million.

Form 1099-K

The IRS previously announced that 2023 would be the first year that third-party payment providers such as Venmo, Zelle, PayPal, etc., would be required to send form 1099-Ks to any taxpayer who received over $600 in payments, for reporting purposes. However, the changes were pushed back to the 2024 tax year and 2023 is being considered a transitional year. Therefore, for the year 2023 no changes have been made: reporting is not required unless the taxpayer received over $20,000 and had 200+ transactions. 

Inflation Adjustments 

Accounting for inflation, there have been a several changes for the 2023 tax year. 

Standard Deductions: The standard deductions for each filing status have been considerably increased.

Filing Status2022 Tax Year2023 Tax Year% Increase
Single$12,950$13,8506.95%
Married, filing separately$12,950$13, 8506.95%
Married, filing jointly$25,900$27,7006.95%
Head of household$19,400$20,8007.22%

2023 Federal Income Tax Brackets & Rates: Tax brackets have slightly increased while rates remain unchanged. 

Tax RateSingle Married filing jointly or qualifying surviving spouseMarried filing separatelyHead of household
10%$0 to
$11,000
$0 to
$22,000
$0 to
$11,000
$0 to
$15,700
12%$11,001 to $44,725$22,001 to $89,450$11,001 to $44,725$15,701 to $59,850
22%$44,726 to $95,375$89,451 to $190,750$44,726 to $95,375$59,851 to $95,350
24%$95,376 to $182,100$190,751 to $364,200$95,376 to $182,100$95,351 to $182,100
32%$182,101 to $231,250$364,201 to $462,500$182,101 to $231,250$182,101 to $231,250
35%$231,251 to $578,125$462,501 to $693,750$231,251 to $346,875$231,251 to $578,100
37%$578,126
or more
$693,751
or more
$346,876
or more
$578,101
or more
Source: https://www.irs.gov/filing/federal-income-tax-rates-and-brackets

The above tax strategies are intended to be for informational purposes only and are not meant to be completely relied on for tax, legal, or accounting advice. Using any one or combination of these tactics may prove to be advantageous to you, however you should always consult with a professional before engaging in any transactions.

Corporate Transparency Act – Effective January 1, 2024

corporate-transparency-act

Effective January 1, 2024, most new and existing corporate entities in the United States will be required to file reports on their beneficial owners with the federal government.  These requirements are part of the Corporate Transparency Act and are expected to impact many business entities.

What is the Corporate Transparency Act?

The Corporate Transparency Act, or CTA, is an expansion of anti-money laundering laws and is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity.

Who is required to file reports?

Domestic reporting company – any entity that is a corporation, a limited liability company, or otherwise created by the filing of a document with the secretary of state or similar office.

Foreign reporting company – any entity formed under the law of a foreign country and registered to do business in any US state by the filing of a document with the secretary of state or similar office.

Exemptions for filing include sole proprietorships, trusts, and general partnerships since these entities do not require the filing of a formal document with the secretary of state.  There is also an exemption for large operating companies defined as any entity with 1) more than 20 full-time US employees, 2) an operating presence at a physical office within the US and 3) more than $5.0mm of US sourced gross receipts reported on its prior year federal income tax return.

What is the due date of the initial report?

The due date for the initial report depends on when the entity was created:

  1. If the company was created on or after January 1, 2024, then the initial report is due within 30 calendar days of the date the entity is created.
  2. If the company was formed before January 1, 2024, then the initial report is due no later than January 1, 2025.
  3. If there is a change to previously reported information about the reporting company or its beneficial owners, an updated report must be filed within 30 days of the change.

What information is included in the report?

Reports include information about:

  1. The reporting company, including full legal name, trade name, current address, jurisdiction of formation and federal taxpayer ID number.
  2. The reporting company’s beneficial owners, including full legal name, date of birth, current address, unique identifying number and issuing jurisdiction (passport, driver’s license), and image of document with identifying number.
  3. The company applicants who made the filings to create the entity. If the reporting company is formed or registered after 2023, the same information is required as #2 above.  Otherwise, no information is required for the company’s applicants.

Alternatively, individuals and entities may apply for and obtain a FinCEN identifier, which can be included on subsequent filings in lieu of the information above.

How do I file?

Reports must be filed electronically.  FinCEN’s e-filing portal, available at https://boiefiling.fincen.gov, provides two methods:  1) by filling out a web-based version of the form and submitting it online, or 2) by uploading a completed PDF version of the report.

If you have any questions about these new reporting rules and how they affect your business, please contact your L&P accountant who would be happy to discuss them with you.

Congress Proposed Ending of Several Business Pandemic Tax Credits

congress-proposed-ending-of-pandemic-tax-credit

By James Santiago

As part of an agreement to avert a partial governmental shutdown, the Senate Finance Committee and the House Ways and Means Committee announced a bipartisan, tax framework that will be sunsetting several pandemic tax credits at the end of the month which originally had expiration dates of another year. Credit initiatives like the Employer Retention Tax Credit, “ERTC” which provided critical cash flow to struggling small businesses will now end on 1/31/24. Although the bill has not been signed into law as of today, the bill has bipartisan support and leaves very little time to spare to process any credits once signed into law.

It is our recommendation for any small business who was impacted by the COVID-19 pandemic and issued W2’s to their employees to open a dialogue with one of our CPA members. We can determine if your business qualifies for the ERTC and can also have a conversation about other credit programs which you may be eligible for. There is still time to file for the ERTC, but timing is of the essence, and we would need a response by the organization no later than 1/22/24 to have a chance to meet the statute of limitations deadline.

Small Business Tax Credits: For self-employed individuals (Schedule C or 1065 K-1s) who had positive net income and paid self-employment taxes there is still time to file for the small business tax credit. The small business tax credit is a pandemic related credit similar, but in addition to PPP and the Employer Retention Tax Credit “ERC” which provides small business owners compensation for sick and family leave time to business owners who would not be eligible to claim ERC for themselves. If you were self-employed, had positive net income and were unable to work due to COVID-19 sickness (or other qualifying reasons), you have until 04/15/2024 for tax year 2020 and 04/15/2025 for tax year 2021 to file an amended return for these credits. We would strongly recommend consideration of filing this credit now, before it is taken away like the ERTC by any future congressional bills.

As a firm we are here to support and provide you with the information you need to make the right decision regarding these credits. If you would like to discuss this matter further with one of our subject matter experts, now is the time to call. Thank you and we look forward for the opportunity to service you as a client.