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Alerts and Updates

What's New for Tax Year 2023 (When Filing in 2024)

February 29, 2024

What's New for Tax Year 2023 (When Filing in 2024)

February 29, 2024

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Guidance and interpretation related to new tax legislation continue to evolve, although at a reduced pace due to political gamesmanship.

Not surprisingly, tax planning and compliance activities continue to increase in complexity, with no end in sight. Not only are we nearing the end of tax reporting under the Tax Cuts and Jobs Act of 2017, we have experienced a plethora of new tax legislation in the last couple of years, most notably two versions of the Secure Act and the new Corporate Transparency Act, among others, which you can read about on our publications page. While tax compliance may have been simplified for some wage earners, the multitude of tax law changes impacted executives, investors, entrepreneurs and high-net-worth individuals in terms of increased complexities, more voluminous tax returns, new computations, new and revised decisions and many interactions with their tax lawyer or CPA. Guidance and interpretation related to new tax legislation continue to evolve, although at a reduced pace due to political gamesmanship. To help address these challenges, here is a quick hit list of some of the most significant changes, whether low or high dollar value, facing taxpayers when preparing (or properly extending) their tax returns for 2023.

For Individuals

  • Additional child tax credit – The maximum additional child tax credit amount has increased to $1,600 for each qualifying child.
  • New clean vehicle credit – The credit for new qualified plug-in electric drive motor vehicles has changed. This credit is now known as the clean vehicle credit. The maximum amount of the credit and some of the requirements to claim the credit have changed. The credit is still reported on Form 8936 and Schedule 3 (Form 1040), line 6f. This credit is available for previously owned clean vehicles acquired and placed in service after 2022.
  • Standard deduction increased – For 2023, the standard deduction amount has been increased for all filers. The amounts are: single or married filing separately—$13,850; married filing jointly or qualifying surviving spouse—$27,700; and head of household—$20,800.
  • Credits for qualified sick and family leave wages – The credits for qualified sick and family leave wages paid in 2023 for leave taken before April 1, 2021, and for leave taken after March 31, 2021, and before October 1, 2021, are now reported on Schedule 3, line 13z.
  • Alternative motor vehicle credit The alternative motor vehicle credit has expired.
  • Self-employed health insurance deduction – Use Form 7206 and its instructions to determine any amount of the self-employed health insurance deduction you may be able to claim and report on Schedule 1 (Form 1040), line 17.
  • Qualified charitable distribution one-time election – Beginning in 2023, you can elect to make a one-time distribution up to $50,000 from an individual retirement account to charities through a charitable remainder unitrust, or a charitable gift annuity funded only by qualified distribution.
  • Increase in required minimum distribution age – If you reach age 72 in 2023, the required beginning date for your first required minimum distribution is April 1, 2025.
  • IRA contribution limit increased – Beginning in 2023, the IRA contribution limit is increased to $6,500 ($7,500 for individuals age 50 or older) from $6,000 ($7,000 for individuals age 50 or older).
  • Deferred compensation contribution limit increased – If you participate in a 401(k) plan, 403(b) plan or the federal government’s Thrift Savings Plan, the total annual amount you can contribute has increased to $22,500 ($30,000 if age 50 or older) for 2023. This also applies to most 457 plans.
  • Insurance premiums for retired public safety officers – Eligible retired public safety officers can exclude from income up to $3,000 of distributions from their eligible retirement plan that is paid directly to them and is used to pay for health insurance premiums.
  • Exception to the 10 percent additional tax for early distributions – The exception to the 10 percent additional tax for early distributions include the following:
    • Distributions from a retirement plan in connection with federally declared disasters.
    • Distribution from a retirement plan made to someone who is terminally ill.
    • Distributions to firefighters at age 50 or with 25 years of service under the plan.
  • Health flexible spending arrangements (health FSAs) under cafeteria plans – For tax years beginning in 2023, the dollar limitation under section 1251(i) on voluntary employee salary reductions for contributions to health FSAs is $3,050.
  • Temporary allowance of 100 percent business meal deduction has expired – Section 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provided for the temporary allowance of a 100 percent business meal deduction for food or beverages provided by a restaurant and paid or incurred after December 31, 2020, and before January 1, 2023.
  • Disaster tax relief – The special rules that provide for tax-favored withdrawals and repayments now apply to disasters that occur on or after January 26, 2021.
  • Distributions to terminally ill individuals The exception to the 10 percent additional tax for early distributions is expanded to apply to distributions made after December 29, 2022, to an individual who has been certified by a physician as having a terminal illness.
  • Certain corrective distributions not subject to 10 percent early distribution tax Beginning with distributions made on December 29, 2022, and after, the 10 percent additional tax on early distributions will not apply to the income attributed to a corrective IRA distribution, as long as the corrective distribution is made on or before the due date (including extensions) of the income tax return.
  • Delayed refund for returns claiming the additional child tax credit (ACTC) – The IRS cannot issue refunds before mid-February 2024 for returns that properly claim ACTC. This time frame applies to the entire refund, not just the portion associated with ACTC.
  • Standard mileage rate – The 2023 rate for business use of a vehicle is 65.5 cents a mile. The 2023 rate for use of your vehicle to do volunteer work for certain charitable organizations is 14 cents a mile. The 2023 rate for operating expenses for a car when you use it for medical reasons is 22 cents a mile.
  • Modified adjusted gross income (AGI) limit for traditional IRA contributions – For 2023, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is:
    • More than $116,000 but less than $136,000 for a married couple filing a joint return or a qualifying surviving spouse;
    • More than $73,000 but less than $83,000 for a single individual or head of household; or
    • Less than $10,000 for a married individual filing a separate return.

If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work but you aren't, your deduction is phased out if your modified AGI is more than $218,000 but less than $228,000. If your modified AGI is $228,000 or more, you can't take a deduction for contributions to a traditional IRA.

  • Modified AGI limit for Roth IRA contributions – For 2023, your Roth IRA contribution limit is reduced (phased out) in the following situations:
    • Your filing status is married filing jointly or qualifying surviving spouse and your modified AGI is at least $218,000. You can't make a Roth IRA contribution if your modified AGI is $228,000 or more.
    • Your filing status is single, head of household or married filing separately and you didn't live with your spouse at any time in 2023 and your modified AGI is at least $138,000. You can't make a Roth IRA contribution if your modified AGI is $153,000 or more.
    • Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than zero. You can't make a Roth IRA contribution if your modified AGI is $10,000 or more.
  • Alternative minimum tax (AMT) exemption amount increased The AMT exemption amount is increased to $81,300 ($126,500 if married filing jointly or qualifying surviving spouse; $63,250 if married filing separately). The income levels at which the AMT exemption begins to phase out have increased to $578,150 ($1,156,300 if married filing jointly or qualifying surviving spouse).
  • Non-fungible tokens (NFTs) NFTs are digital certificates of ownership for virtual or physical assets and are taxed as property subject to the capital gain and loss rules. Taxation of NFTs is complicated. Contact us for further guidance.

For Businesses

  • Employee retention tax credit – The IRS has ordered a moratorium, currently in effect indefinitely, on processing new employee retention credit claims due to an increase in suspect claim submissions. Many businesses now reevaluating qualifications and considering amending refund claims filed. Consider conducting a simulated audit. Contact us for details.
  • R&D expenses and credits – Research and development expenses can no longer be expensed immediately. U.S.-based expenses must now be capitalized and amortized over five years. International expenses must be amortized over 15 years. Software development expenses must now be capitalized and amortized in same manner.
  • 1099-K reporting IRS announced that calendar year 2023 will be treated as another transition year for the reduced reporting threshold of $600. For year 2023, third-party settlement organizations are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions. For year 2024, IRS plans for a threshold of $5,000 to phase in reporting requirements.
  • Small business pension plan credit Beginning January 1, 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100 percent of the administrative costs for establishing a workplace retirement plan, capped annually at $5,000. Employers with 51 to 100 employees are eligible for a tax credit equal to 50 percent of administrative costs, capped annually at $5,000. Qualified plan types include SEP, Simple, 401(k) and defined benefit. SECURE Act credits are 50 percent of eligible costs (first three years) up to the greater of $500, or the lesser of $250 multiplied by the number of nonhighly compensated employees or $5,000. SECURE 2.0 credits are 100 percent of eligible costs up to $5,000 annually over the first three years.
  • Commercial clean vehicle credit Businesses and tax exempt organizations qualify for this nonrefundable credit. The vehicle must be subject to a depreciation allowance, made by a qualified manufacturer, not held for resale, be primarily used in the U.S. and with no other previous credits taken. There are other restrictions based on kilowatt hours and weight. The credit can be worth up to $40,000 ($7,500 if under 14,000 pounds), and is the lesser of 15 percent of basis (30 percent if not powered at all by gas/diesel) or incremental cost. IRS Notices 2023-9 for year 2023 and 2024-5 for year 2024 provide a safe harbor regarding incremental cost of certain qualified commercial clean vehicles.
  • Business interest expense limitations The Tax Cuts and Jobs Act limits the deduction for net interest business expense to the sum of the following: The taxpayer’s business interest income for the year; 30 percent of the taxpayer’s adjusted taxable income (ATI); and the taxpayer’s floor plan financing interest expense for the taxable year.
  • Business meals and entertainment Beginning January 1, 2023, meals and entertainment deductions revert back to the limits placed under the Tax Cuts and Jobs Act. Client business meals are once again 50 percent deductible. Entertainment related meals are also 50 percent deductible if charges are separately stated from cost of entertainment, as are the cost of meals in office during meetings. No deduction is allowed for entertainment activities.
  • Maximum net earnings  The maximum net self-employment earnings subject to the Social Security part of the self-employment tax is $160,200 for 2023. There is no maximum limit on earnings subject to the Medicare part.
  • Standard mileage rate – For 2023, the standard mileage rate for the cost of operating your car, van, pickup or panel truck for each mile of business use is 65.5 cents a mile.
  • Maximum first year depreciation for passenger automobiles – Depreciation limitations for passenger automobiles at: $12,200 for the first tax year (if electing out of bonus depreciation); $19,500 for the second year; and $11,700 for the third year.
  • Select business tax extenders – These may be renewed by Congress, subject to the pending budget legislation)
  • New markets tax credit (expiring 2025)
    • Employer tax credit for paid family and medical leave (expiring 2025)
    • Work opportunity tax credit (expiring 2025)
    • Employee retention credit (expired June 30, 2021)
    • De minimis meals, related eating facilities and meals for the convenience of employer limit decreased from 100 percent to 50 percent (expiring 2025)
  • Bonus depreciation – Phaseouts begin in 2023. Businesses can write off only 80 percent—instead of 100 percent—of an eligible property's purchase price in 2023. In the years following, that percentage will reduce by 20 points each year until bonus depreciation is completely phased out by 2027.

TAG’s Perspective

Each year at this time, at the top of everyone’s mind is how tax law changes will affect their individual and business tax situation, both current and prospective. With the flurry of continuous changes and the continuation of reporting under various new tax acts over the last few years, the income tax landscape has changed dramatically and continues to impact nearly all taxpayers, individuals and businesses alike. As major legislative developments and opportunities emerge, we are always available to discuss the impact of a new or pending tax law on your personal or business situation. Many of the rules under the various new pieces of legislation (as well as proposed tax bills) are complex and require careful planning. Contact us for further information and guidance.

For More Information

If you would like to discuss the tax law changes indicated herein or have other concerns, please do not hesitate to contact John I. Frederick, Michael A. Gillen, Steven M. Packer or the practitioner with whom you are in regular contact. For information on other pertinent topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.