his is the last week for this year that you should consider meeting with a tax professional to discuss any year end strategies that might reduce your 2023 taxes. The following are some of the tax breaks from which you may benefit, as well as the strategies that could be used to help minimize your taxable income and resulting federal tax liability for 2023. Some strategies would help lower your business’s tax liability for 2023.
Filing Status. Your tax return filing status can impact the amount of taxes you pay. For example, if you qualify for head-of-household (HOH) filing status, you are entitled to a higher standard deduction and more favorable tax rates. To qualify as HOH, you must be unmarried or considered unmarried (i.e., legally separated or living apart from a spouse) and provide a home for certain other people.
If you are married, you will either be filing your return using the married filing jointly or married filing separately filing status. Generally, married filing separately is not beneficial for tax purposes, but in some specific cases, such as when one party earns substantially less or when one party may be subject to IRS penalties for issues relating to their tax reporting, it may be advantageous to file as married filing separately. If one spouse was not a full-year U.S. resident, an election is available to file a joint tax return where such joint filing status would otherwise not apply, and this may help reduce a couple’s tax liability.
Standard Deduction versus Itemized Deductions. The Tax Cuts and Jobs Act of 2017 (TCJA) substantially increased the standard deduction amounts, thus making itemized deductions less attractive for many individuals. For 2023, the standard deduction amounts are: $13,850 (single); $20,800 (head of household); $27,700 (married filing jointly); and $13,850 (married filing separately). If the total of your itemized deductions in 2023 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2023 and taking the standard deduction in 2024 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses (discussed below), and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.
Medical Expenses, Health Savings Accounts, and Flexible Savings Accounts. For 2023, your medical expenses are deductible as an itemized deduction to the extent they exceed 7.5 percent of your adjusted gross income. To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. Deductible expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Depending on what your taxable income is expected to be in 2023 and 2024, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2023 or defer them until 2024.
You may also want to consider health saving accounts (HSAs) if you do not already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans (HDHPs). If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. These contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2023, the annual contribution limits are $3,850 for an individual with self-only coverage and $7,750 for an individual with family coverage.
In addition, if you are not already doing so and your employer offers a Flexible Spending Account (FSA), consider setting aside some of your earnings tax free in such an account so you can pay medical and dental bills with pre-tax money. Since you do not pay taxes on this money, you will save an amount equal to the taxes you would have paid on the money you set aside. FSA funds can be used to pay deductibles and copayments, but not for insurance premiums. You can also spend FSA funds on prescription medications, as well as over-the-counter medicines, generally with a doctor’s prescription. Reimbursements for insulin are allowed without a prescription. And finally, FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.
Sale of a Home. If you sold your home this year, up to $250,000 ($500,000 for married filing jointly) of the gain on the sale is excludible from income. However, this amount is reduced if part of your home was rented out or used for business purposes. Generally, a loss on the sale of a home is not deductible. But again, if you rented part of your home or otherwise used it for business, the loss attributable to that portion of the home is deductible.
Discharge of Qualified Principal Residence Indebtedness. If you had any qualified principal residence indebtedness which was discharged in 2023, it is not includible in gross income.
Deductions for Mortgage Insurance Premiums. You may be entitled to treat amounts paid during the year for any qualified mortgage insurance as deductible qualified residence interest if the insurance was obtained in connection with acquisition debt for a qualified residence.
Qualified Business Income Passthrough Tax Break. Under the qualified business income tax break, a 20 percent deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below a certain threshold ($364,200 for joint filers; $182,100 for other taxpayers) are simpler and more permissive than the rules that apply to individuals with income above those thresholds.
Child Tax Credit. For 2023, a child tax credit of as much as $2,000 is available for each child under age 17, depending on your modified adjusted income. In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children. Where the credit exceeds the maximum amount of tax due, it may be refundable. The maximum amount refundable for 2023 is $1,600 per qualifying child. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relatives. The amount of the credit is reduced for taxpayers with modified adjusted gross income over $200,000 ($400,000 for married filing jointly) and eliminated in full for taxpayers with modified adjusted gross income over $240,000 ($440,000 for married filing jointly).
Earned Income Credit. The earned income tax credit (EITC) is determined by multiplying your earned income for the year (but only up to a maximum amount of earned income) by a credit percentage that varies depending on whether you have any qualifying children and, if so, the number of qualifying children. The EITC is also subject to a limitation based on your adjusted gross income. For 2023, the maximum amount of the EITC is (1) $600 for a taxpayer with no qualifying children, (2) $3,995 for a taxpayer with one qualifying child, (3) $6,604 for a taxpayer with two qualifying children, and (4) $7,430 for a taxpayer with three or more qualifying children. In addition, the EITC cannot be claimed if your investment income (including interest, dividends, capital gain net income, and net rental income) exceeds $11,000 for 2023.
Dependent Care Credit. If you incurred expenses to care for a child or another dependent so that you can work, you may be eligible for the child and dependent care credit. This credit is available to individuals who, to work or to look for work, have to pay for childcare services for dependents under age 13. The credit is also available for amounts paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care. The credit is not available for amounts paid to a dependent or a taxpayer under age 19. The amount of the credit is a specified percentage of your total employment-related expenses – generally, 35 percent reduced (but not below 20 percent) by one percentage point for each $2,000 by which your adjusted gross income for the tax year exceeds $15,000. Employment-related expenses incurred during any tax year which may be considered cannot exceed $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.
Premium Tax Credit. A health insurance subsidy is available in the form of a premium assistance tax credit for eligible individuals and families who purchase health insurance through the Health Insurance Marketplace, also known as the “Exchange.” The provision is the result of the Patient Protection and Affordable Care Act (PPACA). This credit is refundable and payable in advance directly to the insurer on the Exchange. In the past, individuals with incomes exceeding 400 percent of the poverty level were not eligible for these subsidies. However, the cap has been eliminated through 2025 and therefore, anyone can qualify for the subsidy. In addition, the percentage of your income paid for health insurance under a PPACA plan is limited to 8.5 percent of income. Thus, if you buy your own health insurance directly through an Exchange, you can receive increased tax credits to reduce your premiums.
Education-Related Deductions and Credits. Certain education-related tax deductions, credits, and exclusions from income may be available for 2023. For example, tax-free distributions from a qualified tuition program, also referred to as a Section 529 plan of up to $10,000 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, i.e., kindergarten through grade 12. It also includes expenses for fees, books, supplies, and equipment required for the participation in certain apprenticeship programs and qualified education loan repayments in limited amounts. A special rule allows tax-free distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.
Depending on your modified adjusted gross income for the year, you may also qualify for: (1) an American Opportunity Tax Credit of up to $2,500 per year for each eligible student; (2) a Lifetime Learning credit up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution; (3) an exclusion from income for education savings bond interest received; and (4) a deduction for student loan interest.
If you qualified for any student loan forgiveness in 2023, the forgiven amount will generally be excludible from your income for federal tax purposes. However, you may be liable for state or local income taxes because of the discharge.
Clean Energy Credits. For 2023, the clean energy tax credits available include (1) residential energy property credits (the energy efficient home improvement credit and the residential clean energy credit) and (2) vehicle-related credits (the new clean vehicle credit, the previously owned clean vehicle credit, and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act, generally beginning in 2023.
The energy efficient home improvement credit is credit for 30 percent of the costs of all qualified energy efficiency improvements and residential energy property expenditures you make during the year. This credit is subject to an annual limit of $1,200, and there are also limits for specific types of qualifying improvements. These limits are: (1) $250 for any exterior door ($500 total for all exterior doors), (2) $600 for exterior windows and skylights, (3) $600 for other qualified energy property (including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers), and (4) a higher $2,000 annual limit for heat pumps and heat pump water heaters, biomass stoves, and boilers. The Inflation Reduction Act also added a credit of up to $150 per year for home energy audits. Roofs do not qualify for the credit beginning in 2023.
The residential clean energy credit equals 30 percent of the cost of certain qualified property installed on or used in connection with your home. Qualifying properties are: (1) solar electric property, (2) solar water heating property, (3) fuel cell property, (4) small wind energy property, (5) geothermal heat pump property, and (6) battery storage technology. There is no annual or lifetime limit on the residential clean energy credit except with respect to fuel cell property, which is limited to $500 for each half kilowatt of capacity. In addition, if more than one person lives in your home, the combined credit for all residents cannot exceed $1,667 for each half kilowatt of fuel cell capacity.
A new clean vehicle credit of up to $7,500 may be available if you acquired a qualified electric vehicle and placed it in service (i.e., taken delivery of the vehicle) this year. To qualify, the vehicle must have been assembled in North America. The calculation of the credit amount will depend on when you take delivery of the vehicle. If you took delivery before April 18, 2023, the total new clean vehicle credit equals a base amount of $2,500 and is increased by the amount of propulsion energy produced by the battery. For vehicles delivered on or after April 18, 2023, the credit amount equals $3,750 for vehicles meeting a critical minerals requirement plus $3,750 for vehicles meeting a battery component requirement. Price limits (i.e., MSRP limitations) apply depending on the vehicle type ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles). The Department of Energy provides a list at FuelEconomy.gov of eligible clean vehicles that meet the requirements to claim this credit, including the applicable MSRP limitation. The credit is not available if your adjusted gross income for the year is over $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (single). Beginning in 2024, the new clean vehicle credit can be transferred to the dealer and used as a down payment at the time of sale.
Beginning this year, a credit is also available for the purchase of a previously-owned clean vehicle. The credit amount is the lesser of (1) $4,000, or (2) 30 percent of the cost of the vehicle. To qualify for the previously owned clean vehicle credit, the vehicle must be sold by a dealer for a sale price not in excess of $25,000, and the sale must be the first transfer of the vehicle since August 16, 2022. In addition, the buyer must be an individual taxpayer who cannot be claimed as a dependent by another taxpayer, who purchases the vehicle for use and not for resale, and who has not been allowed the previously owned clean vehicle credit in any of the 3 years preceding the sale of the vehicle. The credit is not available to taxpayers with adjusted gross income over $150,000 (married filing jointly), $112,500 (head of household), and $75,000 (single). Like the new clean vehicle credit, this credit will be transferable to the dealer beginning in 2024.
The alternative fuel vehicle refueling property credit is allowed with respect to any single item of qualified alternative fuel vehicle refueling property placed in service during the tax year not in excess of (1) $100,000 in the case of depreciable property, and (2) $1,000 in any other case. Qualifying property includes bidirectional charging equipment, and the credit can also be claimed for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads.
Section 179 Expensing and Depreciation Deductions. The two business tax deductions that present the best opportunities for reducing your business’s taxable income are the Section 179 deduction, where your business can elect to deduct the entire cost of certain property acquired and placed in service during the year, and the bonus depreciation deduction, where 80 percent of the cost of business property may be expensed. Under the Section 179 expensing option, your business can immediately expense the cost of up to $1,160,000 of “Section 179” property placed in service in 2023. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during 2023 exceeds $2,890,000.
The bonus depreciation rules apply to all businesses unless the business specifically elects out of these rules. An election out might be preferable where a business expects a tax loss for the year and the bonus depreciation would just increase that loss or where it might be advantageous to push depreciation deductions into future years. For example, if the owner of a pass-thru entity to whom these deductions would flow expects to be in a higher tax bracket in future years, such deductions might be of more use in those future years. When applying both the Section 179 deduction and the bonus depreciation deduction to an asset, the Section 179 deduction applies first.
If you need a vehicle for your business, purchasing a sport utility vehicle weighing more than 6,000 pounds can trigger a bigger deduction than if a smaller vehicle is purchased. This is because vehicles that weigh 6,000 pounds or less are considered listed property and the related first-year deduction is limited to $20,200 for cars, trucks and vans acquired and placed in service in 2023. For vehicles weighing more than 6,000 pounds, however, up to $28,900 of the cost of the vehicle can be immediately expensed.
It is worth noting that if you leased a passenger automobile in 2023 with a value of more than $60,000, the deduction available for that lease expense is reduced. In such cases, you must include in gross income an amount determined by a formula the IRS issues each year.
Qualified Business Income Deduction. If you are conducting your business as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction can significantly help reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily defined amount (i.e., the threshold amount). For any tax year beginning in 2023, the threshold amount is $364,200 for married filing joint returns and $182,100 for all other returns.
Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income. However, the QBI deduction does not apply to a “specified service trade or business,” which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.
As you can see, there is much to consider before you prepare your 2023 personal and business tax return and calculate any estimated tax payments that might be due in 2024. You could call me at your convenience or professional tax preparer to meet and review potential strategies for reducing your 2023 taxable income and tax liability.
Rental Real Estate. If you have any rental real estate activities, it is important to determine if the activity will be considered a passive activity by the IRS. Generally, losses from passive activities are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against non passive income to the extent you actively participate in the rental real estate activities. This deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately). Additionally, you may be eligible for a qualified business income deduction if certain criteria are met, such as the rental activity qualifying as a Section 162 trade or business.
Substantiation of Vehicle-Related Deductions. In audits, the IRS tends to focus on deductions taken for vehicle expenses. If not properly substantiated, such deductions are disallowed. Thus, if vehicles are used in any part of your business or business-related activities, your tax records with respect to each vehicle should include the following:
(1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);
(2) the amount of mileage for each business or investment use and the total miles for the tax period;
(3) the date of the expenditure; and
(4) the business purpose for the expenditure.
The IRS will consider the following as adequate substantiation for such expenses: (1) records such as a notebook, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.
It is important to note that records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.
Employee Benefits. Contributions made to retirement plans on behalf of employees are deductible and your business may be eligible for a tax credit for setting up a qualified plan if you do not already have one.
If your business has not already done so, you might consider the establishment of a flexible spending arrangement (FSA). An FSA allows employees to be reimbursed for medical expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Some of the benefits of providing an FSA for employees include contributions made by the business being excluded from the employee’s gross income, reimbursements to the employee are tax free if used for qualified medical expenses. The FSA can be used to pay qualified medical expenses even if the employer or employee have not yet placed the funds in the account. Up to $610 of funds in the FSA can be carried over to subsequent years indefinitely.
Another popular employee benefit your business might consider is a high deductible health plan paired with a health savings account (HSA). The benefits to your business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA, and there is no use-it-or-lose-it limit like there is for most flexible spending arrangements (FSAs). Thus, the funds can grow tax free and be used in retirement.
If your business employs fifty or fewer employees and does not currently offer a retirement plan, a new provision for 2023 allows a credit equal to 100 percent of the administrative costs of setting up a qualified employer plan. An additional credit of up to $1,000 per employee is also available, calculated as a percentage of the amount contributed by the employer on behalf of employees. The applicable percentage is 100 percent in the first and second years, 75 percent in the third year, 50 percent in the fourth year, and 25 percent in the fifth year. No credit is available for tax years thereafter.
Charitable Contributions. The tax benefits of making charitable contributions and taking an itemized deduction for such contributions were tamped down because of the increase in the standard deduction in the TCJA. If you are itemizing deductions, you can maximize the tax benefit of making a charitable contribution by donating appreciated assets, such as stock, instead of cash. Doing so generally allows you to deduct the fair market value of the asset while also avoiding the capital gains tax that would otherwise be incurred if you sold the asset. However, it is important to also keep in mind that tax deductions for contributions of appreciated long-term capital gain property may be limited to a certain percentage of your adjusted gross income depending on the amount of the deduction.
Expenses Incurred While Working from Home. Although more people are working from home these days, related expenses are not deductible if you are an employee. TCJA eliminated the deductibility of such expenses when it suspended the deduction for miscellaneous itemized expenses that was available before 2018. However, if you are self-employed and worked from home during the year, tax deductions are still available.
Mortgage Interest Deduction. If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., your mortgage) could be limited. The mortgage interest deduction on mortgages of more than $750,000 obtained after December 14, 2017, is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately). If you have a mortgage on a principal residence acquired before December 16, 2017, the limitation applies to mortgages of $1,000,000 ($500,000 in the case of married taxpayers filing separately) or less. However, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.
Interest on Home Equity Indebtedness. You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal expenses, such as credit card debt, is not.
Pass-Thru Entity Considerations. If you are operating a business through a pass-thru entity such as a partnership or S corporation, your basis in the entity must be high enough to allow for any loss deduction, if you have one for the year. In such a situation, you should consider the options available for increasing your basis in such entity.
If you are an S corporation shareholder, it is important to ensure that you and other shareholders involved in running the business are paid an amount that is commensurate with the work being done. The IRS scrutinizes S corporations which distribute profits instead of paying compensation subject to employment taxes. Failing to pay arm’s length salaries can lead to tax deficiencies, interest, and penalties. The key to establishing reasonable compensation is to show that the compensation paid for the type of work an owner-employee does for the S corporation is similar to what other entities would pay for similar work. An S corporation needs to adequately document the factors that support the salary an S corporation owner is being paid.
Further, because there are stringent requirements for who may be an S corporation shareholder, if the number of shareholders have changed or increased during the year, you should review the residency or citizenship status of the S corporation’s shareholders and S corporation stock beneficiaries (including contingent and residuary beneficiaries).
Energy Efficient Commercial Buildings Deduction. If your business owns a commercial building, a deduction is available for an amount equal to the cost of “energy efficient commercial building property” placed in service during the tax year. EECBP includes property installed as part of the building’s interior lighting systems; heating, cooling, ventilation, and hot water (HVAC) systems; or the building envelope that is certified as being installed as part of a plan to reduce the total energy and power costs for these systems. An alternative deduction is also available for energy efficient building retrofit property installed as part of a qualified retrofit plan that is expected to reduce the building’s energy use intensity upon completion of the retrofit by 25 percent or more.
The 2022 IRA expanded this deduction by increasing the maximum deduction and changing the maximum from a lifetime cap to a 3-year cap. For property placed in service in 2023 and after, the amount of the deduction equals the lesser of (1) the cost of the energy efficient commercial building property or (2) the energy savings per square foot. The maximum deduction increases to 5 times the savings per square foot amount if local prevailing wages are paid and apprenticeship requirements are met.
Clean Vehicle Credits for businesses. The 2022 IRA expanded the tax new clean vehicle credit, which is available to individuals but can also be claimed by businesses that purchase and place in service a new clean vehicle. The law also introduced the qualified commercial vehicle credit for businesses that purchase and place in service a commercial clean vehicle.
If a partnership or an S corporation places a new clean vehicle in service, and the new clean vehicle credit is claimed by individuals who are partners of the partnership or shareholders of the S corporation, the AGI thresholds apply to those partners or shareholders. In addition, if a new clean vehicle is used both for personal and business use, and the business use of the vehicle is less than 50 percent of the total use of the vehicle, the credit must be apportioned and treated as a general business credit corresponding to the percentage of the business use.
Qualified Commercial Clean Vehicles Credit. The 2022 IRA also introduced a new credit for qualified commercial electric vehicles placed into service and used in a trade or business by the taxpayer after 2022. The amount of credit is the lesser of (1) 15 percent of the taxpayer’s basis in the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel engine) or (2) the “incremental cost” of the vehicle. The credit is limited to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.
A “qualified commercial clean vehicle” is defined as any vehicle that is (1) used in the taxpayer’s trade or business or for the production of income, (2) acquired for use or lease by the taxpayer and not for resale, (3) treated as a motor vehicle under the Clean Air Act and is (i) manufactured primarily for use on public roads or (ii) mobile machinery, and (4) propelled to a significant extent by an electric motor which draws electricity from a rechargeable battery. The “incremental cost” of the vehicle generally means the excess of the purchase price over the price of a comparable vehicle that is powered solely by a gasoline or diesel internal combustion engine. Under a safe harbor rule provided by the IRS, the incremental cost will not limit the available credit amount for street vehicles that weigh less than 14,000 pounds and are placed in service in calendar year 2023.
Energy Investment Tax Credit. The energy investment tax credit (ITC) was also extended by the 2022 IRA and could reduce your business’s federal tax liability by a percentage of the cost of a solar system installed during the tax year. Solar systems placed in service in 2022 or later, and that began construction before 2033, are eligible for a 30 percent ITC, or a production tax credit based on a kilowatt-hour formula if they meet certain prevailing wage and apprenticeship requirements or are under 1 megawatt in size.
Research and Development Deductions and Credits. Finally, the provision allowing a deduction for research and development (R&D) expenses expired at the end of 2021. Such expenditures must now be amortized over five years. However, under the 2022 IRA, businesses that engage in certain types of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit. Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (i.e., a business with less than $5 million in gross receipts and that is under five years old) to apply up to $250,000 of the research credit toward its social security payroll tax liability. The 2022 IRA expanded the amount available for the credit from $250,000 to $500,000 for tax years beginning after 2022.
Retirement Planning. If you can afford to do so, investing the maximum amount allowable in a qualified retirement plan will yield a large tax benefit. If your employer has a 401(k) plan and you are under age 50, you can defer up to $22,500 of income into that plan for 2023. Catch-up contributions of $7,500 are allowed if you are 50 or over. If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2023 is $15,500. That amount increases to $19,000 if you are 50 or older. The maximum IRA deductible contribution for 2023 is $6,500 and that amount increases to $7,500 if you are 50 or over.
Life Events. Life events can have a significant impact on your tax liability. For example, if you are eligible to use head of household or surviving spouse filing status for 2023 but will change to a filing tax status of single for 2024, your tax rate will go up. If you married or divorced during the year and changed your name, you need to notify the Social Security Administration (SSA). Similarly, the SSA should be notified if you have a dependent whose name has been changed. A mismatch between the name shown on the tax return and the SSA records can cause problems in the processing of tax returns and may even delay tax refunds. If you have been impacted by a life event, such as a birth or death in your family, the loss of a job or a change in jobs, or a retirement during the year, all of these can affect you tax situation.
As you can see, there is much to consider before you prepare your 2023 personal and business tax return.
At Pierre Tax Group, we appreciate your continued support. We are looking forward to bringing you more of the latest tax developments in the coming year to help you minimize your tax liability and keep you out of trouble with the Internal Revenue Service.
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