What one sentence sums up the theme for the 2023 tax filing season? It may just be, “Hold on to your wallet,” says Lynn Martin, certified public accountant, Clemson University lecturer, and former owner and chief financial officer of MST Concrete Products. Many of the taxpayer-friendly rule changes that occurred during the COVID-19 pandemic have now expired, and we have reverted to pre-pandemic credit and deduction amounts. Some taxpayers may get an unpleasant surprise on April 18. Martin offers 10 things to know before filing 2022 taxes.
April 18, you say? April 15 falls on a Saturday this year, and Emancipation Day is Monday, April 17. Emancipation Day, the weekday closest to April 16, is a public holiday in the District of Columbia. Therefore, tax filing day is April 18, 2023.
IRS Free File
The Free File program offered by the IRS makes brand-name tax software and electronic filing available to most taxpayers for free. Each IRS Free File provider sets its own eligibility rules based on age, income and state residency. Taxpayers who made $73,000 or less in 2022 will likely find an offer from a Free File provider matching their needs and may even be able to prepare their state return free as well.
Go to https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free. If your income is over $73,000, you may find the IRS’s Free File Fillable Forms helpful if you are comfortable preparing your own taxes.
The IRS has hired 5,000 new employees to help with your tax questions. However, the quickest way to get tax refund information and answers to common tax questions is at https://www.irs.gov/.
Standard deduction increased
In 2019, nearly 90 percent of Americans took the standard deduction, according to data from the IRS. The standard deduction is a flat adjustment to your adjusted gross income instead of itemizing deductions. The Tax Cuts and Jobs Act (TCJA) increased the standard deduction in 2018. The 2022 standard deduction is $12,950 for single filers, $25,900 for joint filers and $19,400 for heads of household.
1099-K reporting ($600 rule) delayed
The America Rescue Plan Act required third-party networks to provide IRS Form 1099-Ks if payees received more than $600 during 2022 for goods or services. The previous rule required reporting only if the total number of transactions for the year exceeded 200 and the aggregate amount of the transactions exceeded $20,000.
On December 23, 2022, the IRS issued Notice 2023-10, delaying the $600 rule Form 1099-K reporting requirements for the 2022 tax reporting year. The notice states that for tax years beginning before January 1, 2023, the previous rules will apply.
Child tax credit reduced
The maximum child tax credit for 2022 is $2,000 per child. The credit is available only for children under age 17 and is partially refundable in 2022. Phase-out of the credit begins when modified adjusted gross income exceeds $200,000 for single filers and $400,000 for married filing jointly filers. The phase-out also applies to the $500 other dependent credit available for dependents over age 16.
Taxpayers who received the credit in 2021 may be shocked at the big decrease from 2021 maximum credit amounts. In 2021, the maximum credit for children ages 6-17 (17-year-olds were included) was $3,000 and $3,600 for children under 6.
Child and dependent care credit reduced
Maximum child and dependent care credit is $2,100. The credit is based on a percentage of qualifying employment-related expenses (up to $3,000 for one qualifying individual and $6,000 for more than one qualifying individual) paid to care for that individual so the taxpayer can work. The credit percentage ranges from 20 percent to 35 percent, depending on the taxpayer’s adjusted gross income (AGI). Once your AGI is over $43,000, the maximum credit is 20 percent of your qualifying employment-related expenses. The credit is nonrefundable in 2022.
Above-the-line charitable contribution deduction eliminated
Only taxpayers who itemize their deductions may take a charitable contribution deduction in 2022. There are no more above-the-line charitable contribution deductions that were available to taxpayers in 2020 and 2021.
Taxpayers taking the standard deduction in 2020 could take an above-the-line charitable contribution deduction up to $300 per return. The maximum amount was increased in 2021 to $600 for married filing joint returns.
Is the 2022 special South Carolina state tax rebate taxable for federal income tax purposes?
According to the IRS, South Carolinians who received the 2022 state tax rebate don’t have to report it for federal tax purposes “if the payment is a refund of state taxes paid and either the recipient claimed the standard deduction or itemized their deductions but did not receive a tax benefit.” If you claimed the standard deduction in 2021, do not include any of the rebate in income for 2022. If you itemized deductions in 2021, consult a tax adviser to determine the amount that should be included in your 2022 taxable income.
Federal EV tax credit of up to $7,500 under the Inflation Reduction Act
The electric vehicle tax credit, or the EV credit, is a nonrefundable tax credit offered to taxpayers who purchase qualifying plug-in electric or “clean” vehicles. The new credit will allow for a maximum credit of $7,500 for new EVs, and up to $4,000, limited to 30 percent of the sale price, for used EVs.
Contribute to an IRA or HSA
Make a contribution to your HSA and/or IRA for 2022 up to the tax filing deadline on April 18, 2023, if you are eligible. You may be able to reduce your 2022 tax bill as well.
IRA contributions remained unchanged at $6,000 for the year, with a $1,000 additional catch-up contribution for those 50 or older.
If you are eligible to participate in an HSA, you also have until April 18 to make your 2022 contribution. The maximum contribution for 2022 for self-only coverage is $3,650 and $7,300 for family coverage. Those 55 and older can make a $1,000 catch-up contribution as well.
Consult with a tax professional to determine if you are eligible to participate in either program and if your contributions will be tax-deductible.
Whether you use an accountant or choose to prepare your own tax return, remember the tax code is always changing and your opportunities for savings may change yearly as well.
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