Filing your tax return serves as a yearly reminder of how tediously complex the U.S. tax code is, and this year is no exception.
It's not as messy as it was in pandemic times, but a lot of new provisions are coming into effect and some changes could potentially kick in mid-season.
Procrastinating can cost you money. Interest and late fees on unpaid taxes (yes, penalties also accrue interest) are at 8%, more than double what they were just a few years ago.
As the filing deadline approaches (April 15 or April 17 for Maine and Massachusetts residents), here are some of the latest changes to keep in mind:
Can I file my return using the Internal Revenue Service's new free service?
Starting in mid-March, residents of certain 12 states are expected to have the option to file their tax returns electronically using the IRS' Direct File program. The system, which is in a limited pilot phase, is being rolled out slowly in stages and is only accessible to taxpayers with relatively simple tax situations.
To qualify, taxpayers must have income limited to wages reported on Form W-2, Social Security or unemployment, and interest income of $1,500 or less. You must also claim the standard deduction (do not itemize your deductions).
Reporters must also reside in one of the 12 states participating in the pilot program. Eight of these states (Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming) and four (Arizona, California, Massachusetts, and New York) have no state income tax. This tool does not yet provide state tax returns, but directs taxpayers to state assistance tools they can use to prepare and file their state tax returns.
Check out my colleague Ann Carrns' story for more details.
I bought a new electric car. Am I eligible for tax benefits?
maybe. People who buy a new electric vehicle will again be able to claim a tax credit of up to $7,500 in 2023 (and through 2032), but the eligibility rules have been tightened. Your income and the price of the car must fall below certain limits, and the vehicle itself must check a series of boxes.
To get started, single tax filers must have modified adjusted gross income of $150,000 or less. Married joint filers must have income of $300,000 or less. For the head of household, it's $225,000. (You can use your income based on the year you purchased the car or the previous year, whichever is lower.)
Vehicle manufacturers proposed that retail prices could not exceed $80,000 for vans, sport utility vehicles and pickup trucks and $55,000 for all other vehicles. There are a lot of finer details. For example, the vehicle must undergo final assembly in North America and have certain battery components. You can check if your vehicle qualifies by visiting the U.S. Department of Energy site.
The exact amount of your credit will depend on when you use it. received The car and whether it meets certain criteria. The tax credit is not refundable. This means you can't get back more than you owe in taxes, and you can't apply the excess amount to future tax bills.
Starting this year, new car buyers will be able to transfer the credit to their dealership for an upfront discount rather than waiting to receive their money during the 2025 tax season.
“It will theoretically lower the purchase price,” said Mark Luscombe, a principal federal tax analyst at information services firm Wolters Kluwer.
What about used cars?
Starting this year, you can receive a non-refundable credit equal to 30% of the sale price (up to $4,000) if you purchase a qualifying pre-owned electric vehicle for $25,000 or less from a qualified dealer.
I made my house energy efficient. Are there any new tax benefits that could offset some of the costs?
yes. Thanks to the Inflation Reduction Act, these categories of tax breaks have become more generous and now cover more costs, and some taxpayers may be able to re-qualify even if they used up previous credits in the past.
Beginning with tax year 2023, the Energy Efficient Home Improvement Deduction allows taxpayers to claim up to $1,200 per year for certain improvements made through 2032, including items such as exterior doors, windows and insulation, up to a lifetime maximum of $500. Additionally, another credit worth up to $2,000 per year is available for a variety of new water heaters, heat pumps and boilers.
Residential clean energy property credits are also available again for items such as solar panels, solar water heaters and wind turbines. From 2022 to 2032, the credit is 30% of eligible expenses (later reduced to a lower amount).
Child credits may change mid-season. So does that mean I have to wait to file my taxes?
no. The House of Representatives passed a bipartisan bill to temporarily expand the child tax credit. If enacted, this bill will greatly benefit low-income families, especially families with multiple children. But it must first be approved by the Senate, which faces challenges. No matter what happens, taxpayers should not delay filing their returns. The IRS may pay your refund retroactively.
“An amended return is not necessary,” says Julie Welch, tax director at Meara Welch Browne, PC in Kansas City, Missouri.
The existing child tax credit is available for up to $2,000 for each eligible dependent under age 17, but is reduced if income exceeds $400,000 for married filers and $200,000 for singles and heads of households. (The IRS's Interactive Tax Assistant can help you decide if you qualify.)
However, a portion of the credit (up to $1,600) is refundable. This means that after the tax you owe is reduced dollar for dollar through tax credits, any remaining tax credits are paid out in the form of a refund.
Inflation has stopped. What changes has the IRS made to alleviate this problem?
of course. To account for higher inflation, the IRS raised the outer limits of federal tax brackets, or the income threshold above which higher tax rates apply, by about 7 percent. Without the adjustment, people who received a raise would have been taxed at a higher rate on more of their income, even if their income simply kept pace with inflation.
For example, for tax year 2023, there will be a 24% tax bracket on income exceeding $95,375 for single taxpayers and $190,751 for married joint filers, with similar changes for other tax brackets. In 2023, the standard deduction for single filers will increase to $13,850, an increase of $900. For married people filing jointly, that rose $1,800 to $27,700. For heads of households, this increased to $20,800.
The amount you can save in a 401(k) plan in 2023 increases from $20,500 in 2022 to $22,500. However, eligible taxpayers can maximize their 2023 savings in an IRA until they file their return. Total contributions cannot exceed: $6,500, $7,500 for those over 50 years old.
These levels will rise again for tax year 2024 (filing returns in 2025).
I use Venmo for my side hustle. Is the IRS tracking more income this year?
Not yet.
Anyone who is a freelancer, gig worker, small business, or side hustle has an obligation to track and report their income to the IRS whenever their income exceeds $400. However, to increase compliance, online processors and marketplaces like Venmo, PayPal, eBay, or Airbnb will be required to record and report more of this sales activity in 2023. This will be documented on IRS Form 1099-K and sent to both places. IRS and taxpayers.
People who earn income through these online payment processors or marketplaces were required to obtain these tax forms for all payments exceeding $600, but the IRS has postponed that requirement for the second year in a row.
The existing rules still apply this tax season. This means that a 1099-K should only be issued if the activities of those selling goods or services exceed 200 transactions and total annual payments of $20,000.
The IRS said it plans to lower this threshold to a total annual payment of $5,000 with no transaction minimum for tax year 2024, and eventually lower the total payment to a permanent level of $600. However, some people may receive forms for amounts exceeding the lower limit anyway.
Ultimately, the IRS decided it needed more time to fix problems that could arise when sending millions of new forms to people who didn't expect them or didn't pay their taxes.
The agency is studying ways to ensure that Form 1099-Ks are issued only to those who need them.
State and local tax (SALT) tax relief is limited, but I heard there is a solution. Am I eligible?
Many taxpayers in high-tax states sorely miss the more generous SALT tax break, which allows them to deduct without limitation all income, property and sales taxes they pay to state and local governments.
That all changed in late 2017 when the Tax Cuts and Jobs Act capped SALT deductions at $10,000 through 2025. Residents complained, and before long more than 30 states had figured out a solution.
The states' strategies vary greatly, but the takeaways are as follows: According to tax experts, under federal tax law, the SALT limit applies to individual taxpayers but not to businesses structured as pass-through entities, such as construction companies or small law firms. . Therefore, if a pass-through entity (usually an S Corporation or partnership) pays taxes, a sole proprietor can deduct that entity's taxes on his or her personal tax return instead of his or her own state and local taxes.
“However, these solutions may not be available in all states and their effectiveness may vary depending on the specific circumstances,” said Mark Friedlich, vice president of government affairs at Wolters Kluwer.
It's also complicated. The rules and deadlines for electing these taxes vary from state to state, so it's necessary to work with a professional who is familiar with the rules.
I got into cryptocurrency. What do I need to know?
If anyone sells stocks, bonds, or other investments, they must report any income (capital gains) or losses on their tax return, as well as any interest or dividends. To make this easier, brokerage firms should prepare tax forms, including 1099-Bs and 1099-DIVs, to help track what is reported to the IRS.
Brokerage firms have not been required to report transactions on cryptocurrencies and other digital assets, but that may soon change. Rules proposed last year required sending a new form called 1099-DA for digital assets. Tax year 2025.
But that doesn't mean taxpayers will be in trouble in tax year 2023 (or any year).
“Whether or not someone receives a tax form, it is their responsibility to report all income,” said Eric Bronnenkant, head of tax at investment firm Betterment. You can find 1040 instructions as well as more information from the Taxpayer Advocate Service and the IRS website.
For example, if you bought or sold a cryptocurrency held in a traditional investment wrapper like a Bitcoin ETF, that transaction would still be tracked on your existing 1099-B just like any other exchange-traded fund or stock.
Are there any changes for retirees (or those about to retire)?
A law that took effect last year allows retirees to delay required minimum withdrawals from tax-advantaged retirement accounts until they turn age 72 or 73 in 2022.
In practice, this means that if you turn 72 in 2023, you can postpone your first required withdrawal (in 2024) for an extra year, or until April 1, 2025, said David Oh, head of tax and estate planning at Arta Finance. .
However, if you turn 73 in 2023 (and you turn 72 in 2022), the old rules apply. (i.e. the first withdrawal due date is April 1, 2023 and the second withdrawal due date is December 31, 2023).
These rules apply to Traditional IRAs, SEP IRAs, and SIMPLE IRAs. People with 401(k)s can generally delay withdrawals until after retirement, but Roth IRAs are not subject to withdrawals until the account owner dies.