Article Highlights:
With the holiday celebrations coming to an end and the New Year just around the corner, now is the time to take a look at the changes that will impact your 2023 tax return when you file it in 2024.
Keeping up with the constantly changing tax laws can help you get the most benefit out of the laws and minimize your taxes. Many tax parameters, such as the standard deduction, contributions to retirement plans, and tax rates, are annually inflation adjusted, while some tax changes are delayed and take effect in future years. On top of all that, we have Congress considering the retroactive extension of some tax provisions that expired after 2021 or will expire at the end of 2022, as well as proposing new tax legislation. Here are some changes that might affect your 2023 tax return:
Solar Credit Gets New Life – The solar credit is a percentage of the cost of a solar electric system installed on a taxpayer’s first or second residence located in the U.S. Before the passage of the Inflation Reduction Act the solar credit was being phased out by slowly reducing the credit percentage from 30% to 22% over several years, and the credit was scheduled to end after 2023. The Inflation Reduction Act give the credit new life by extending the credit through 2032 at 30% before phasing it out in years 2033 and 2034.
Here are some of the issues about the credit you need to be aware of:
As you can see, there is a lot to consider, and these are not all the issues that should be taken into account before making the final decision to install a solar system. Is it worth it, and is it the right financial move for you? Please call for a consultation before signing any contract to make sure a solar system is appropriate for you tax wise.
Home Backup Electric Storage Battery - Emergency power outages imposed by utilities in fire prone areas during periods of high winds and low humidity, as well as in other disaster areas, can be a major inconvenience, especially for those that work from home, resulting in many taxpayers asking if storage batteries added to a solar installation would qualify for the credit. The tax code had been silent on whether storage batteries were eligible for the credit, although the IRS had issued a private ruling indicating that they would be allowed. The Inflation Reduction Act of 2022 amended the code by adding and defining the term “qualified battery storage technology expenditure.” Thus clarifying that for expenditures made after December 31, 2022, battery storage technology which meets the following requirements will qualify for the credit:
(A) It is installed in connection with a dwelling unit in the United States that is used as a residence by the taxpayer, and
(B) It has a capacity of not less than 3 kilowatt hours.
Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery.
Home Energy Improvement Credit Is Enhanced - With the passage of the Inflation Reduction Act of 2022 the Home Energy Improvement Credit once again becomes a meaningful incentive for taxpayers to make energy-saving improvements to their homes. The new legislation did away with the minimal $500 lifetime limit by replacing it with a $1,200 annual limit and increased the credit rate from 10% to 30%. As before, under prior law, there are certain credit limits that apply to the various types of energy-saving improvements. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements under the new law
This credit is a nonrefundable personal tax credit and there are no credit carryover provisions, so if the credit is not fully utilized in the year of the home energy improvements it is lost. You may wish to consult with this office prior to making any energy-saving improvements to your home to ensure you will benefit from the tax credit.
Research Credit – The Inflation Reduction Act enhanced the Research Credit for new businesses (generally, those that have been in business for 5 years or fewer) that have less than $5 million in gross receipts and that qualify for the research tax credit. These businesses can elect to use the credit to pay the employer’s share of its employees’ FICA withholding requirement (the 6.2% payroll tax).
The research credit is equal to 20% of qualified research expenditures more than the established base amount. If using the simplified method, the research credit is equal to 14% of qualified research expenditures that total more than 50% of the company’s average research expenditures in the prior three years.
Clean Vehicle Credit
After 2022 and through 2032, this credit replaces the plug-in electric vehicle credit and makes significant changes as follows.
Credit AmountIs based upon two amounts (certified by the qualified manufacturer):
Final Assembly RequirementThe final assembly of the vehicle must occur in North America.
Not all Vehicles Will Qualify Because of the critical mineral, battery, and final assembly requirements, only some vehicles will qualify for the credit. Noticeably missing are Toyota, Nissan, and Hyundai.
Manufacturer's Suggested Retail Price Limitation No credit is allowed for a vehicle with a manufacturer's suggested retail price more than $80,000 for vans, sport utility vehicles, and pickups and $55,000 for other vehicles.
MAGI Limit The credit is not allowed for high income taxpayers. No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the current tax year and the preceding tax year exceeds $300,000 for married individuals filing jointly and those qualifying as surviving spouse; $225,000 for head of household filers; and $150,000 for others.
New Clean Vehicle Definition Must have a minimum battery capacity of 7 kilowatt-hours, up from 4 kilowatt-hours under prior law. The dealer that sells the vehicle will furnish a report to both the buyer and IRS that the vehicle qualifies for the credit and the vehicle identification number (VIN) of the vehicle.
Credit For Previously Owned Clean Vehicles
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 and before 2032 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price.
MAGI limit The credit is not allowed for high income taxpayers. No credit is allowed for any tax year if the lesser of the modified adjusted gross income (MAGI) of the taxpayer for the current tax year and the preceding tax year exceeds $150,000 for married individuals filing jointly and those qualifying as surviving spouse; $112,500 head of household filers; and $75,000 for others.
Previously Owned Clean Vehicle A previously owned clean vehicle is defined as a motor vehicle
Qualified BuyerA qualified buyer is an individual who:
Credit For Qualified Commercial Clean Vehicles
After 2022 and through 2032, credit is available for qualified vehicles acquired and placed in service after December 31, 2022, and before 2033.
Credit AmountThe per vehicle credit is the lesser of 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine.
Maximum Credit The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.
Qualified Commercial Clean Vehicle RequirementsMust:
Qualified commercial fuel cell vehicles are also eligible for the credit.
Inflation Adjustments
Standard Deduction The standard deduction, which is used by taxpayers who do not have enough deductions to itemize them, is inflation adjusted annually. The standard deductions for 2023 are as follows:
Individuals who are blind and/or age 65 or over are allowed standard deduction add-ons. These add-ons are for the taxpayer and spouse but not for dependents. The add-on amounts are $1,500 for those filing jointly and surviving spouse (up from $1,400 in 2022) and $1,850 for all others (up from $1,750 in 2022).
Retirement Contributions IRA and retirement contributions are periodically subject to inflation adjustment. However, the inflation adjustments for 2023 are substantial and increased all the retirement limits for 2023, giving all eligible taxpayers the opportunity to increase their retirement savings beginning in 2023.
Other Inflation Adjusted Amounts
The foregoing may not represent all the changes for 2023. Congress has gotten into the habit of making tax changes and extending expiring provision until almost the end of the year and sometimes even in the midst of tax season.
For further information related to 2023 changes and inflation adjustments or to request a 2023 tax planning appointment, please give this office a call.