Article Highlights:​

• Standard, Personal, and Dependent Exemptions

• Traditional and Roth IRA - Limits and Phaseouts

• Retirement Plans - Contribution Limits

• Required Minimum Distributions (RMD)

• Child Care Credit

• Clean Vehicle Credit

• Used Vehicle Clean Vehicle Credit

• Standard Mileage Deductions

• Solar Credit

• Credit for Energy Efficient Home Modifications

• Cryptocurrency Transactions

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As the end of the year approaches, now is a good time to review the various changes that impact 2023 tax returns. Some of the changes are likely to apply to your tax situation. In addition, be aware that various tax-related bills currently in Congress may or may not pass this year. If any of them do pass, we will quickly get the details to you.

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Standard, Personal, and Dependent Exemptions – Under the current tax law, personal and dependent exemptions are not allowed. Standard deductions are as follows:

• Joint SS (married filing jointly) = $29,200

• MS (married filing separately) = $14,600

• Single = $14,600

• Head of Household = $21,900

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An additional standard deduction of $1,550 is allowed for each married elderly (age 65 and over) or blind individual. If elderly and blind, the additional standard deduction is $3,100. Single individuals (elderly or blind) are allowed an additional standard deduction of $1,950, $3,900 if both elderly and blind.

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Traditional and Roth IRA - Limits and Phaseouts – Both Traditional and Roth IRA contributions are combined for purposes of maximum contribution limits illustrated in the table. Contributions must be made by the due date of the tax return, NOT including extensions. Contributions ARE allowed regardless of age. Contributions are limited to earned income.

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Maximum Contributions for 2023 (Combined Total of Both Traditional & Roth)

• Under age 50 = $6,500

• Age 50 and over = $7,500

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In addition, for traditional IRAs, the deduction is ratably phased out for higher-income individuals who actively participate in an employer-sponsored plan and/or whose spouse is an active plan participant. Those not covered by an employer-sponsored plan, are not subject to MAGI limitations. For Roth IRAs, there is no tax deduction for contributions, there is no tax on qualified distributions, and the accounts benefit from tax-free accumulation. The contributions are ratably phased out for higher-income individuals. Contributions must be made by the due date of the tax return, NOT including extensions. Contributions ARE allowed regardless of age.

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Retirement Plans - Contribution Limits – Current tax season contribution limits are listed below. Some may be subject to additional restrictions.

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• SE Defined Contribution Plans: Lesser of 25% of compensation or $66,000 ($69,000 in 2024)

• SEP Plans: Lesser of 25% of compensation or $66,000 ($69,000 in 2024)

• 401(k) and 403(b) Plans Elective Deferrals: $22,500 ($23,000 in 2024). Add $7,500 if age 50+

• SIMPLE Plans Elective Contributions: $15,500 ($16,000 in 2024). Add $3,500 if age 50+

• Defined Benefit Plans: Max annual benefit: $265,000 in 2023 ($275,000 in 2024)

• Highly Compensated Employee Status Threshold: $150,000 for 2023 ($155,000 for 2024)

• Key Employee Status Threshold: $215,000 for 2023 ($220,000 for 2024)

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Required Minimum Distributions (RMD) – Once you reach the age of 73, you must begin taking minimum distributions from your traditional IRAs and qualified plans. The minimum distribution amount is determined by dividing the account’s value on December 31 of the prior year by your life expectancy determined from the IRS’s Uniform Lifetime Table. For the year you turn 73, the distribution can be delayed until no later than April 1 of the next year.

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Child Care Credit – For 2023, the maximum child care credit remains at $2,000 per child for after-school expenses. Looking ahead for year 2024, the maximum expenses that be used to compute the 2024 and subsequent years’ credits are $3,000 for one qualified individual and $6,000 for two or more qualified individuals. The credit ranges from a maximum of 35% to 20% of the care expenses depending on the taxpayer’s AGI. The 20% rate kicks in for taxpayers with AGIs more than $43,000, regardless of filing status.

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Clean Vehicle Credit – The maximum $7,500 credit depends partly on the vehicle being manufactured in North America and partially on whether the critical minerals included in the battery were extracted or processed in the U.S. or a country with a free trade agreement or recycled in North America. The manufacturer’s suggested retail price cannot exceed $80,000 for vans, SUVs, and pickups, or $55,000 for other vehicles (the actual purchase price doesn’t matter). If the buyer’s modified adjusted gross income (MAGI) for the credit year, or if less for the preceding tax year, exceeds $300,000 for married individuals filing joint; $225,000 for those filing head of household; and $150,000 for others, no credit is allowed.

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Used Vehicle Clean Vehicle Credit – Beginning in 2024, a credit is allowed up to the lesser of $4,000 or 30% of a used clean vehicle’s sale price. This credit is for lower-income taxpayers and no credit is allowed if the taxpayer’s MAGI for the credit year, or if less for the preceding tax year, exceeds $150,000 for married individuals filing joint; $112,500 for those filing head of household; and $75,000 for others. The vehicle must be acquired from a dealer for a price of $25,000 or less and be the first transfer of the vehicle since this credit was enacted. For both the new and used clean vehicle credit, the dealer must report the required information to the buyer and the IRS, including the maximum credit allowed, the buyer’s name and tax ID number, and the vehicle identification number.

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Standard Mileage Deductions – These are the $/mile rates in effect for 2023.

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• Business = $0.655

• Medical and Moving = $0.26

• Charity = $0.14

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Per diem rates (in effect since 10/1/2023) are:

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• Meals and incidental expenses (M & IE) = $74 for high-cost locality; $64 for low-cost locality

• Lodging and M & IE = $309 for high-cost locality; $214 for low-cost locality

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Solar Credit – There is a 30% nonrefundable federal tax credit for installing solar on your first and second homes. Unused credit can be carried forward to the subsequent year. The credit begins to phase out in 2033. Expenses of battery storage technology with a capacity of not less than 3 kilowatt hours count toward the credit. Battery and systems upgrades will qualify for credit even after the initial installation.

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Credit for Energy-Efficient Home Modifications – The Inflation Reduction Act has breathed new life into this credit by increasing the credit rate to 30% and by replacing the lifetime credit cap with an annual cap of $1,200. That allows individuals to annually make up to $4,000 of home energy improvements that qualify for credit. There are annual limits for certain types of improvements; for example, there is a $600 annual credit limit for residential energy property expenditures, windows, and skylights, and $250 for exterior doors ($500 total for all exterior doors). A new feature is being able to claim a credit of up to $150 in addition to the $1,200 annual cap for an energy audit performed by a certified home energy auditor on your primary residence. This credit is non-refundable (meaning it can only offset the current tax liability) and there is no carryover.

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Cryptocurrency Transactions – Cryptocurrency is treated as property, and when it is sold or used, the gain or loss from the transaction must be reported in the same manner as a stock transaction. The IRS is closely looking at taxpayer compliance. Under proposed IRS regulations cryptocurrency exchanges must begin reporting digital asset transactions occurring in 2025 or later, but some “brokers” and others facilitating crypto transactions are already doing so.

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If you have questions related to any of the topics discussed in this article, please call the tax professionals at ProTax Service in Los Angeles at (310) 869-0038. We specialize in filing taxes for self-employed individuals, families, and small business tax preparation in Culver City, Playa del Rey, Westchester, Santa Monica and Marina del Rey.