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Roundup of Individual Tax Changes For 2023

Published on: Published in: Taxes

Article Highlights:

  • Required Minimum Distributions (RMD)
  • Excess Accumulation Penalty
  • Military Spouse Retirement Plan Participation
  • Clean Vehicle Credit
  • Credit For Previously Owned Clean Vehicles
  • Early Distribution Penalty Exceptions
  • Credit For Energy Efficient Home Modifications
  • Home Solar Energy Credit
  • Credit For Small Employer Pension Plan Startup Costs
  • Nanny Retirement Contributions
  • Qualified Charitable Distributions

Two recently passed pieces of tax legislation have brought about several tax changes for 2023 that may affect you. The legislation includes the Inflation Reduction Act and the Secure 2.0 Act. Here is a condensed summary of those changes. Check over the list and see if any of the new rules apply to you.

  • Required Minimum Distributions (RMD) – For 2023 the age at which individuals must begin taking distributions from their traditional IRAs and retirement plans is 73, up from 72 in 2022.
  • Excess Accumulation Penalty – This is the penalty for failing to take an RMD. In the past, this penalty was a draconian 50% of the amount that should have been withdrawn for the year but wasn’t. Beginning in 2023 the penalty has been reduced to 25%, and if a corrective distribution is timely made the penalty drops to 10%.
  • Military Spouse Retirement Plan Participation – In the past, because of frequent military moves, a military spouse often failed to qualify to contribute to an employer’s retirement plan. Beginning in 2023, a military spouse can participate in their employer’s plan starting 2 months after their employment begins and and will be immediately 100% vested in all employer contributions.

In return, the employer receives a tax credit equal to $200 per military spouse, and 100% of all employer contributions (up to $300) made to the plan on behalf of the military spouse. The result is a maximum tax credit of $500 for the employer.  This credit applies for 3 years with respect to each military spouse.

  • Clean Vehicle Credit – Although the credit can still be as much $7,500, this credit has significantly changed. For 2023, to qualify for the credit, among other requirements, the vehicle’s final assembly must be in North America. In addition, the manufacturer’s suggested retail price (MSRP) cannot be more than $80,000 for a pickup, van, or SUV and not more than $55,000 for other vehicles. To qualify, a purchaser’s adjusted gross income (AGI) must be $300,000 or less for married taxpayers filing jointly, $225,000 for head of household filers, and $150,000 for others.
  • Credit For Previously Owned Clean Vehicles – This credit has not been available in prior years. A previously owned clean vehicle (in other words, a used vehicle) is a formerly owned vehicle that is a model year at least two years earlier than the calendar year in which the taxpayer acquires it. Also it cannot be a vehicle for which a previous credit has been allowed, and it must be acquired from a dealer for a purchase price of $25,000 or less. The available credit is the lesser of $4,000 or 30% of the vehicle’s price. To qualify, a purchaser’s income is limited – their AGI must be no more than $150,000 for married taxpayers filing jointly, $112,500 for heads of household and $75,000 for others.
  • Early Distribution Penalty Exceptions – Current law imposes a 10% additional tax on early (generally before age 59½) distributions from tax-preferred retirement accounts such as traditional IRAs and 401(k) plans, unless an exception provided in the law applies. Several new exceptions to the penalty begin in 2023.
    • In case of a distribution to a terminally ill individual.
    • For public safety officers at least age 50 or with at least 25 years of service with the employer sponsoring the plan, whichever comes first.
    • For corrections officers or forensic security employees providing for the care, custody, and control of forensic patients who are employees of state and local governments.
    • In the case of a federally declared disaster.
      • The permanent rules allow up to $22,000 to be distributed from employer retirement plans or IRAs for affected individuals.
      • Such distributions are not subject to the early distribution 10% additional tax and are considered as gross income over 3 years.
      • Distributions can be repaid to a tax preferred retirement account.
      • Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed.
    • For corrective IRA distributions including the excessive contribution and any earnings allocable to that contribution.
    • The exception already applies for births and adoptions. Starting in 2023, recontributions of the distributed amounts are permitted within 3 years.
    • For private sector firefighters, extends the age 50 rule (is age 55 for others).
    • For domestic abuse survivors for distributions of the lesser of $20,000 or 50% of the retirement account balance.*

* Distributions may be repaid at any time during the 3-year period beginning on the day after the date on which such distribution was received.

  • Credit For Energy Efficient Home Modifications – This provision provides a non-refundable tax credit for certain energy-saving improvements to a taxpayer’s home. The has been modified through 2032.

The previous lifetime credit limit of $500 has been replaced with an annual maximum credit of $1,200, and the credit percentage increased from 10% to 30%. Although not a complete list, the following are annual credit limits that apply to various energy-efficient improvements:

    • $600 for credits with respect to residential energy property expenditures, windows, and skylights.
    • $250 for any exterior door ($500 total for all exterior doors).
    • $300 for residential qualified energy property expenses.
    • Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
    • $150 for a home energy audit.
    • The new law adds air sealing insulation as a creditable expense.

Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.

  • Home Solar Energy Credit – Beginning in 2023 the credit returns to 30% and is extended through 2034, though the credit rate drops to 26% and 22%, respectively, for years 2032 and 2034. The change includes a credit for battery storage technology of at least 3 KW hours.
  • Credit for Small Employer Retirement Plan Start-up Costs – Under prior law, small businesses (100 or fewer employees) qualify for a nonrefundable credit for administrative and retirement education expenses when adopting a new qualified defined benefit or defined contribution plan.

Beginning in 2023 a new category was added (50 employees or fewer) and the credit percentage was increased from 50% to 100% and applies for 4 years with the credit percentage reduced to 75%, 50%, and 25% in those succeeding years. The maximum credit per year per employee is $1,000.

  • Nanny Retirement Contributions – Beginning in 2023, employers of domestic employees (e.g., nannies) are allowed to provide retirement benefits for them under a Simplified Employee Pension (“SEP”) plan.
  • Qualified Charitable Distributions – Under existing law a taxpayer is allowed to make a Qualified Charitable Distribution (QCD) of up to a total of $100,000 each year that is transferred from their traditional IRA to qualified charities of their choice. The QCD offsets their RMD, up to the amount of the RMD.

Beginning in 2023, taxpayers will be allowed to make a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

If you would like details related to any of these provisions, please give this office a call.