Tax season is here again, but before you file, make sure you’re up to date on important tax changes.
One of the biggest changes this year is that many of the credits or tax breaks that were in place due to the pandemic have gone away, or gotten smaller. That means you might need to prepare for a larger tax bill, or a smaller refund.
Here is an overview of some of the main tax changes this year:
- Standard deduction increases: The standard deduction increased for 2022, up to $25,900 for married couples filing jointly, $12,950 for single filers, and $19,400 for head of household filers.
- Child tax credit decreases: The child tax credit decreased quite a bit for the 2022 filing year. The credit amount is now a maximum of $2,000 per dependent under age 17, which is down from the $3,600 for children under age six or $3,000 for children under age 18 we saw in 2021.
- Tax brackets change: The 2022 tax brackets increased, but the tax rates did not change. That means that even if your income increased last year, you won’t necessarily have a higher tax bill. You can see the tax brackets for 2022 here.
- The $300 charitable deduction is gone: Since 2020, taxpayers were able to deduct $300 (or $600 if married filing jointly) for qualified charitable donations. That deduction is no longer available. This year, taxpayers who want to deduct charitable donations will have to itemize those deductions.
Tax Changes 2023: Roth Conversions
This isn’t a new change, but it’s an important reminder every tax season. If you completed a Roth conversion in 2022, you should have received Form 1099-R from your custodian. From there, you’ll have to report the conversion on Form 8606, which tells the IRS which part of your conversion is taxable.
This can be tricky, especially if you have a mix of pretax and non-deductible IRA contributions to include. That’s because of something called the “pro-rata rule,” which states that your IRA will be taxed proportionally to your amount of after-tax and before-tax contributions. Whatever percentage of funds that haven’t been taxed yet will be taxed at the pro-rata rate, which can catch taxpayers off guard.
If you did perform a Roth conversion (or a backdoor Roth conversion) in 2022, make sure you’re prepared to submit the necessary forms and pay potential fees when you file.
Qualified Charitable Distributions
Qualified charitable distributions, or QCDs, are IRA transfers of up to $100,000 to qualified charities. This option allows IRA owners aged 70 ½ or older to reduce their taxable income by transferring money to a charity each year.
Beginning at age 72, IRA owners are required to take Required Minimum Distributions, or RMDs. If they don’t, they could be hit with costly penalties.
Fortunately, QCDs allow people who are at least 70 ½ to reduce their taxable income by sending some of that RMD amount to a qualified charity. This is a smart strategy because donors do not have to count the QCD as taxable income or pay taxes on it, and they get to use that money to support a favorite charity.
Solar Tax Credit
The federal residential solar energy credit is a tax credit available to taxpayers for a percentage of the cost of a solar PV system. If you installed solar panels on your home within the past tax year, then you are eligible for a 30 percent credit for the installation cost.
That amount will decrease to 26 percent for systems installed in 2033 and 22 percent for systems installed in 2034. The credit will expire in 2035 unless it’s renewed by Congress.
The Massachusetts Fair Share Amendment
Beginning this year, Massachusetts residents earning more than $1 million will be charged an additional 4 percent income tax to help pay for education, bridges, roads and public transportation. Also known as the “Millionaires Tax,” this proposal passed last November with 52 percent of the vote.
This change might increase the state budget by a significant 2.4 percent, which could have a real impact on education and transportation. On the flip side, the state’s highest earners may decide to leave Massachusetts or avoid paying the tax.
Another potential impact concerns people who have homes with low cost basis. Housing markets have rapidly appreciated over the last few decades, and someone could hit the threshold for this tax if their basis is low. Additionally, family businesses that own land could also incur this tax even if they are depreciating the property as allowed by law. That’s because this tax lowers your basis in the property, thereby making it likelier to hit this tax.
Additional Tax Resources
If you’re working on your taxes and need some additional posts, here are some resources that might help you as you go:
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