TAX UPDATES
Basic Tax Information - Tax Year 2023
1) Section 199-A (Qualified Business Income Deduction – QBID)
20% Income Deduction
Business taxpayers who are engaged in the following business types: self-employment, partnerships, S Corps, LLCs – may deduct 20% of their taxable income (phase-outs and income thresholds may reduce the deduction). If qualified, this deduction is reflected on Line #10, Form 1040, even for those who own and rent Commercial Buildings or Residential Rental Property. This provision does not apply to high-income taxpayers.
2) Standard Deduction
Standard Deduction (Taxpayer without Itemized deduction) – 2023
| Filing Status | Deduction Amount |
|---|---|
| Single or Married Filing Separate | $13,850 |
| Head of Household | $20,800 |
| Married Filing Jointly | $27,700 |
Additional Standard Deduction – 65 and Older and Blind
| Single or Head of Household | $1,850 |
| Married | $1,500 |
| Married Filing Jointly | $3,000 |
3) Itemized Deduction
SALT (State and Local Tax): For itemizing purposes, the SALT deduction has been capped at $10,000. E.g. real estate taxes, automobile taxes, such as DMV fees, and state and municipal taxes.
Maximum Home Mortgage Interest Deduction: Mortgage interest deductions are limited to the first $750,000 of the mortgage (Mortgages created after Dec. 15, 2017). Please refer to Publication 936 (2019), Home Mortgage Interest Deduction from the IRS.
- California allows deductions for home mortgage interest on mortgages up to $1 million, plus up to $100,000 in equity debt.
Charitable Contributions: Up to 60% of AGI is deductible for 2023. For California, 50% of AGI.
4) 2023 Child Tax Credit:
$2,000 per qualifying dependent (child under 17).
5) Other Dependent Credit: $500
6) 2023 Capital Gain Tax Rate: 0%, 15%, 20%, and 28%
| 2023 (TAXABLE INCOME) | 0% | 15% | 20% |
|---|---|---|---|
| Single | $44,625 | ~$492,300 | Starts $492,301 |
| Married Filing Separately | $44,625 | ~$276,900 | Starts $276,901 |
| Head of Household | $59,750 | ~$523,050 | Starts $523,051 |
| Married Filing Jointly | $89,250 | ~$553,850 | Starts $553,851 |
| Estate and Trusts | $3,000 | ~$14,650 | Starts $14,651 |
7) Holding Period for acquiring a principal residence under Section 1031 exchange – A house exchanged using Section 1031 must be held for a minimum of five years from the date the exchange was completed to exclude any capital gains taxes.
8) Most taxpayers no longer have the option to carry back the net operating loss (NOL). For most taxpayers, NOLs arising in tax years after 2020 can only be carried forward.
9) Precautions to take with 1040X filings: When amending several years, do not put multiple 1040x filings into one envelope. We recommend our clients to mail in each amendment separately. Submit an amendment (1040X) only after the original tax return (1040) is fully accepted by the IRS. If amendments are received by the IRS prior to the original return, this may cause severe delays and complications. Please do not send related supporting materials with the amendments.
10) Social Security Benefit Rule: A single credit is given for every quarter you have earned an income of $1,860 or more as of 2023. Forty credits (10 years) is required to start receiving benefits. The SSA calculates the benefits based on your highest 35 years of earnings.
11) Meals and Entertainment Expenses are for 2023:
| Type of Expense | Deduction |
|---|---|
| Entertaining clients (concert tickets, golf games, etc.) | 0% deductible |
| Business meals with clients | 50% deductible |
| Office snacks and meals | 50% deductible |
| Company-wide party | 100% deductible |
12) Marijuana Industry Considerations: Only the cost of goods sold is deductible. Marijuana businesses are not entitled to claim ordinary and necessary business expenses otherwise allowed under IRC Sec.162. Licensed cannabis business may deduct cost of goods sold and all necessary business expenses, such as rent and wages. Unlicensed cannabis businesses may deduct cost of goods sold, but may not deduct other business expenses, such as rent and wages.
13) Earned Income Credit
For low-income taxpayers who worked throughout the year, the maximum credit that can be received in 2023 is shown below:
| Qualifying Children | AGI < Amount (MFJ) |
AGI < Amount (Other Filing Statuses) | Maximum Credit |
|---|---|---|---|
| No Children | $24,120 | $17,640 | $600 |
| One Child | $53,120 | $46,560 | $3,995 |
| Two Children | $59,918 | $52,918 | $6,604 |
| Three or More Children | $63,398 | $56,838 | $7,430 |
14) Social Security Benefits
Social Security Benefits increased to a maximum of $4,555/month ( age 70) for 2023. The Social Security Benefit was raised due to a “cost of living” (3.2%) adjustment.
Retirement Earnings Tax Exempt Amounts: Year 2023
| Age | Retirement Earnings Test Exempt Amounts | Reduction of benefits for every $3 in earning in excess of limit | Tax-free average monthly income |
|---|---|---|---|
| Under 66 years old | $21,240 | 1/2 (50%) | $1,770/Month |
| 66 years old | $56,520 | 1/3 (33%) | $4,710/Month |
| Over 66 years of age | No limit | None | N/A |
Social Security taxed at 50%:
Some must pay federal income taxes on Social Security benefits if their income is high.
| Filing Status | % Taxed | Income Threshold |
|---|---|---|
| Single, HOH, QW, MFS Apart All Year |
Up to 50% | $25,001-$34,000 |
| MFJ | Up to 50% | $32,001-$44,000 |
| Single, HOH, QW, MFS Apart All Year |
Up to 85% | Over $34,000 |
| MFJ | Up to 85% | Over $44,000 |
| MFS Living With Spouse | Up to 85% | 0 |
15) Medicare Premium Amount for 2023 – $164.90 (Part B)
Part A Premium (Medicare Hospital Insurance) – Taxpayers with 40 credits or more will not pay the monthly premium beyond the age of 66. If you are still 65 years old, you will have to pay the maximum base premium of $506 for up to a year to the Social Security Office if the taxpayer had a surgery and/or hospitalization.
Part B Premium (Medicare Medical Insurance) – Monthly Standard Premium: $164.90 in 2023 & $174.70 in 2024. Used when visiting a hospital without surgery. Discounted prescriptions may be purchased. If the taxpayer is still 65, you must pay this premium separately to the Social Security Office for one year. The premiums are automatically distributed from your Social Security Benefits (SSA) from age 66.
Monthly premiums are higher for high-income taxpayers. As annual income increases, the standard premiums will increase accordingly. E.g. $174.70, $244.60, $349.40, $454.20, and $559.00, etc. Premiums may rise to the maximum amount.
16) Health Insurance
Self-employed Premiums paid in 2023 can be deducted from 100% of the total income. Employees may deduct health insurance premiums on Schedule A.
17) Self-employment Tax
If you are self-employed, you are subject to 15.3% in self-employment taxes on a net income up to $160,200 in 2023 and $168,600 in 2024. If the net income exceeds the above threshold, the taxpayer is subject to an additional 2.9% in taxes (after the 15.3% threshold is met).
18) Standard Mileage Deductions 2023
| Business Mileage | 65.5 cents |
| Charity Mileage | 14 cents |
| Medical or Moving Purposes | 22 cents |
19) Student Loan Interest
a) If the taxpayer is a student in 2023, he/she may deduct up to $2,500 of student loan interest paid from his/her total income before AGI.
b) Limits: If the MFJ taxpayers’ AGI (adjusted gross income) is between $145,000 – $175,000, and for Singles, HOH, or qualifying widower $70,000 – $90,000, a phaseout of deductions will occur. Student loan interest is not deductible if the AGI exceeds the maximum ceiling of the bracket.
c) MFS (married filing separate) couples and dependents of another may not claim this deduction.
20) The American Opportunity Credit (Undergraduate Student Only)
a) If the taxpayer is a student in 2023, he/she may deduct up to $2,500 with 40% refundable on 100% of the first $2,000 of qualified higher education expenses, plus 25% of the next $2,000 of qualified higher education expenses.
b) Limits: If the MFJ taxpayers’ AGI (adjusted gross income) is between $160,000-$180,000, and for Singles, HOH, or qualifying widower $80,000-$90,000, a phaseout of deductions will occur. Student loan interest is not deductible if the AGI exceeds the maximum ceiling of the bracket.
c) MFS (married filing separate) couples and dependents of another may not claim this deduction.
21) The Lifetime Learning Credit- (IRC SEC. 25A)
Maximum Credit: $2,000 per year
a) Tuition: Up to $10,000
b) 20% of Tuition Fee – Ex) Tuition $4,000 x 20% = $800
This credit is available for children as well as taxpayers. Taxpayers with high incomes will see a phaseout of the credit. In the case of married couples, if the revised AGI (income – various expenses prescribed by the tax law) is $160,000- $180,000, or in the case of a single or head of household $80,000- $90,000, the credits will be phased out.
22) Section 179 Depreciation
If you’ve purchased equipment or machinery this year, and you are considered to continue your business for more than 5 or 7 years, you may deduct purchases of up to $1,160,000 in the first year (2023). Bonus Depreciation under IRC Sec. 168(k), increasing it to 80% (full expensing) for property placed in service in 2023.
23) I.R.A. Maximum Contribution
| Year | Maximum Payment | Maximum Payment (for those over 50) |
|---|---|---|
| 2023 | $6,500 | $7,500 ($6,500 + $1,000) |
24) Gift Tax
For 2023, you may give up to $17,000 to an individual without filing a gift tax form. If the gift exceeds $17,000, Form 709 must be filed. The lifetime gift limit without having to pay a gift tax is $12,920,000 in 2023. Lifetime gifts that exceed $12.92 million dollars are subject to a gift tax. The highest gift tax rates range from 18% to 40%.
25) Estate Tax Exclusion
| Applicable Exclusion Amount | |
|---|---|
| 2023 | $12,920,000 (40% of exceeding amount) |
| 2024 | $13,610,000 (40% of exceeding amount) |
26) Foreign Earned Income Exclusion
Tax exemption of $120,000 USD in 2023 on foreign income if the U.S. citizen or permanent resident continues to live abroad for more than 330 days in a calendar year to receive. Employees working abroad will be able to apply their foreign taxes paid against their foreign earned income. If self-employed abroad, a self-employment tax (15.3%) is applied.
27) 2023 BASIC TAX RATES
General Income Tax Rate: This tax rate is calculated based on taxable income.
| Tax Rate | Single | Married filing jointly | Married filing separately | Head of household |
|---|---|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 | $0 to $11,000 | $0 to $15,700 |
| 12% | $11,001 to $44,725 | $22,001 to $89,450 | $11,001 to $44,725 | $15,701 to $59,850 |
| 22% | $44,726 to $95,375 | $89,451 to $190,750 | $44,726 to $95,375 | $59,851 to $95,350 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 | $95,351 to $182,100 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 | $182,101 to $231,250 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 | $231,251 to $346,875 | $231,251 to $578,100 |
| 37% | $578,126 or more | $693,751 or more | $346,876 or more | $578,101 or more |
28) Long-term Capital Gain (holding over 12 months) Rate for 2023 (Taxable Income)
- 0 % – Single $0-$44,625: Married filing jointly $0-$89,250.
- 15% – Single $44,626-$492,300: Married filing jointly $89,251-$553,850.
- 20% – Single $492,301 or more: Married filing jointly $553,851 or more.
- 25% – Applies to the gain from selling real estate that has been depreciated.
- 28% – Collectibles and rare metals (tax rate can go as high as 28%). Small business stock.
Note: Taxpayers with a tax rate of 37% are subject to an additional Medicare tax of 3.8%, which is imposed on short-term capital gains and other net investment income. The general tax rate for short term capital gains is 41.7% (37 + 3.8). Long term capital gains rate for these taxpayers is 23.8% (20 + 3.8).
29) QUALIFYING WIDOW(ER) TEST (IRC SEC. 2 (A))
In the year of the spouse’s death, the tax return may be filed as MFJ, and in the second year, the taxpayer may file as a Qualifying Widow(er) for up to 2 years as long as there is a dependent.
What is the age limit for a qualifying child? 19 years old.
To meet the qualifying child test, your child must be younger than you and either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year to receive other dependent credit. There’s no age limit if your child is “permanently and totally disabled” or meets the qualifying relative test.
30) Net Investment Income Tax (NIIT) – 3.8% – Form 8960
Taxpayers whose income exceeds a certain MAGI threshold and investment income are subject to an additional 3.8% tax (net investment income tax).
| Filing Status | Threshold Amount |
|---|---|
| Married filing jointly | $250,000 |
| Married filing separately | $125,000 |
| Single | $200,000 |
| Head of household (with qualifying person) | $200,000 |
| Qualifying widow(er) with dependent child | $250,000 |
Taxpayers should be aware that these threshold amounts are not indexed for inflation.
- Net Investment Income (included): Capital gains, dividends, rental and royalty income, taxable interest, passive income from investments, etc.
- Net Investment Income (not included): SSA and Veterans’ benefits, wages, qualified retirement plan withdrawals, tax-exempt interest from funds or bonds, life insurance proceeds, etc.
- High income earners with net investment income can pay up to 41.7% (37+3.8) federal income taxes.
31) Identity Theft
Due to an increase of ID theft in recent years, the IRS has been issuing notices to taxpayers whose identity may have been compromised. If you have received an identity theft notice from the IRS, you must provide us with the IP PIN to file your tax return electronically. If you are suspecting ID theft, please visit the website below.
(www.irs.gov/pub/irs-utl/about_the_security_summit.pdf)
32) First- Time Penalty Abatement Waiver – FTA
1. The IRS’s first-time abatement penalty waiver (FTA), although introduced 12 years ago, is infrequently used by qualifying taxpayers. An FTA can be obtained for a failure- to-file, failure-to-pay, or failure-to-deposit penalty.
2. A taxpayer may claim an FTA for only a single tax period. To qualify, taxpayers must not have been assessed any other penalties of a “significant amount” on the same type of tax return within the past three years and must be in compliance with all filing and payment requirements.
33) Taxpayers who are more likely to be audited
- High-income taxpayers
- Taxpayers with multiple Forms 1099 and W-2 (all sources of income must be reported even if a tax form was not received)
- Taxpayers with high charitable contributions in a given year
- Taxpayers who claim a home office while having excessive deductions for their business/es
- Rental property shows an excessive loss
- Taxpayers who claim 100% of their automobile expenses as business expenses
- Schedule C self-employed taxpayers who report multiple years of losses in a row
- Businesses that deal frequently in cash transactions
- Taxpayers who receive high interest income from a foreign bank
- A taxpayer who deposits and/or withdraws more than $10,000 in cash from a bank
- Taxpayers who do did not retain sufficient supporting documents for deductions claimed on Schedule A
34) Form 1099-K Matching Program
Small business owners who receive revenues from credit card transactions will be issued a Form 1099-K from the credit card processor. This summary of credit card transactions will be reported directly to the IRS from the credit card processor. If revenue is calculated correctly (cash sales + credit card sales), reported revenue should almost always exceed the credit card sales. For 2023, the IRS delayed the new $600 Form 1099-K reporting threshold requirement for third party payment organizations for tax year 2023 and is planning a threshold of $5,000 for 2024 to phase in the new law.
Clients can view their tax information easily through the irs.gov website. Go to “Sign In to Your account” and create an id.me account to view tax information such as transcripts. This account can also be used to view information on ssa.gov.
