Important tax changes for 2023, Part 2

Editor”™s note: The first half of this column ran last week and covered a number of tax law changes for 2023. This half of the column describes more key changes that may help you reduce your taxes.

Estate and gift taxes: For an estate of any decedent during calendar year 2023, the basic exclusion amount is $12.92 million, indexed for inflation (up from $12.06 million in 2022). The maximum tax rate remains at 40%. The annual exclusion for gifts increases to $17,000.

Adoption credit: In 2023, a nonrefundable (only those individuals with tax liability will benefit) credit of up to $15,950 is available for qualified adoption expenses for each eligible child.

Earned Income Tax Credit: For tax year 2023, the maximum Earned Income Tax Credit (EITC) for low, and moderate-income workers and working families increases to $7,430 (up from $6,935 in 2022). The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Child Tax Credit: For 2023, the child tax credit reverts to $2,000 per child, age 17 or younger. The refundable portion of the credit increases to $1,600 in 2023, so that even if taxpayers do not owe any tax, they can still claim the credit. A $500 nonrefundable credit is also available for dependents who do not qualify for the Child Tax Credit (e.g., dependents age 17 and older).

Child and Dependent Care Tax Credit: If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) to work or look for work, you may qualify for a credit of up to $1,050 or 35% of $3,000 of eligible expenses in 2023. For two or more qualifying dependents, you can claim up to 35% of $6,000 (or $2,100) of eligible expenses.

For higher-income earners (AGI of $43,000 or more), the credit percentage is reduced, but not below 20%, regardless of the amount of adjusted gross income. This tax credit is nonrefundable.

Clean Vehicle Tax Credit: The Inflation Reduction Act makes several additional changes to the electric vehicle tax credit that took effect on New Year”™s Day. Vehicles eligible for the Clean Vehicle Tax Credit now include both EVs (electric vehicles) and FCEVs (fuel cell electric vehicles) but must meet two requirements to be eligible for the tax credit. The critical minerals component refers to sourcing requirements for critical mineral extraction, processing, and recycling. The battery components requirement refers to vehicles that include a traction battery that has at least seven kilowatt-hours (kWh).

Vehicles that meet critical mineral requirements are eligible for $3,750 tax credit, and vehicles that meet battery component requirements are eligible for a $3,750 tax credit. Vehicles meeting both requirements are eligible for a nonrefundable tax credit of up to $7,500; however, there are additional additional requirements regarding manufacturer suggested retail price (MSRP) thresholds for modified adjusted gross income (MAGI).

American Opportunity Tax Credit and Lifetime Learning Credit: The maximum credit is $2,500 per student for the American Opportunity Tax Credit. The Lifetime Learning Credit remains at $2,000 per return. Both credits phase out for taxpayers with modified adjusted gross income between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers). To claim the full credit for either, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly).

While the phaseout limits for Lifetime Learning Credit increased, taxpayers should note that the qualified tuition and expenses deduction was repealed starting in 2022.

Interest on educational loans: In 2023, the maximum deduction for interest paid on student loans is $2,500. The deduction begins to be phased out for higher-income taxpayers with modified adjusted gross income of more than $75,000 ($150,500 for joint filers) and is completely eliminated for taxpayers with modified adjusted gross income of $90,000 ($185,000 joint filers).

Contribution limits: The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $22,500. Contribution limits for SIMPLE plans also increase to $15,500. The maximum compensation used to determine contributions increases to $330,000 (up from $305,000 in 2022).

Income phase-out ranges: The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $73,000 and $83,000.

For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $116,000 and $136,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $218,000 and $228,000.

The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $138,000 and $153,000 for singles and heads of household, up from $129,000 to $144,000. For married couples filing jointly, the income phase-out range is $218,000 and $228,000, up from $204,000 to $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver’s Credit: In 2023, the AGI limit for the Saver’s Credit (also known as the Retirement Savings Contribution Credit) for low and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000 in 2022; $54,700 for heads of household, up from $51,000 in 2022; and $36,500 for singles and married individuals filing separately, up from $34,000 in 2022.

This column is for information only and should not be considered as individual advice. Taxes are complicated and mistakes can be costly, so consider seeking professional planning and preparation assistance.

Norman G. Grill is managing partner of Grill & Partners LLC, certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien.