Tax Planning

From The Wall Street Journal: What You Need to Know for Filing Taxes in 2023

BY Spectrum Wealth Management | Jan 30, 2023
By Ashlea Ebeling
January 20, 2023

In September, Michael Durschlag bought a fire engine red Kia EV6, an all-electric crossover, for $70,000, expecting he would snag a $7,500 federal tax credit when he filed his return. 

But the biotech executive in San Diego turned out to be wrong. The sweeping energy law Congress passed in August included a provision that says electronic vehicles purchased on or after Aug. 16, 2022, must be assembled in North America to qualify for a tax credit. His Kia, made in South Korea, didn’t count.

“I was kind of caught flat-footed,” Mr. Durschlag says. “Usually when Congress puts a new rule in place, they make it start in the new year to give people time to digest it.”

As tax season 2023 opens, the EV tax credit changes are just one wrinkle causing confusion. The tax code changes every year, and accountants and individuals have to adjust. This year, taxpayers are facing expired Covid tax breaks, abrupt tweaks to energy tax incentives and a delay meaningful for gig-economy workers. 

The Internal Revenue Service has announced that it will start accepting returns for tax year 2022 on Monday, Jan. 23. For many, it’s crucial to pay attention to reporting investment gains and losses after a down year in markets. Here’s what else you need to know.

Tax day isn’t April 15

Tax day this year is Tuesday, April 18, because of the weekend and the District of Columbia’s Emancipation Day holiday on the 17th. The IRS is expecting 168 million individual tax returns. Because of federally-declared disaster areas, many Californians, and some taxpayers in Georgia and Alabama, have until May 15 to file. Even if you go on extension until Oct. 16, you still have to pay any tax you expect to owe by April 18, or May 15, or the IRS will add penalty and interest charges to the amount owed.

Don’t rush to file your taxes

You can start working on your return, but don’t press the e-file button until all the reporting forms have arrived, says Alex Oware, an accountant in Denver. These forms include W-2s reporting wage income and 1099s reporting unemployment compensation, dividends and pension distributions. You should get most forms by Jan. 31, but some could linger.  

If you forget to include income from a freelance job and get a 1099 form later from the payer, for example, then you will have to deal with an IRS letter later saying you didn’t report that income and a possible balance due. 

One reason you might want to file early is if you’re hoping for a big refund. The IRS says it will issue most refunds within three weeks for e-filed returns.

You could get a smaller refund

The average tax refund last season was nearly $3,200, while refunds for low-income taxpayers entitled to an earned-income tax credit and child tax credit may sometimes be closer to $10,000, according to the IRS. 

Tax refunds could shrink by a few hundred to a few thousand dollars for many taxpayers this year, tax professionals say, since Congress chose not to extend several tax breaks put in place in the height of the Covid-19 pandemic, including an expanded child tax credit and an enhanced child and dependent care tax credit. 

If you always get a refund, maybe it’s time to sit down with a tax professional to rightsize your withholding and estimated tax payments. It’s money you could have used for other purposes, like investing or day-to-day expenses, Mr. Oware says. “It’s much better to break even at the end of the day.”

Charitable donations

Many taxpayers this year won’t get a tax break for charitable donations. For tax year 2021, there was a special charitable deduction of up to $300 for individuals and $600 for joint filers for those who take the standard deduction instead of itemizing deductions. That break wasn’t extended in the year-end budget bill. About nine out of 10 taxpayers take the standard deduction, which is $12,950 for single filers for 2022, double for married taxpayers filing jointly.

EV tax credit

Tax laws change. The energy and healthcare law that Congress passed in August changed the rules midyear for qualifying for a $7,500 tax credit for an electric vehicle purchase, adding the final assembly in North America rule. 

There’s an exception to that rule: If you entered into a binding contract to buy a car before Aug. 16 and took delivery before Jan. 1, 2023, the North America assembly rule doesn’t apply. For tax year 2023, new restrictions and new openness go into effect. Tesla Inc., for example, cut the prices on popular models but some buyers won’t qualify because they earn too much.

The energy law revived a 30% tax credit for residential EV charging systems for 2022, so Mr. Durschlag will be able to snag a 30% credit for the $2,000 he paid to buy and install an EV charger at his home. As of Jan. 1, the EV charger credit will be limited to certain census tracts. 

1099 gig economy reporting

The IRS delayed for a year, until tax year 2023, a new law requiring e-commerce platforms such as eBay, Etsy and Airbnb to give the tax agency information on many users with more than $600 in revenue. When the IRS gets this information, it can match it with taxpayers’ returns to make sure they are reporting income correctly.

The delay doesn’t mean a reprieve from paying taxes. “People should have been reporting this income all along,” says Prof. Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University in Washington, D.C. 

Because of the delay, the old rules apply for 2022, so platforms have to report users’ income to the IRS if they had more than 200 transactions and $20,000 of revenue in 2022.

IRS service

Erin Collins, the National Taxpayer Advocate, an IRS watchdog, says that the IRS has made considerable progress in reducing backlogs. Yet Ms. Collins predicts “continuing frustration and delays” for taxpayers this tax season, citing a backlog of 5.9 million unprocessed individual returns as of Dec. 9 in her annual report to Congress. Agency officials say taxpayers should expect better service this year than in the past because they have hired 5,000 customer service representatives to answer telephones and handle taxpayer queries. 

Before you pick up the phone, consider getting an IRS online account where you can access tax records. To get an account, filers typically must turn over sensitive personal information to a non-IRS contractor and often go through a cumbersome identification process.

“Once it’s done, it makes your life easier dealing with the IRS,” says Mr. Oware. 

This article was originally published in The Wall Street Journal on January 20, 2023, and written by Ashlea Ebeling.

  2. Image courtesy of WSJ and iStock

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