The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 -- up from $20,500 for 2022. The income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver's Credit will also all increase for 2023.
Taxpayers can read the technical guidance regarding all of the cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2023 in Notice 2022-55 on IRS.gov.
Here are some of the changes for 2023:
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $22,500.
The limit on annual contributions to an IRA will increase to $6,500. The IRA catch‑up contribution limit for individuals age 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan will increase to $7,500.
The catch-up contribution limit for employees age 50 and over who participate in SIMPLE plans will increase to $3,500, up from $3,000.
The phase‑out ranges for deducting contributions to a traditional IRA will also increase. Taxpayers should review Notice 2022-55 regarding the details for their situation.
The income phase-out range for people making contributions to a Roth IRA will increase for taxpayers filing as single, head of household and married filing jointly. Again, taxpayers should consult Notice 2022-55 for specifics about their situation.
The income limit for the Saver's Credit for low- and moderate-income workers is $73,000 for married couples filing jointly; $54,750 for heads of household; and $36,500 for singles and married individuals filing separately.
The amount individuals can contribute to their SIMPLE retirement accounts will increase to $15,500.
Before it's too late, now is the opportunity to cut your next tax payment by taking advantage of year-end measures that can help you save money.
Whether you donate to a nonprofit organization, put money into your retirement account, or look into helpful tax deductions, taking these tiny efforts now can make a large difference when it comes time to file your taxes. The filing deadline for taxes owed for 2022 is April 18th, 2023.
The following is a list of five tax-related decisions that you should make before the clock strikes midnight on New Year's Eve.
1) Key Points
Reconsider and review your withholding tax deduction.
Make a right and tax-deductible charitable contribution.
Maximize your 401(k) deduction.
Utilize your FSA to the maximum extent.
Harvest your expected loss.
Consider wash sale rules.
Defer your income to reduce tax.
Withdraw required minimum distribution.
Review and consider estate planning.
2) Lookback your withholding tax
If you've experienced any significant changes in your career or personal life, such as a raise in salary, a shift in your marital status, the birth of a child, or the purchase of a home, it's vital that you review your current tax withholding. To ensure that the appropriate amount of taxes are being withheld from your paycheck, it is a good idea to review your withholding.
If you don't withhold enough money from your paychecks, you could end up with a tax charge after filing your returns. Altering your tax situation to get more money in each paycheck may be preferable if you withhold too much and end up getting a huge tax refund.
The IRS provides a self-service tool called the tax withholding estimator that can help you determine if you have withheld enough money from your paycheck. To get started, you'll need to have access to your most recent pay stub and tax return.
Contributing to a charity you care about before the end of the year might have additional benefits, including lowering your taxable income.
Donations to charity are generally deductible only if you itemize your tax deductions. But to itemize, your total deductions must be higher than the standard deduction.
When filing your taxes, the IRS permits you to deduct a standard amount called the "standard deduction" regardless of your personal circumstances. As the government attempts to adjust for the biggest inflation in decades, it has been increasing standard deductions.
The standard deduction amounts for the 2022 tax year (for returns submitted in 2023) are as follows:
$12,950 for single and married-filing-separately taxpayers
$19,400 for head of household taxpayers
$25,900 for married-filing-jointly or qualifying widow(er) taxpayers
However, before making a donation, verify that the charity of your choice is eligible to receive tax-deductible contributions. The Internal Revenue Service (IRS) provides a search tool where you may get up-to-date information about tax-exempt organizations.
To complete your search, you will need either the company name or EIN.
4) Take the benefit of 401(k) contributions.
A 401(k)-retirement account contribution deadline is typically the later of December 31 or your final paycheck of the year. A maximum of $20,500 can be contributed that year. To the maximum of $27,000, an additional $6,500 can be contributed if you are 50 or older. Limits do not apply to employer contributions. There is a cap of $61,000 for 2022 on the sum of your and your employer's contributions.
You need to take action immediately because December will bring your last paycheck of the year. Increasing your retirement contributions typically requires a conversation with your company's human resources division. To make sure you haven't already reached the annual contribution limit, you should know how much you contributed this year.
5 ) Take a look at your Flexible Spending Account (FSA).
Use IT or Lose IT. A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. FSAs are limited to $2,850 per year per employer. If you’re married, your spouse can put up to $2,850 in an FSA with their employer. You generally must use the money in an FSA within the plan year. But your employer may offer one of 2 options:(1) It can provide a "grace period" of up to 2 ½ extra months to use the money in your FSA.(2) It can allow you to carry over up to $570 per year to use in the following year. As per https://www.irs.gov/pub/irs-drop/n-21-15.pdf this rule temporarily is allowing carry the entire unused amount to next year.
6 ) Harvest your loss.
Tax loss harvesting is when you sell some investments at a loss to offset gains you’ve realized by selling other stocks at a profit. The result is that you only pay taxes on your net profit, or the amount you’ve gained minus the amount you lost, thereby reducing your tax bill. Single filers and married couples filing jointly can deduct up to $3,000 in realized losses from ordinary income.
Select this course of action if you are confident that your investment will not rise in value in the near future.
7 ) Keep in mind the wash sale rules
You can’t, for instance, sell a stock to realize a loss and minimize your tax burden—and then rebuy that exact same stock, or even one that’s nearly identical. This strategy is referred to as a wash sale. A wash sale occurs when you sell securities at a loss and within 30 days before or after the sale buy “substantially” identical securities, or acquire a contract or option to do so. The wash sale rule does not, however, preclude purchasing securities in the same industry. For example, you can sell shares of Pfizer and replace them with shares of Merck.
8 ) Defer your income
By deferring ( postponing ) income to next year, you may be able to minimize your current income tax liability, if your future year tax rate is low. Here are ways you can achieve this strategy
(1) Cash method of accounting: First, the Tax Cuts and Jobs Act (TCJA) widened the class of companies eligible to adopt the cash method of accounting. You still have time to put this plan into action by switching to the cash method automatically before the tax return's due date (including any extensions). Exactly who has the authority to implement this change? As long as inventory is not a significant contributor to income, sole proprietorships, partnerships, and S companies can switch to the cash method of accounting regardless of their average annual gross receipts. A switch to the cash method is made automatically for C corporations (or partnerships with a C corporation partner) with average annual gross receipts of $25 million or less for the past three taxable years.
(2) Postpone Year-End Billing: If you're using the cash approach, put off billing your customers until after the end of the year.
(3) Installment sales: A sale is the transfer of ownership of an item. As long as at least one payment is received in the year after the sale, income recognition is typically deferred under the installment method until the gain is realized. If you think you would sell property before the end of 2022 and it would be financially beneficial to do so, you might want to explore selling the property and reporting the gain under the installment method so that any payments (and tax) can be postponed until 2023 or later.
(4) Interest and Dividend: Treasury securities and bank CDs with maturities of one year or less earn interest, but that interest is not considered taxable income until it is actually received. Investing in bonds or certificates that won't mature until next year is one way to put off collecting interest money. The 2022 tax year won't apply to dividends unless you have constructive receipt of them before December 31. (exceptions may apply if you have control over when dividends are paid to you.)
9 ) Be cognizant about RMD ( Required Minimum Distribution).
Required minimum distributions (RMDs) must be taken from traditional IRAs and employer-sponsored retirement plans after the account holder reaches age 72 (exceptions may apply if the account holder is still actively employed by the plan's sponsor). Withdraw the RMD by December 31st, the end of the tax year for most people. The penalty for not doing so is steep: fifty percent of the amount you were supposed to disperse but didn't. Beneficiaries are typically expected to take annual payments from inherited retirement accounts (and under the 10-year rule), with some exceptions for surviving spouses. Refer to SURE FINANCIALS AND TAX SERVICES LLC: Required Minimum Distribution (RMD) (surefintaxsvs.blogspot.com) for more information.
10 ) Make an estate plan or revisit estate planning.
It's a good idea to sit down with a financial advisor and go over your estate plans towards the end of the year to see if there are any ways you can save money on taxes or improve upon your current approach. The current $12.06 million lifetime gift and estate tax exception, in effect until 2026, may be a topic of conversation. You might also talk about whether or not it makes sense to set up a trust and fund it before the end of the year so as to take advantage of the tax benefits offered by the current legislation.
Employer must complete new hire papers when employer recruit a new employee. Form W-4 is one that employer has to have new hires complete and keep on file. So what does a W-4 form mean? What does the Form W-4 serve? Continue reading to learn the solutions to these and other W-4 queries.
1.Key Points
Employee's Withholding Certificate, Form W-4, is an IRS document used by employees.
When the employee begins working, the employee must fill it out and submit it.
Employers should use a Form W-4 that has been filled out to calculate how much federal income tax (FIT) should be deducted from employee wages.
An employee may claim credit for dependent kids on Form W-4.
The dependent credit depends on the age of the dependent.
Dependents are eligible for a $500 credit if they are over the age of 17 years old and $2000 if they are under 17 years old.
The need to amend a form may arise from a significant life event for an employee.
2.What is Form W4
When an employee begins working for an organization, they must complete IRS Form W-4, Employee's Withholding Certificate. Employee must fill up the following information on the form:
1.Name
2.Address
3.Social Security number
4.Filing status (e.g., Single)
5.Multiple job or spouse work information (if applicable)
6.Number of dependents (if applicable)
7.Adjustments (if applicable)
8.Signature
Additionally, the form includes a few worksheets that employees can use to figure out how many jobs they have and what deductions they have made. Depending on the individual employee, some form sections may be skipped (e.g., claiming dependents).
Employers must calculate the amount of federal income tax (FIT) to deduct from employees' paychecks based on the Form W-4 that the employee has completed.
The IRS Form W-4 is primarily filled out by the employee, although there is a minor section at the bottom that employers must complete. Employers must fill out the form with the following details:
Employer’s name and address
Employee’s first date of employment
Employer Identification Number (EIN)
3.What is the use of Form W-4?
A Form W-4 is used to calculate the amount of federal income tax that will be withheld from an employee's paycheck. The form is filled up by employees using the worksheets and tables. Employer will utilize the form to determine the employee's FIT withholding after that.
Employers need to use the tax tables in IRS Publication 15-T to determine how much Federal Income Tax (FIT) should be deducted from an employee's paycheck.
Remember that the IRS Publication 15-T contains tax tables that are compatible with W-4 forms from 2019 and prior. Before calculating the employee's withholding, make sure you're using the right tax table.
4.Are you exempt from filing Form W-4?
Some employees may, in exceptional circumstances, be excused from federal income taxes. This means that no federal income tax is deducted from the employee's salary.
The federal income tax exemption is only available to some employees. A worker is exempt if they:
1.Owed no federal income taxes for the prior year.
2.Expect not to owe any federal income taxes this year.
Employees must indicate on Form W-4 that they are exempt from FIT by writing "Exempt" in the box underneath Line 4. (c). On their W-4 form, exempt workers must additionally include their name, address, SSN, and signature.
Remember that the data on Form W-4 never expires. An exemption from withholding, however, does. Employees who claim exemption on Form W-4 must submit a fresh form by February 15 of each year.
Look at IRS Publication 505 and the General Instructions on Form W-4 for more information on exemption from withholding.
5.When is an employee expected to update Form W-4?
The Form W-4 can always be updated by an employee. A significant change in circumstances may need an employee to update their form (e.g., got married or had a baby). They could also elect to modify their W-4 form to change the withholding percentage.
Employees must complete a new Form W-4 if they need to make any changes to their current one.
Employer has a set amount of time to make the modifications after the employee fills out the new form. No later than the paycheck period that ends on or after the 30th day following the date the employer received the updated form, put the modifications into effect.
Wait until the next year to put any modifications into effect if the employee is revising a form for the coming year.
6.What employee need to do to claim Dependents:
Starting from 2020 and later, the form W-4 is changed to claim dependents instead of allowances.
The new Form W-4, an employee with a dependent child must look at their dependent’s age to determine the amount of the child tax credit and the credit for other dependents that they may be able to claim. Dependents under 17 have a dependent amount of $2,000, while dependents over 17 have a $500 amount.
7.What is the employer's responsibility?
Yes, the majority of Form W-4 is completed by your employees. However, employer has a few Form W-4 obligations as an employer, including:
1.Completing the Form W-4's bottom employer section
2.W-4 data entry in your payroll processing system
3.Immediately after receiving the form, withhold taxes.
4.Maintaining all W-4 documents in your files for a minimum of four years
Employer and employee may occasionally get a letter from the IRS stating that not enough FIT was withheld from the employee's pay. In most cases, the letter gives the employer instructions to withhold federal income tax at a higher rate.
If an employer or employee gets a letter from the IRS, the withholding tax needs to be adjusted within 60 days in accordance with the notice's instructions. Keep in mind, too, that the employee does have the option to challenge or alter their deductions.
Everyone should know the facts about how the IRS communicates with taxpayers
Knowledge is a taxpayer’s first line of defense against scammers who pretend to be from the IRS with the goal of stealing personal information.
Here are some facts about how the IRS communicates with taxpayers:
The IRS doesn't normally initiate contact with taxpayers by email. Do not reply to an email from someone who claims to be from the IRS because the IRS email address could be spoofed or fake. Emails from IRS employees will end in IRS.gov.
The agency does not send text messages or contact people through social media. Fraudsters will impersonate legitimate government agents and agencies on social media and try to initiate contact with taxpayers.
When the IRS needs to contact a taxpayer, the first contact is normally by letter delivered by the U.S. Postal Service. Debt relief firms send unsolicited tax debt relief offers through the mail. Fraudsters will often claim they already notified the taxpayer by U.S. Mail.
Depending on the situation, IRS employees may first call or visit with a taxpayer. In some instances, the IRS sends a letter or written notice to a taxpayer in advance, but not always. Taxpayers can search IRS notices by visiting Understanding Your IRS Notice or Letter. However, not all IRS notices are searchable on that site and just because someone references an IRS notice in email, phone call, text, or social media, does not mean the request is legitimate.
Private debt collectors can call taxpayers for the collection of certain outstanding inactive tax liabilities, but only after the taxpayer and their representative have received written notice. Private debt collection should not be confused with debt relief firms who will call, send lien notices via U.S. Mail, or email taxpayers with debt relief offers. Taxpayers should contact the IRS regarding filing back taxes properly.
IRS revenue officers and agents routinely make unannounced visits to a taxpayer's home or place of business to discuss taxes owed, delinquent tax returns or a business falling behind on payroll tax deposits. IRS revenue officers will request payment of taxes owed by the taxpayer. However, taxpayers should remember that payment will never be requested to a source other than the U.S. Treasury.
When visited by someone from the IRS, the taxpayers should always ask for credentials. IRS representatives can always provide two forms of official credentials: a pocket commission and a Personal Identity Verification Credential.
Many people work for a family member, whether it’s a child helping out at their parent’s shop or spouses running a business together. When someone is employed by a family member, the tax implications depend on the relationship and the type of business. It’s important for taxpayers and employers to understand their tax situation.
Married people in business together
§Generally a qualified joint venture whose only members are a married couple filing a joint return isn’t treated as a partnership for federal tax purposes.
§Someone who works for their spouse is considered an employee if the first spouse makes the business’s management decisions and the second spouse is under the direction of the first spouse.
§The wages for someone who works for their spouse are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.
Children employed by their parents
If the business is a parent’s sole proprietorship or a partnership in which both partners are parents of the child:
§Wages paid to a child of any age are subject to income tax withholding.
§Wages paid to a child age 18+ are subject to social security and Medicare taxes.
If the business is a corporation, estate, or a partnership in which one or no partners are parents of the child:
§Payments for services of a child are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes regardless of age.
Parents employed by their child
If the business is a child’s sole proprietorship:
§Payments for services of a parent are subject to income tax withholding, social security taxes and Medicare taxes.
§Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
If the business is a corporation, a partnership, or an estate:
§The payments for the services of a parent are subject to income tax withholding, social security taxes, Medicare taxes and FUTA taxes.
If the parent is performing services for the child, but not for the child’s trade or business:
§Payments for services of a parent are not subject to social security and Medicare taxes, unless the services are for domestic services and several other criteria apply.
§Payments for services of a parent are not subject to FUTA tax regardless of the type of services provided.
If you're close to retirement or changing jobs, you may need to figure out what to do with the savings in your 401(k) account. This is where a 401(k) rollover comes in handy. There are many factors that you may need to consider when it comes to selection of rollover options. Follow the “401(K) plan rollover options” to know more and make a wise decision.
A required minimum distribution (RMD) is the amount of money that must be taken out of an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants who have reached retirement age.
Figure 1: Required Minimum Distribution (RMD)
Key Points
After turning 72, retirees must take their RMD in order to avoid paying taxes.
The RMD is the bare minimum; retirees may choose to withdraw more if they so choose.
If a retiree has numerous retirement accounts, each account's RMD must be computed and paid out separately by the retiree.
While the owner of the ROTH IRA is still living, the RMD requirement does not apply. While Roth 401(K) funds are subject to RMD regulations.
The "stretch IRA," an estate planning technique that increased the tax-deferral benefits of IRAs, was largely eliminated by the SECURE Act of 2019's changes to the distribution regulations for some inherited IRAs.
Required Minimum Distribution
A required minimum distribution (RMD) is the amount of money that must be taken out of an employer-sponsored retirement plan, traditional IRA, SEP, or SIMPLE individual retirement account (IRA) by owners and qualified retirement plan participants who have reached retirement age.
Since your contributions to these kinds of IRA accounts are initially tax-free, the goal of RMDs is to ensure that you pay taxes on the money in your account. Qualified Roth IRA distributions are tax-free because contributions to your Roth IRA do not qualify for a tax deduction. For Roth accounts, there are no RMDs because the IRS has already taken its cut.
The retirement account withdrawal age increased to 72 years old in 2020. Therefore, account holders must start making withdrawals from retirement accounts by April 1 of the year they turn 72. The retiree must thereafter take the RMD amount according to the current RMD computation each succeeding year.
The prior year's fair market value (FMV) of the retirement account is divided by the applicable distribution period or life expectancy to arrive at the required minimum distributions. Taxpayers can use a worksheet provided by the Internal Revenue Service (IRS) to determine how much money they need to withdraw. Typically, the custodian of your accounts or the plan administrator will compute these sums and submit them to the IRS.
It should be noted that although while an account holder must take the required minimum distribution, they may also take more. It is completely lawful for the account holder to take the entire balance in the first year, but keep in mind the tax you will have to pay.
A Roth IRA is an effective tool for accumulating wealth and leaving a financial legacy because the original owner is not subject to RMDs. After inheriting the account, your beneficiaries will also benefit from years of tax-deferred earnings growth.
Once you pass away, the distribution guidelines for Roth IRAs do alter. Your Roth fund's specific withdrawal rules will vary depending on who inherits it.
Distribution rules for Roth IRAs inheritance
If a spouse inherits , the spouse, for example, can roll over the Roth assets into his or her own Roth IRA. The IRS does not impose RMDs on those inherited funds while your spouse is living.
If a Non-spouse beneficiary inherits, including children, don't have that rollover option. Those types of beneficiaries can either withdraw the funds immediately or transfer them to an inherited Roth IRA.
For instance, if a spouse inherits, the spouse can transfer the Roth assets to his or her own Roth IRA. While the spouse is still alive, the IRS does not require RMDs on those inherited monies.
Children including non-spouse beneficiaries of an inheritance are not eligible for this rollover option. Such recipients may withdraw the money right away or transfer it to an inherited Roth IRA.
Subject to certain exception, the inherited IRA following distribution rule
Beneficiaries of Roth IRAs inherited before January 1, 2020 may take RMDs over their lifetimes (based on IRS life expectancy tables).
A Roth IRA that is inherited in 2020 or later must be completely exhausted within 10 years of the account's original owner's passing. If the money has been in the account for five years or longer, withdrawals are tax-free
