2023 Limits on Individual Taxes Q&A

2023-Limits-on-Individual-Taxes-Q&A

Many people are more concerned about their 2022 tax bills right now than they are about their 2023 tax situations. That’s understandable because your 2022 individual tax return is due to be filed in a few weeks (unless you file an extension). However, it’s a good time to familiarize yourself with tax amounts that may have changed for 2023. Due to inflation, many amounts have been raised more than in past years. Here is a Q&A about limits on individual taxes for this year.

Note: Not all tax figures are adjusted annually for inflation and some amounts only change when new laws are enacted.

Itemizing Deductions for 2023

I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2023?

In 2017, a law was enacted that eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2023, the standard deduction amount is $27,700 for married couples filing jointly (up from $25,900). For single filers, the amount is $13,850 (up from $12,950) and for heads of households, it’s $20,800 (up from $19,400). If the amount of your itemized deductions (including mortgage interest) is less than the applicable standard deduction amount, you won’t itemize for 2023.

Contribution Regulations

How much can I contribute to an IRA for 2023?

If you’re eligible, you can contribute $6,500 a year to a traditional or Roth IRA, up to 100 percent of your earned income. (This is up from $6,000 for 2022.) If you’re 50 or older, you can make another $1,000 “catch-up” contribution (for 2023 and 2022).

401(k) or 403(b) Contributions

I have a 401(k) plan through my job. How much can I contribute to it?

In 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan (up from $20,500 in 2022). You can make an additional $7,500 catch-up contribution if you’re age 50 or older (up from $6,500 in 2022).

FICA Tax Questions

I periodically hire a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them?

In 2023, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. who are independent contractors is $2,600 (up from $2,400 in 2022).

Social Security Tax

How much do I have to earn in 2023 before I can stop paying Social Security on my salary?

The Social Security tax wage base is $160,200 for this year (up from $147,000 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)

Charitable Deductions for 2023

If I don’t itemize, can I claim charitable deductions on my 2023 return?

Generally, taxpayers who claim the standard deduction on their federal tax returns can’t deduct charitable donations. For 2020 and 2021, non-itemizers could claim a limited charitable contribution deduction. Unfortunately, this tax break has expired and isn’t available for 2022 or 2023.

Gift Tax Return

How much can I give to one person without triggering a gift tax return in 2023?

The annual gift exclusion for 2023 is $17,000 (up from $16,000 in 2022).

Only the Beginning

These are only some of the tax amounts that may apply to you. If you have questions or need more information about 2023 limits on individual taxes, the tax professionals at Ramsay & Associates can help. Contact us today.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

Standard Mileage Rate Updates for 2023

Standard-Mileage-Rate-Updates-for-2023

Although the national price of gas is a bit lower than it was a year ago, the optional standard mileage rate used to calculate the deductible cost of operating an automobile for business is going up. Keep reading to learn about the standard mileage rate updates for 2023 and the rules for deducting vehicle expenses.

Cents-Per-Mile Increase

The IRS recently announced that the 2023 cents-per-mile rate for the business use of a car, van, and pick-up or panel truck is 65.5 cents. These rates apply to electric and hybrid-electric automobiles, as well as gasoline and diesel-powered vehicles. In 2022, the business cents-per-mile rate for the second half of the year (July 1 – December 31) was 62.5 cents per mile, and for the first half of the year (January 1 – June 30), it was 58.5 cents per mile.

How Rate Calculations Are Done

The 3-cent increase from the 2022 midyear rate is somewhat surprising because gas prices are currently lower than they have been. On December 29, 2022, the national average price of a gallon of regular gas was $3.15, compared with $3.52 a month earlier and $3.28 a year earlier, according to AAA Gas Prices. However, the standard mileage rate is calculated based on all the costs involved in driving a vehicle — not just the price of gas.

The business cents-per-mile rate is adjusted annually. It’s based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, including gas, maintenance, repair, and depreciation. Occasionally, if there’s a substantial change in average gas prices, the IRS will change the cents-per-mile rate midyear, as it did in 2022.

Standard Rate Versus Actual Expenses

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses, and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases, certain limits apply to depreciation write-offs on vehicles that don’t apply to other types of business assets.

The cents-per-mile rate is beneficial if you don’t want to keep track of actual vehicle-related expenses. With this method, you don’t have to account for all your actual expenses. However, you still must record certain information, such as the mileage for each business trip, the date, and the destination.

Using the cents-per-mile rate is also popular with businesses that reimburse employees for business use of their personal vehicles. These reimbursements can help attract and retain employees who drive their personal vehicles a great deal for business purposes. Why? Under current law, employees can’t deduct unreimbursed employee business expenses, such as business mileage, on their own income tax returns.

If you do use the cents-per-mile rate, keep in mind that you must comply with various rules. If you don’t comply, the reimbursements could be considered taxable wages to the employees.

The Standard Rate Can’t Always Be Used

There are some cases when you can’t use the cents-per-mile rate. It partly depends on how you’ve claimed deductions for the same vehicle in the past. In other situations, it depends on if the vehicle is new to your business this year or whether you want to take advantage of certain first-year depreciation tax breaks on it.

We Can Help

Now that you know the standard mileage rate updates for 2023, you can better determine whether to use this rate to deduct vehicle expenses. As you can see, there are many factors to consider. The business tax professionals at Ramsay & Associates can help. Contact us if you have questions about tracking and claiming such expenses in 2023 — or claiming 2022 expenses on your 2022 income tax return.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.