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.

Tips for Self-Employed Retirement Planning

Tips-for-Self-Employed-Retirement-Planning

Do you own a successful small business with no employees and want to set up a retirement plan? Or do you want to upgrade from a SIMPLE IRA or Simplified Employee Pension (SEP) plan? Consider a solo 401(k) if you have healthy income and want to contribute substantial amounts to a retirement nest egg. Keep reading to learn tips for self-employed retirement planning.

This strategy is geared toward self-employed individuals including sole proprietors, owners of single-member limited liability companies, and other one-person businesses.

Go It Alone

With a solo 401(k) plan, you can potentially make large annual deductible contributions to a retirement account.

For 2022, you can make an “elective-deferral contribution” of up to $20,500 of your net self-employment (SE) income to a solo 401(k). The elective-deferral contribution limit increases to $27,000 if you’ll be 50 or older as of December 31, 2022. The larger $27,000 figure includes an extra $6,500 catch-up contribution that’s allowed for these older owners.

On top of your elective-deferral contribution, an additional contribution of up to 20 percent of your net SE income is permitted for solo 401(k)s. This is called an “employer contribution,” though there’s technically no employer when you’re self-employed. (The amount for employees is 25 percent.) For purposes of calculating the employer contribution, your net SE income isn’t reduced by your elective deferral contribution.

For the 2022 tax year, the combined elective deferral and employer contributions can’t exceed:

  • $61,000 ($67,500 if you’ll be 50 or older as of December 31, 2022), or
  • 100 percent of your net SE income.

Net SE income equals the net profit shown on Form 1040 Schedule C, E or F for the business minus the deduction for 50 percent of self-employment tax attributable to the business.

Pros and Cons

Besides the ability to make large deductible contributions, another solo 401(k) advantage is that contributions are discretionary. If cash is tight, you can contribute a small amount or nothing.

In addition, you can borrow from your solo 401(k) account, assuming the plan document permits it. The maximum loan amount is 50 percent of the account balance or $50,000, whichever is less. Some other plan options, including SEPs, don’t allow loans.

The biggest downside to solo 401(k)s is their administrative complexity. Significant upfront paperwork and some ongoing administrative efforts are required, including adopting a written plan document and arranging how and when elective deferral contributions will be collected and paid into the owner’s account. Also, once your account balance exceeds $250,000, you must file Form 5500-EZ with the IRS annually.

If your business has one or more employees, you can’t have a solo 401(k). Instead, you must have a multi-participant 401(k) with all the resulting complications. The tax rules may require you to make contributions for those employees. However, there’s an important loophole: You can exclude employees who are under 21 and employees who haven’t worked at least 1,000 hours during any 12-month period from 401(k) plan coverage.

Bottom Line

For a one-person business, a solo 401(k) can be a smart retirement plan choice if:

  • You want to make large annual deductible contributions and have the money,
  • You have substantial net SE income, and
  • You’re 50 or older and can take advantage of the extra catch-up contribution.

Be sure to do your research for self-employed retirement planning. Before you establish a solo 401(k), weigh the pros and cons of other retirement plans — especially if you’re 50 or older. Solo 401(k)s aren’t simple but they can allow you to make substantial and deductible contributions to a retirement nest egg. The experienced team at Ramsay & Associates can help. Contact us before signing up to determine what’s best for your situation.

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.

What qualifies as a “coronavirus-related distribution” from a retirement plan?

coronavirus-related distribution

As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10 percent early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10 percent tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses.

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10 percent additional tax that otherwise generally applies to distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:

  • Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • Experiences adverse financial consequences as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
    • Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
    • Be unable to work due to a lack of childcare because of COVID-19;
    • Experience a business that he or she owns or operates due to COVID-19 close or have reduced hours;
    • Have pay or self-employment income reduced because of COVID-19; or
    • Have a job offer rescinded or start date for a job delayed due to COVID-19.

Favorable rules

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10 percent early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance.

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.

3 Keys to Mid-Year Retirement Planning Checkup

Retirement Planning, Retirement Savings Checkup, Retirement Plan, Ramsay CPA, Mahtomedi, MNWith Q2 firmly in the rearview and Q3 of the 2016 calendar year off to a strong start, now is the perfect time to review your retirement savings goals and opportunities.

From contributions to spending and net worth, give your retirement investments a mid-year checkup to make sure your retirement plans are still on track. Here are three keys to any checkup worth its salt.

1. Adjust Your Annual Contributions.

Whether you contribute to a 401(k) or to Roth IRAs, you still have time to fine-tune your annual contributions to maximize your retirement savings. If you don’t already belong to your employer’s retirement plan, join as soon as you can. If the plan allows for contributions, review your contribution amount to take advantage of the opportunity to save for your retirement.

The maximum annual salary deferral contributions allowed for 2016 are $18,000 to 401(k) or 403(b) plans and $12,500 to SIMPLE plans. If you are 50 or older by the end of the year, your plan may allow you to make additional catch-up contributions of $6,000 to 401(k) or 403(b) plans and $3,000 to SIMPLE plans.

If an employer’s retirement plan is not an option, you can still contribute toward your retirement via a traditional or Roth IRA. For 2016, you can contribute a maximum of $5,500 ($6,500 if you are 50 or older) or your taxable compensation for the year, whichever is less.

2. Rebalance Your Net Worth.

From Brexit to the immanent presidential election, this year’s events have resulted in a volatile stock market. If you are near retirement and see a big fluctuation in your net worth in 2016, perhaps you have too much invested in stocks. While the bull has stampeded throughout the US stock market in recent months, an unstable economic climate could quickly curtail the bear’s hibernation.

3. Stick to Your Spending Budget.

Many of us overspend during the holiday season, resolve to be more frugal in the new year and successfully adhere to a stricter budget for the first several months. However, much like diet and exercise resolutions, summertime can throw a wrench in our plans and reset the cycle. Mid-year is a good time to check your budget and see if you are spending too much money. Consider increasing the salary deduction percentage if you aren’t maxed out on your 401(k) contributions yet. Less cash in the bank might take a little getting used to but it will help you achieve your budgetary goals.

Confused about which retirement plan is right for you? Ramsay & Associates can analyze your needs and help you understand which plan makes the most sense for your financial circumstances. Contact us today to learn more!

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.