2023 tax season: What you need to know

Katherine Tierney, CFA®
Senior Strategist, Retirement
 

We’ve seen many tax-related changes these past two years, and the 2022 tax year is no exception. From inflation adjustments to the expiration of pandemic-related tax breaks to newly effective laws, here are some changes that could impact your taxes for 2022. Keep in mind, this list is not all-encompassing, is only meant for educational purposes and is not intended as tax advice.

1. Tax brackets, standard deduction and contribution limits have increased.

As in years past, tax brackets, standard deduction amounts and contribution limits for 401(k) plans were adjusted for inflation. While contribution limits for IRAs stayed the same, the income thresholds for traditional IRA deductibility and Roth IRA eligibility increased.

2. Most COVID-19 tax breaks expired.

In 2021, taxpayers enjoyed several tax breaks that have since expired. If you were able to take advantage of these benefits, you could see a meaningful bump in your 2022 taxes.

Child tax credit

• In 2021, the maximum credit amount was temporarily increased to $3,600 for children under 6 years old and up to $3,000 for children ages 6 to 17 (which represented an increased maximum age). The credit was also fully refundable, meaning you could receive the credit even if it was larger than the amount of taxes you owed.
• For 2022, it reverts to its pre-2021 terms: The maximum credit you can claim is $2,000 per qualifying child, the maximum age for a qualifying child is 16, and it’s only partially refundable up to $1,500 per qualifying child.

Child and dependent-care tax credit

• The maximum credit allowed in 2021 was $4,000 for one child and $8,000 for two or more children. The full amount was available to families making less than $125,000 per year before it started to phase out, and it was fully refundable.
• For 2022, the maximum credit allowed is $1,050 for one child and $2,100 for two or more children. The full amount is only available to families making less than $15,000 before it starts to phase out, and it’s nonrefundable.

Dependent-care flex spending account (FSA) limit

• In 2021, a family could contribute up to $10,500 to a dependent-care FSA without paying taxes on the contributions.
• For 2022, it reverts to the normal $5,000-per-year limit.

Earned income tax credit

• Last year, more workers without children were able to claim the earned income tax credit. The minimum age to qualify was lowered to 19, and the maximum age was lifted. The maximum credit also increased to $1,502.
• For 2022, the minimum age to qualify reverts to 25, the maximum age limit of 65 applies, and the maximum credit decreases to $560.

Charitable tax deductions

• In 2021, non-itemizers could deduct up to $300 ($600 for joint filers) for cash contributions to charities. If you itemized, the limit that typically applies to cash donations to charities was suspended.
• For 2022, the deduction for non-itemizers is no longer available. For those who itemize, a limit of 60% of adjusted gross income for cash donations to charities is reinstated.

3. A new law could impact your taxes.

The Inflation Reduction Act extended or modified certain tax credits that could impact your 2022 taxes.

Premium tax credit

The premium tax credit helps eligible individuals cover their Affordable Care Act (ACA) health care premiums.

• The American Rescue Plan Act increased eligibility as well as the amount of the tax credits for 2021 and 2022, and the Inflation Reduction Act extended most of the tax credit enhancements through 2025.
• However, one enhancement that helped unemployed individuals was not extended beyond 2021. Individuals who received unemployment in 2021 were automatically eligible for full premium subsidies and full cost-sharing reductions for the year, or at least until they qualified for employer-sponsored insurance or Medicare. If you received unemployment in 2022, though, you must satisfy the normal eligibility requirements.

Residential clean energy tax credit

The Inflation Reduction Act increased the credit amount from 26% to 30% of the cost to install qualifying electric, water heating or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power.

Clean vehicle credit

The Inflation Reduction Act also revised the clean vehicle tax credit (formerly called the electric vehicle tax credit). Most changes aren’t effective until 2023, but there are a few provisions that could impact your 2022 taxes:

• One new requirement to qualify for the credit is that final assembly of the vehicle must occur in North America. This requirement is effective for vehicles sold after Aug. 16, 2022. You can check whether your vehicle satisfies this requirement on the U.S. Department of Energy website. The battery also must meet certain manufacturing requirements to qualify.
• If you purchased your vehicle before Aug. 17, 2022, you do not need to meet the new assembly requirements. You can qualify based on the old rules, even if you did not take possession of the vehicle until after Aug. 16, 2022.

Actions to consider

• To prepare for your tax filing, get your paperwork in order. Check out our tax-filing checklist for a list of common documents and information you may need to complete your tax return.
• Given the expiration of so many tax breaks, you may want to plan for a larger tax bill or smaller refund this year. One way to do this is to reserve some cash to meet your potential tax liabilities.
• There are still some steps you may be able to take to lower your taxes:
  • If you haven’t already maxed out on your contributions, consider making a 2022 IRA contribution. It could help you progress toward your retirement goals and lower your tax bill if you qualify for a deduction. You have until the tax filing deadline to do so. You could also get a jump start on your 2023 taxes by making a 2023 IRA contribution. For 2023, the IRA contribution limits increase to $6,500 for individuals below age 50 and $7,500 for individuals 50 and older.
  • If you took a COVID-19-related distribution from a retirement account in 2020, you could return those funds to your retirement account by the tax-filing deadline (including extensions). You have up to three years from the day after you received your distribution to return those funds, and they do not count toward the annual contribution limits.
  • If you turned 72 in 2022, don’t forget to take your required minimum distribution (RMD) or you’ll face a 50% penalty for any undistributed funds. You have until April 1, 2023, to take your first RMD.