How inflation will affect your 2022 and 2023 tax bills
The IRS recently announced next year’s inflation-adjusted tax amounts. For 2023, the standard deduction will increase to $13,850 for single taxpayers, $27,700 for married couples filing jointly and $20,800 for heads of household. This is up from the 2022 amounts of $12,950 for singles, $25,900 for married couples filing jointly and $19,400 for heads of household. For 2023, the highest tax rate of 37% will affect singles and heads of households with income exceeding $578,125 ($693,750 for married taxpayers filing jointly). This is up from 2022 when the 37% rate affects single taxpayers and heads of households with income exceeding $539,900 ($647,850 for married couples filing jointly).
Inflation means you and your employees can save more for retirement in 2023
How much can you and your employees contribute to your 401(k)s next year? The IRS recently announced the 2023 cost-of-living adjustments. The amounts increased more than in recent years due to inflation. The 2023 contribution limit for employees who participate in 401(k) plans will increase to $22,500 (from $20,500 in 2022). This amount also applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan. The catch-up contribution limit for employees age 50 and over who participate in 401(k)s and the other plans mentioned above will increase to $7,500 (from $6,500 in 2022). That means those age 50 and older can contribute up to $30,000 to their 401(k)s in 2023.
Employers: In 2023, the Social Security wage base is going up
The Social Security Administration recently announced that the wage base for computing Social Security tax will increase to $160,200 for 2023 (up from $147,000 for 2022). Wages and self-employment income above this threshold aren’t subject to Social Security tax. The Federal Insurance Contributions Act imposes two taxes on employers, employees and self-employed workers. One is for Social Security tax, and the other for Medicare tax. There’s a maximum amount of compensation subject to the Social Security tax, but no maximum for Medicare tax. For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022).
You may be liable for “nanny tax” for all types of domestic workers
You’ve probably heard of the “nanny tax.” But even if you don’t employ a nanny, it may apply to you. Hiring a house cleaner or other household employee (who isn’t an independent contractor) may make you liable for federal income tax, Social Security and Medicare (FICA) tax and federal unemployment tax. You may also have state tax obligations. In 2022, you must withhold and pay FICA taxes if your worker earns cash wages of $2,400 or more ($2,600 in 2023). You pay household worker obligations by increasing your quarterly estimated tax payments or increasing withholding from wages, rather than paying a lump sum. Employment taxes are then reported on your tax return. Questions? Contact us.
Supplementing your company’s health care plan with an EBHRA
One way to take your company’s health care benefits to the next level is to supplement group coverage with an Excepted Benefit Health Reimbursement Arrangement (EBHRA). As with a traditional HRA, EBHRAs are employer owned and funded. However, because employer contributions to EBHRAs are limited, the accounts qualify as “excepted benefits” and aren’t subject to mandates under the Public Health Service Act. In 2022, up to $1,800 can be newly allocated to each participant to reimburse eligible medical expenses. This amount will rise to $1,950 for plan years beginning in 2023. Various other rules apply, and EBHRAs are subject to ERISA and parts of HIPAA. Contact us for more information.
Manageable growth should be a strategic planning focus
When a company engages in strategic planning, growing the business is typically at the top of the agenda. But unbridled growth can be a dangerous thing. Businesses often must fund intensive growth initiatives with one or more lines of credit, using the money to acquire assets such as equipment, hardware and software. And as they take on more debt, these companies could see loan payments consume most or all their cash flows. To avoid this, monitor warning signs such as: 1) A high debt-to-equity ratio. 2) Quickly declining profit margins. 3) Rising complaints from customers, vendors and lenders. Contact us for help building reasonable financial objectives into your strategic planning process.
Plan now to make tax-smart year-end gifts to loved ones
Are you feeling generous this year? Taxpayers can transfer large amounts free of gift taxes to loved ones each year with the proper use of the annual exclusion. For 2022, the exclusion amount is $16,000. The exclusion covers gifts that an individual makes to each recipient each year. So a taxpayer with three children can transfer $48,000 to the children this year free of federal gift taxes. Married couples can consent to give up to $32,000 a year to each recipient because two exclusions are available. Other rules may apply, and you may need to file a gift tax return if you give more than $16,000 or you consent to give gifts with your spouse. We can prepare a gift tax return for you.
Providing fringe benefits to employees with no tax strings attached
Businesses may provide tax-free benefits to employees that don’t cost them much or anything. For example, two benefits that employees generally can exclude from income are: 1) A no-additional-cost benefit, which involves a service that doesn’t impose any substantial additional cost on an employer. For example, a hotel might allow employees to stay in vacant rooms. 2) A de minimis fringe benefit, which includes property or services provided infrequently by an employer with a value so small that accounting for it is unreasonable or administratively impracticable. An example is the personal use of a copier. Keep in mind the rules for tax-free benefits are strict. Contact us with questions.
M&A on the way? Consider a QOE report
Are you thinking of selling a business or acquiring one? Many prospective buyers obtain a quality of earnings (QOE) report to evaluate the accuracy and sustainability of the seller’s reported earnings. Sometimes sellers obtain their own such reports to spot problems that might derail the transaction and identify ways to preserve or even increase company value. Generally, the starting point for a QOE report is the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). The report also identifies factors that bear on the business’s continued viability as a going concern, such as operating cash flow and supply chain stability. Contact us for more information.
Tax and other financial consequences of tax-free bonds
If you’re interested in investing in tax-free municipal bonds, you may wonder if there are any tax consequences. In general, interest received on tax-free municipal bonds isn’t included in gross income for federal (and possible state) tax purposes. However, it may be included for alternative minimum tax purposes. Keep in mind that a municipal bond may pay a lower interest rate than an otherwise equivalent taxable investment. The after-tax yield is what counts. In addition, if you receive Social Security benefits, municipal bond investing could increase the tax you must pay with respect to the benefits. Contact us if you have questions about how the tax rules apply to your situation.