2023 Tax Changes
If you completely trust online retirement calculators, think again. Many of the assumptions these calculators make when projecting your retirement income apply to only a handful of retirees.
We’re here to discuss the factors you should consider that go above and beyond what calculators take into account. We also want to outline some of the changes to expect in the 2022 and 2023 tax years.
Online Retirement Calculators
While the ability to project your retirement income using online calculators is highly convenient, you shouldn’t rely too heavily on them. Here are a few limitations to consider:
- Health and lifespan: The biggest unknown is your health. If you’re healthy at retirement, odds are you’ll live longer, and your retirement income has to last. Of course, if you have health problems, you need to fund an unknown amount of medical care.
- Expectations vs. reality: Sometimes, what you expect to happen and what actually occurs are vastly different. For instance, about 10% of people say they expect to retire between ages 62 and 64 when in reality, about 30% of people end up doing so. This is an example of why it’s important to plan for all possible contingencies, which an online calculator cannot do.
- Social Security: The timing of your Social Security benefits also makes a huge difference. If you start taking it at 62 instead of waiting until age 67, that’s a 43% increase. Or if you take it at 62 instead of waiting until age 70, that’s a 77% increase. This is particularly important if Social Security will be a significant portion of your retirement income. An online calculator doesn’t recommend when to start taking Social Security because it can’t see the whole picture.
- Risk tolerance: Are you willing to put more investments on the growth side if it also means a higher chance of losing money? Everyone’s risk tolerance is different, and online calculators don’t account for this.
- Spending patterns: Some retirees take out the same amount of money every year once they stop working. Others take out more early in retirement to travel or help their kids financially. Still others hold off on spending money now in case they have higher medical costs later on. Calculators fail to account for these different spending patterns.
- Leaving money behind: About 75% of retirees are motivated to leave behind inheritance money or donate to charities they care about. This highly personalized factor affects how much retirement income you should generate, which online calculators leave out of the equation.
The best way to overcome these limitations of online retirement calculators is to speak with a knowledgeable financial planner who can offer personalized advice based on your unique situation.
Tax laws are adjusted slightly every year. Brush up on what’s different for the 2022 and 2023 tax years so you’re not caught off guard.
Changes on 1099-K Reporting
Third-party payment processors like Venmo, Cash App, and PayPal must report payments of $600 or more per year. This was supposed to start for 2022 but got delayed a year to 2023.Using these platforms to sell belongings, resell concert tickets, or make money with a side gig now automatically generates a 1099-K. This can have tremendous tax implications. If you use third-party payment vendors, check out our recent podcast and blog for more information on this topic.
Higher Underpayment Penalties
Inflation pushed the underpayment penalty from 4% to 6% for the 2022 tax year. This will rise to 7% for your 2023 return. To avoid being penalized for underpaying, make sure your tax withholding is high enough.
- W-2 employees: Use the IRS’s tax withholding estimator to determine if you’re paying enough.
- Contractors: If you receive 1099 forms, keep track of your income and consider setting up automatic quarterly payments through the Electronic Federal Tax Payment System.
- Retirees: Be aware that Social Security and some retirement plan withdrawals may be taxable.
For the past two years, anyone could take a charitable deduction of up to $300 for single filers and $600 for married filers, even if you took the standard deduction. This is no longer the case on 2022 tax returns.
The change is even more significant for itemizers, who were able to write off up to 100% of their adjusted gross income (AGI) as charitable contributions for the past two years. This is returning to the traditional 60% threshold for 2022.
Residential Energy Credits
From 2018 to 2021, the residential energy credit was capped at a lifetime credit limit of $500 for any energy-efficient improvements made to your home. This includes new windows, doors, air conditioners, furnaces, boilers, water heaters, and other similar improvements. The credit limit is increasing to 30% of the total cost, up to $1,200 per year. This credit is available to any taxpayer regardless of income.
The clean vehicle tax credit for buying a new, plug-in electric or fuel cell electric vehicle is still $7,500, but you must meet strict requirements to qualify:
- The final vehicle assembly must be completed in North America.
- The manufacturer suggested retail price (MSRP) for the vehicle cannot exceed $55,000 for cars or $80,000 for trucks, vans, or SUVs.
- Single filers must earn less than $150,000, and married filers must earn less than $300,000.
Unfortunately, these narrow parameters greatly limit the list of vehicles that qualify for this tax credit.
Used electric vehicles may also qualify for a credit totaling 30% of the purchase price up to $4,000 if they meet these requirements:
- The model must be at least two years old.
- The MSRP must be $25,000 or less.
- You must purchase the vehicle from a dealership.
- Single filers must earn less than $75,000, and married filers must earn less than $150,000.
Get More Help from Nelson Financial Planning
If you’re concerned about these tax changes or want more personalized retirement advice than an online calculator can provide, turn to Nelson Financial Planning. Our Certified Financial Planners can help you change your life with a successful financial plan that provides peace of mind for the future.
To learn more, please contact us online or call our Winter Park, FL, office at 407-629-6477.
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