¶ Tax Credits and Deductions in 2023
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Welcome to a Wiser Retirement Podcast . We believe the best financial advice should always be conflict-free . I'm your host , casey Smith . Joining me today is Jordan Suti Norton . She is with Suti CPA and today we're going to talk about tax credits you should know about in 2023 . Jordan , you've become a regular on the podcast . Thank you for joining us .
A lot of our clients use your services for tax preparation each year And evidently our podcast is becoming famous . We're getting , i think , the top 25% of all podcasts now . So , yeah , i'm about to start preparing for these things . Right , yeah , can't just wing it anymore when you're 25 .
So when we start off with talking about a tax deduction versus tax credit , this is something that I think a lot of people get confused about .
Right . I think people use them synonymously too , like they say tax deduction when they mean credit , or they say credit when they mean tax deduction , when in reality they both are good but they do very different things . Tax deductions are reducing your income , but tax credits are not .
I think people think that they get their tax return and they say wait a second , I forgot to give you my $3,000 gift to the charity, Habitat for Humanity, and they think their taxes are going to come down as a result by $3,000 , and that's not the case . Instead , it's reducing your income that then the tax is levied on , whereas you have a tax credit .
It's a direct dollar for dollar reduction of your tax liability , so your income is already set in stone . We levy the tax and then we're able to knock it down with tax credits . So they're both very useful .
So a tax credit sounds better to me .
Yes , it is better There's less tax credits than tax deductions , but that's because they are more valuable .
So an example of this would be like in Georgia we get to deduct our up to $8,000 per student for five to nine plans , right , yes , so putting an $8,000 for your child's education in Georgia , the taxes , we'll call it 6% , that's actually a $480 deduction in your tax .
Yes , exactly Yes . you're knocking down your income by $8,000 , but then we still have to levy the 6% , so effectively , your savings is $480 .
Right , so you're not putting an $8,000 in removing $8,000 in tax liability . That's deduction versus credit . Yes , absolutely Where , if it was an $8,000 credit , you would get $8,000 off the bottom line right .
Yes , absolutely Yep , and I think there's a lot of confusion , especially with Georgia . Five to 29 plans and then , as we'll probably get into later , the goal , georgia goal . Those are . We've seen tax returns from non-Georgia preparers . We have new clients that come in and we're like wait a second .
Last year kind of got wonky , because these are two very different things doing to effecting your taxes differently and you got to make sure you get them right from the job .
To be correct , Okay , so when we talk about deduction , updates .
Yeah , so for 2023 , a few updates . I know that the cost of living has gone up for everybody , and so the government's helping us out just a little bit here in taxes . The mileage rate that actually went up in 22 , but it's still in effect at 62 and a half cents a mile , so it's , you know , pretty nice deduction there .
And again , these are deductions , not credit . So these are helping reduce your income . Before the taxes levy The retirement there's . Every year , you know , we see a slight increase in retirement . If you're participating in your company's 401k , you can suck away 22.5 this year , plus an extra 7,500 if you're over 50 .
So that's a nice deduction there that we always encourage . That's a low hanging fruit , but , you know , max out your retirement where you can always good to defer . And then teachers . I know it's not even a dent in the bucket for you guys , but typically you can knock off $250 of unreimbursed expenses , But for 2023 , it's up to 300 .
So generous , I know right , we'll take it when we get it . Hopefully one day it'll be more than that , but at least we're getting a little bit of an increase this year .
Okay , so let's talk about refundal versus non refundable tax credits .
Yeah . So tax credits are great because they're reducing our tax liability , right . So some are non refundable and some are refundable . The best ones are refundable . So that means that let's say your tax and your tax liability is 5,000 and you have $6,000 in refundable tax credits .
Not only is it going to reduce your tax to zero , whatever's left over is in yours to take home . So that's awesome . You're taking money that's technically wasn't even yours to begin with . So refundable tax credit , whereas most of the credits we see they're non refundable , so they can reduce you to zero . But after that there's not much more you can do .
Oftentimes they can carry forward so you can use them in future years when you have tax liability but you're not going to be able to take . How many money that wasn't yours .
I mean for a refundable tax credit that's got to be probably really centered toward low income .
Right , Our income credit . we see it a lot there to become refundable , but yeah , it's not something super common .
Okay , so let's talk about credits that are sitting out there right now . Yes , electrical vehicle credits . Does that still exist ?
Yes , it came back this year , although it's totally different than we had seen it previously . When you think about electric vehicles , tesla's I know there's a lot of ball , those and I feel like every car manufacturer is making something now . They're just becoming super popular and they're eligible Most of them are eligible for this really great tax credit .
¶ EV and Home Improvement Tax Credits
So , with the new EV credit , we're looking at certain dates here of when cars are placed in service , but the big one for this year was after April 18th 2023 , there's a new EV credit , and so the max is 7,500 , but there's a few kind of requirements there .
You battery or like mineral percentage very kind of nuance But if you're at an EV retailer or a car dealership , they have very strict requirements , and they're going to be the ones to tell you this car qualifies , this one doesn't , and you also need them to say that , because if they sell you the car and you want to go after this credit , they've got to also
furnish the information to the IRS themselves . Yeah , so you're a self-reporting , but also , at the same time , they're reporting for you as well , so the informational need to match . The only kind of downside here is that the income limitations are much lower than they had been previously .
So , for a single taxpayer , your AGI can't exceed 150 , and for a married taxpayer , it can exceed 300 . So the good thing , though , is that if you buy a car this year , say , you're married and you're going to be making 350 . So , yeah , let me go get a Tesla . You know I'm making some good money . You wouldn't be eligible for the credit .
However , if you were under 300 last year , you could use last year's AGI to qualify for a car purchase this year . Okay , that's a nice kind of little way to scoot in when you might not otherwise be able to .
Interesting . So basically anyone making over 300,000 is deemed no credit .
Thank you , yeah , you know unless , unless they could qualify under the other prior years interesting .
Yep .
So that's a bottom line number , that right it's . If you do qualify for the 7500 , that comes off the Yes the bottom line .
Yep , not a fundable , but it's all through tax liability . I actually was looking at Tesla's this morning , not for , I mean , i don't think I'm actually gonna do it , but I was just curious looking at their website and they even on all of the models on the Tesla website They report the vehicle cost is after the tax credit .
Yeah it might cost 50 , but 43 , you know exactly .
Yeah , i remember when they first rolled out all those credits and going . Oh , this is not expensive as I thought . And now it's applying the credit to the already applied credit price , i'm like , oh yeah , i never mind .
Watch out for that , for sure .
So let's talk about home improvement credits .
Yeah , so Lots of really good things going on here . I want to start the solar panels because I think that's the the biggest opportunity and even as you drive around , i feel like Cobb County I start to see more and more homes that have solar panels on . There's huge tax savings there , even if you choose to finance those solar panels .
I know that's a big option for a lot of people . Get rid of your power bill and instead take on .
You know , hey , and you have 10 , 15 , 20 years will be paid off and you won't have Bill or The problem is that solar panels aren't aren't Good forever , so hope in 10 to 15 years you could be needing new solar panels fair enough .
However , wait , there is a great tax credit , so up to there's no , there's no limit here except for your tax liability . So if you go and you put in let's call it $50,000 worth of solar panels , the tax credit is 30% of your cost . So 50,000 , that's what $15,000 tax credit So and it's not refundable carry forward .
So it'll reduce your tax liability to zero and then you can carry it forward . But that's , i feel like that's just such an awesome credit because you know there's no limit there , whereas in the other home improvement costs that we'll get into there is like a very strict , very low lifetime credit . That's kind of limiting .
But the solar panels and it's also like solar water heaters as well . Yeah lots of , lots of upside to the to the credit .
So basically $15,000 , and so panels would equal a $15,000 credit .
Yeah so , and I know a lot of places that are a lot of taxpayers in Florida . That's a big place , you know we're actually a lot of .
It's an awesome , awesome credit , for sure , and you just have to do an Excel spreadsheet outside of the salesperson To make sure , to make sure that it all comes in , comes in line . I mean , i look at my , my power spend right now And it's it's pretty low . What's high is , you know , waste and Maybe .
Well , waste and water are pretty , are relative to the power beds . We don't consume as much power as we think we do . Maybe , right , but if I'm spending $300 a month , i'll say on a power bill I say it's not even that high , it's $250 a month . I just wonder what the break even is .
That that's something that we'll have to , we'll have to dive into on on that . But $15,000 off , you know , a $50,000 Improvement , that really helps you get over the hurdle , right ?
and then also to .
I mean , maybe you can ask this , question It in some cases I don't know if this is true in Cobb County , i know it happens in other municipalities You can sell the power back to the power .
Yeah .
Is that counted as income ?
I would have to assume .
So I mean , if you're gonna , say , yeah , you're gonna send you a 1099 .
Yeah .
Yeah , but even if they did , that's not that big of a deal . I mean , it's still more . Even if it was taxed at 20% , that's still , you know , 80 cents more in your in your pocket per dollar than you , than you had before . Right , absolutely , if you can sell it back to the , to the municipality .
That obviously helps with With the cost in addition to the credit . So it could be something there . Yeah , absolutely , and then kind of on the lower you know lower end of things .
If you replace your windows or I know that there's other home energy efficient Things that you can improve on your , on your primary residence and again , this has to be primary residence You can't put solar panels on your , on your rental property and then you see this really nice tax credit or home energy improving Windows or whatnot .
There's also another tax credit , but it's lifetime . So starting in 2023 , the lifetime credit is $1,200 . So if you go out and you put 10 grand of new windows in , there's a tax credit up to $1,200 that you can use to take off your taxes . But then you won't get that again in the future .
If you put $10,000 of new windows in , there's a tax credit up to $1,200 $10,000 of new windows into your next , you know , primary residence . So And it's there , and if it's available to you , i suggest to take it . Just know that . Yeah it's not gonna make or break any year , for for most people .
Okay , what do you think has to be done ? I mean , you just can't do it and say I did it and check a box on the tax return . So what's the procedure for ?
Right . So what we look for as CPAs when we're preparing taxes , there's often the invoice whoever's preparing , the company that's installing or that you're working with . They have very strict measures of giving you the proper documentation , and that's I would suggest make ensuring .
Hey , you say this is gonna give me a tax credit and show me the background , or give me something that I can give to somebody and it would stand up if it was ever questioned .
So definitely I would use reputable installers and companies to help you with these products , because anybody could say I mean , i could go tell you hey , sam , come to your house and put in new windows and you're gonna get a $1,200 tax credit , but I wouldn't have anything to give you to back that up .
So I would recommend you a proper documentation from qualified installers and retailers .
Okay , what are some recurring credits that may have changed in 23 ?
Yeah , so not a ton of changes here . A few years ago we had some kind of exciting things happening with the child tax credit , independent care credit , kind of centered around COVID , but everything's kind of just gone back to normal . But still there are things that make sure that you're taking advantage of , especially if your child is in daycare .
That's a cost that we can get back on the return . I just have to reiterate I feel like we see a lot of this Mother's Day out . If one of the parents doesn't work doesn't qualify . We have to have two working parents here to qualify for this credit . But first if you can use that dependent FSA at your employer .
But again , only way we can use that is if both spouses work . So max out your FSA , your spending account and then whatever's after that . Or if you don't have one of those , whatever you're spending on daycare we can get some costs back . It's not as awesome as you might think , but anything will help And the long run .
And then Yeah , so let's say education credits .
Yeah . So these the American Opportunity Credit and Lifetime Learning Credit nothing new here . And the downside a lot of our clients can't qualify for this because the income limitations are pretty low .
Where I think you really see the benefit of these are young adults who are putting themselves through grad school or paying for their own college or they're working enough during college .
Maybe they're still getting some money from mom and dad , but if they're working enough in college and maybe mom and dad are phased out of tuition credits but they have a job where they're making a 25 , 30 grand a year , where they're also in school , they have the opportunity to take advantage of these credits and see some real impact .
So I think that's you definitely don't wanna be skirting any IRS rules by hey , mom and dad's still sending me more than half of my support . But if we can make an argument that an adult child is providing more than half of their support , that's a great opportunity for them to take advantage of an education credit .
So let's look at a scenario where I think this is a common question . Household income is north of 250,000 a year and they're putting their kid through college . They say they go to Auburn but they're paying full freight , so they're spending $60,000 a year in tuition . There's no tax deduction for that . Is that right ?
That's right , yeah , and you're still going to get a 1098T , but we'll input it every time that we see it . But oftentimes you're just income limited because it's really meant for lower income or medium income taxpayers to take advantage of , and I know it's a huge expense but it's just we're kind of stuck with income limitations there .
That's where , to the opportunity , we can have a child that's working in college , help maybe come off of our tax return as a dependent , and I think that's where the biggest opportunity lies for taxpayers like the ones you mentioned .
Okay .
I think that kind of segues into to the retirement savers credit . That's a , that's a credit for for people . And again , this is super income limited , very low income limits here . But if you're working and you're putting money into a retirement account , the IRS loves to see that .
they want to see lower income taxpayers doing that And I feel like where we see it most often are on tax returns of kids who are coming off as dependents and they're starting to work in this first few years . Yeah that's where we really can . Can make the benefit .
You put money into retirement because the IRS is going to , it's going to pay you back for it . You know they want you to , they're encouraging them .
Can you explain that a little more ? Let's say , my child just graduated college . They got their first job . They're making 35,000 , 50,000 .
There . I mean they're a great , that's a great example if they're putting money into their company's retirement plan And we'd see that on their W2 , you know , b or whatever it may be , code S .
If it's a simple , if they're putting money into a retirement plan through their employer , or if they're self employed and putting money away into retirement plan , there is a , there's a form the retirement savers credit where if they're within the income limitations , the IRS will give them a credit back for a portion of the money they're putting into their retirement
plan . Okay again , not a make or break , But if you can take advantage of it , why not ? you know ?
your . What's changed with the adoption credit ?
No changes here . It's just something that I think it's forgotten about .
You know it might not be something that you bring up to your CPA every year , but there and again it's income limited , just like most of these credits , but it's something that every time you have a significant family change , whether it's having a new baby or , as we can talk about for Georgia , even being having a child in utero , being pregnant these are these
are things to tell your prepare or if you're going through the adoption process . I know that is so expensive And the IRS is understands that , and so there are available channels for for you to receive a credit there . You just have to at least say , hey , what about this ?
you know and as a CPA we're not as involved as maybe a financial advisor is to hear about every single . You know life change in your life , but it's still . It's worth bringing up . And I will say there was a client of ours this past year who made a note in their tax organizer gave birth to baby like January 3 , 2023 .
And so at first I'm like , oh , that's wonderful , but that won't help us for 22 . But in fact there is . Was 22 tax credit , but in plate will not credit but deduction put into place for Georgia , where if you were even pregnant with a child throughout 2022 , that qualified as a dependent on your Georgia tax return .
So they're giving credit for unborn children as well . So by just notating that on their return , it you know Hey , here's an extra 200 bucks that will go into your pocket from Georgia because of that Interesting Yeah .
¶ Roth Accounts and Georgia Tax Credits
So I had a question recently about a minor Roth account , and normally when you put money into a Roth , you have earned income . So we see this with small business owners . They hired their child to pay him $6,000 .
And they put the $6,000 into a Roth , right , yep , and so that's something to think about , because that's a great way to transfer wealth and get them a huge head start for retirement .
If you don't own a business and I'm not putting you on the spot here because we didn't talk about this beforehand , but I saw this for the first time They said , well , we paid our child an allowance And so they did chores around the house and it was like $600 . So it was below the threshold right of reportable income .
And then they opened up a Roth IRA and put the $600 into the Roth IRA , stating that , well , they earned it because they did chores around the house . I thought that was a bit of a stretch .
Yeah , i like that . it's gosh a genius . Yeah , i don't know what the IRS would say , but Yeah .
I thought , I was like I think that's definitely a great area And I think I mean $600 isn't that big a deal . But when they're like two years old , like what chores were they really doing around the house , right ? And Right .
But certainly when they , if they , get jobs as teenagers , that's something that you could look at as doing a minor Roth and that really compound over , you know , 40 something years . Right , be a good investment .
Right And even to the extent that we had a client a couple of years ago . I was so impressed by what this client and his daughter had done . She got an internship in the summer . She was in college , got an internship . She made like right at maybe 12 grand And her net paycheck was like $5 because she had put all of it into her employers Roth for 1K .
They let her participate even as a midwife , and then we go to file her tax return and , sure enough , we report the 12,000 of wages because we had to , and but there was no tax levied on that amount because it was underneath the standard deduction .
So she put , you know well , all of her , essentially all of her summer earnings into a Roth account without paying tax on it , once you know . But it was totally legal because she was beneath the limit of the standard deduction . But I'm sure you know that takes . She had expenses still .
That takes a parent who's willing to still , you know , give your child an allowance . But I thought that was just genius .
Yeah , that's awesome .
Set your child up for success .
So let's transition to Georgia specific credits . So what do you have in mind ?
Georgia . If you go to the Georgia Department of Revenue website and you just Google you know credits you're gonna see there are so many different Georgia credits and quite a few of them are transferable .
So that means another entity generates those credits and they generate a little too much , and then they're able to either transfer them to you or sell them to you at maybe a discounted cost . That statement needs some money , but there's significant opportunities in Georgia for ways to reduce your taxable income .
There's in some circles . I feel like film credits have gotten mixed in with the land credits . Land credits bad , film credits good .
Yes , film credits are good , especially the audited ones . I mean , we haven't had any trouble with non-audited credits . But to the extent you somebody offers audited film tax credits at a reasonable price , we think that's a no-brainer for tax savings .
And that's saving on Georgia tax .
Yes , exactly . So with COVID this used to be huge . Before COVID They were essentially 90 cents a piece or 89 cents a piece , so you would pay somebody 89 cents for a dollar of credit .
So you're saving 11% there and you could buy up to whatever amount you needed for your Georgia returns And you could even retroactively amend tax years that had already ended to get a refund . So that was just an awesome way to take advantage .
As COVID happened and movies became less and TV shows were filmed less , the credits kind of depleted there for a while , but we're starting to see them come back And they're right around the limit where I'm sure a financial advisor would say , okay , i think maybe , yes , we can start playing with this again , but the prices are starting to look a lot better than
they have for a few years .
That's good . There's more film being produced . I see that here near our office all the time . There's a church parking lot next door And all last week there were all the movie sets come in . It's amazing how fast they set that stuff up and break it down and move on to the next set .
And it's yeah , it's fun . As for us , because we'll see the credit reports or the documentation , it'll be like Stranger Things season four , so you're buying new credits for real , yeah , real .
Shows as you watch . That's awesome .
It's really cool .
What about low-income housing credits ?
Yeah , i think this is . we see this less in the film tax credits , just because there's some kind of more rules associated here . You can't go retroactively , so you've got to buy the low-income housing credits in the year that you're wanting to use them . So that takes a little bit more work of hey , what's my liability gonna be .
But to the extent you overbuy you can carry forward . So it's still a good , we think , a good investment . And you're buying as a part of a syndicate , as opposed to where the film tax credits you're buying for a particular film . So it's still a good opportunity , a way to reduce tax .
They're sold at a discount , so that's where your savings is coming into play . You're buying enough credits to cover your Georgia tax . You're just buying them at a lower cost .
Okay , and so these are . This would apply to anyone who has state tax liability , which in Georgia we don't have an exceptionally high tax rate , but if you're a highway journeyer , that number increases pretty quick .
Right , and the good thing here too is that with Georgia I know that there's the new pass through entity tax election that you can make So and we can get into this . I'm sure on a whole we can use a whole episode to talk about PTE and the benefits . but now these pass through entities .
you know , your partnerships and your S-corp can pay tax at the entity level and there's significant tax savings And so those entities can also be purchasing the credits as well , and so there's kind of a double tax savings play there .
By your S-corp purchasing the tax credit and then that passes down to the to the personal tax return , but off as an expense as well .
Well , yeah , so the S-corp's paying the tax . you're getting the deduction for your federal purposes , So that's where the saving is coming into play , but the entity is not passing through any Georgia income . Besides , and maybe if you're an S-corp owner , your W-2 is still on your personal return .
Yeah , yeah , yeah .
But then whatever tax .
So your earnings , your distribution or , at the end of the year , your profit .
basically , Yes , your profits staying at the entity just for Georgia , not for your federal still flows through , but you're receiving a significant tax savings on the federal side . So now your entity has the tax due and instead of just writing a check or you have to go online and pay it , you can buy some credits at the entity level to fulfill that obligation .
So what's the deadline for setting something like that up ?
The PTE or the for PTE , there's no debt . You make the election with your tax return , however .
You can do it . You can do it after the tax year's over retroactive .
Yes , because you're just selecting with the return . Cause in a year that you have a loss , you don't elect PTE . You want that loss to flow through . So it's a year by year basis .
And then the only thing is with , if you're cash basis , we'll wanna kind of be strategic about when you made your tax payment , because if you wait to make it with your tax return , then it's a tax savings that year .
So if , let's see , we're in 23 now , the best case scenario is to make your tax payment by 1231 , 23 for Georgia for it to count for 2023 . If you wait until April , then it's a 2024 deduction . So it's just a timing game , but it's worth it nonetheless .
Okay , would that apply to the film tax credits as well ?
Yes , yeah . so let's say that you decide in March or April of 24 that you are gonna elect PTE , you're gonna pay tax at the entity level for your S-Corp , your partnership .
You do that with your tax return and then you can , at the same time , go by tax credits and to fulfill that obligation at the exact same time , and it'll go retroactively to the past tax year .
So for let's shift gears a bit , Let's talk a little bit about higher wage earners that are W2 employees . It's really hard for someone who's making a half a million a year or more . It's really hard to find deductions Absolutely Pre-tax .
Hopefully you're at a larger company that has deferred comp plans or something like that , but those film credits could apply to someone in that situation to save money on Georgia return . Yes , It's .
That's where it kind of stinks , because you're likely having Georgia tax with Hill from your paycheck and then you're also gonna have to write a check to the film tax whoever's selling the film tax credit . So you're out twice , but you're gonna get the money back , so it- .
Or 10% of it back 10% .
Yes , you're gonna be making 10% .
I feel like at times Well , actually you get everything you paid in your paycheck back plus 10% .
Yes , exactly right . But coming out of pocket twice without being refunded it's kind of a hit . But we think at some . Once you hit 90 cents on the dollar for some of these film tax credits , you think it's worth it .
Okay , well , jordan , thank you for your time today and the 2020 insights . I know we'll have other podcasts in the remainder of the year , especially as we get more toward tax planning , which is usually done in September , at least here at our firm . But , yeah , thank you for you and Michael and all you do for Wiser clients .
Absolutely thanks .
We'll talk to you next time .
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