There’s Still Time to Fund an IRA for 2023
The tax filing deadline is fast approaching, which means time is running out to fund an IRA for 2023. If you had earned income last year, you may be able to contribute up to $6,500 for 2023 ($7,500 for those age 50 or older by December 31, 2023) up until your tax return due date, excluding extensions. For most people, that date is Monday, April 15, 2024.
You can contribute to a traditional IRA, a Roth IRA, or both. Total contributions cannot exceed the annual limit or 100% of your taxable compensation, whichever is less. You may also be able to contribute to an IRA for your spouse for 2023, even if your spouse had no earned income.
Traditional IRA contributions may be deductible
If you and your spouse were not covered by a work-based retirement plan in 2023, your traditional IRA contributions are fully tax deductible. If you were covered by a work-based plan, you can take a full deduction if you’re single and had a 2023 modified adjusted gross income (MAGI) of $73,000 or less, or married filing jointly with a 2023 MAGI of $116,000 or less. You may be able to take a partial deduction if your MAGI fell within the following limits.
| 2023 income ranges for a partial deduction for traditional IRA contributions: | ||
|---|---|---|
| Covered by a work-based plan and filing as: | Partial deduction if your MAGI is between: | No deduction if your MAGI is: |
| Single/Head of household | $73,000 and $83,000 | $83,000 or more |
| Married filing jointly | $116,000 and $136,000 | $136,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
If you were not covered by a work-based plan but your spouse was, you can take a full deduction if your joint MAGI was $218,000 or less, a partial deduction if your MAGI fell between $218,000 and $228,000, and no deduction if your MAGI was $228,000 or more.
Consider Roth IRAs as an alternative
If you can’t make a deductible traditional IRA contribution, a Roth IRA may be a more appropriate alternative. Although Roth IRA contributions are not tax-deductible, qualified distributions are tax-free. You can make a full Roth IRA contribution for 2023 if you’re single and your MAGI was $138,000 or less, or married filing jointly with a 2023 MAGI of $218,000 or less. Partial contributions may be allowed if your MAGI fell within the following limits.
| 2023 income ranges for partial contributions to a Roth IRA: | ||
|---|---|---|
| Partial contributions are allowed if your MAGI is between: | You cannot contribute if your MAGI is: | |
| Single/Head of household | $138,000 and $153,000 | $153,000 or more |
| Married filing jointly | $218,000 and $228,000 | $228,000 or more |
| Married filing separately | $0 and $10,000 | $10,000 or more |
Tip: If you can’t make an annual contribution to a Roth IRA because of the income limits, there is a workaround. You can make a nondeductible contribution to a traditional IRA and then immediately convert that traditional IRA contribution to a Roth IRA. (This is sometimes called a backdoor Roth IRA.) Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own — other than IRAs you’ve inherited — when you calculate the taxable portion of your conversion.
A qualified distribution from a Roth IRA is one made after the account is held for at least five years and the account owner reaches age 59½, becomes disabled, or dies. If you make an initial contribution — no matter how small — to a Roth IRA for 2023 by your tax return due date, and it is your first Roth IRA contribution, your five-year holding period starts on January 1, 2023.
You have until your tax return due date, excluding extensions, to contribute up to $6,500 for 2023 ($7,500 if you were age 50 or older on December 31, 2023) to all IRAs combined. For most taxpayers, the contribution deadline for 2023 is April 15, 2024.
Tax Season News and Survival Tips
It’s not easy to keep up with complex tax laws that always seem to be changing, much less figure out how they might affect you personally. Even so, it’s important to consider the potential impact of taxes when making many types of financial decisions.
The IRS automatically adjusts the standard deduction and income tax brackets annually for inflation. The rate of inflation rose to 40-year highs in 2022, so the 7% increases for 2023 are the largest since these adjustments began in 1985.¹ The standard deduction is $13,850 for single filers in 2023 (up $900 from 2022) and $27,700 for married joint filers (up $1,800).
The filing deadline for 2023 federal income tax returns is April 15, 2024, (April 17 in Maine and Massachusetts, due to local holidays). Even though the 2024 tax year is well underway, there may still be time to take steps that lower your tax liability for 2023.
Understand “marginal” tax rates
U.S. tax rates increase at progressively higher income levels or brackets. If your taxable income goes up and moves you into a higher bracket, the resulting tax increase might not be as bad as it may appear at first glance. For example, if you and your spouse are filing jointly for 2023 and have a taxable income of $110,000, you are in the 22% tax bracket. However, you will not pay a 22% rate on all your income, only on the amount over $94,300.
Determining the value of certain deductions also depends on where your income falls in the tax brackets. Using the same example, a $10,000 deduction would reduce your income from $110,000 to $100,000 and theoretically reduce your tax liability by $2,200 (22% x $10,000). For a $20,000 deduction, you would have to calculate the amount of the deduction that falls in the 22% and 12% brackets: 22% x $15,700 + 12% x $4,300 ($3,454 + $516 = $3,970).
Although it’s helpful to know your marginal rate, your effective tax rate — the average rate at which your income is taxed (determined by dividing your total taxes by taxable income) — may offer a better way to gauge your tax liability.
Deduct large casualty losses
Wildfires, tornadoes, severe storms, flooding, landslides. The United States was struck by a record number of billion-dollar catastrophes in 2023.² If something you own was damaged or destroyed by a disaster, and your loss exceeds 10% of your adjusted gross income (AGI) plus $100, you may be able to claim an itemized deduction on your federal income tax return. This typically applies to large losses that are uninsured or subject to a high deductible. For 2018 to 2025, a personal casualty loss is deductible only if it is attributable to a federally declared disaster.
The rules relating to casualty losses can be complicated. If you have suffered a significant loss, it may be worthwhile to consult a tax professional.
Apply for an extension
If you can’t meet the filing deadline for any reason, you can file for and obtain an automatic six-month extension using IRS Form 4868. (Otherwise, if you owe taxes, you might face a failure-to-file penalty.) You must file for an extension by the original due date for your return. For most individuals, that’s April 15, 2024; the deadline for extended returns is October 15, 2024.
An extension to file your tax return does not postpone payment of taxes. Estimate your tax liability and pay the amount you expect to owe by the original due date. Any taxes not paid on time will be subject to interest and possible penalties.
Pay yourself instead
Making deductible contributions for 2023 to a traditional IRA and/or an existing qualified health savings account (HSA) could lower your tax bill and pad your savings. If eligible, you can contribute to your accounts up to the April 15, 2024, tax deadline.
The 2023 IRA contribution limit is $6,500 ($7,000 in 2024). If you’re 50 or older, you can make an additional $1,000 catch-up contribution. If you or your spouse is covered by a retirement plan at work, eligibility to deduct contributions phases out at higher income levels.
If you were enrolled in an HSA-eligible health plan in 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family coverage. (The limits for 2024 are $4,150 and $8,300, respectively.) Each eligible spouse who is 55 or older (but not enrolled in Medicare) can contribute an additional $1,000.
Avoid scams and costly mistakes
Tax season is prime time for identity thieves who may fraudulently file a tax return in your name and claim a refund — which could delay any refund owed to you. Or you might receive threatening phone calls or emails from scammers posing as the IRS and demanding payment. Remember that the IRS will never initiate contact with you by email to request personal or financial information, and will never call you about taxes owed without sending a bill in the mail. If you think you may owe taxes, contact the IRS directly at irs.gov.
The IRS has examined less than 0.5% of all individual returns in recent years, but the agency has stated plans to increase audits on high-income taxpayers and large businesses to help recover lost tax revenue. Wherever your income falls, you probably don’t want to call attention to your return.3 Double-check any calculations you do by hand. If you use tax software, scan the entries to make sure the math and other information are accurate. Be sure to enter all income, and use good judgment in taking deductions. Keep all necessary records.
Finally, if you have questions regarding your individual circumstances and/or are not comfortable preparing your own return, consider working with an experienced tax professional.
1) The Wall Street Journal, October 18, 2022
2) National Oceanic and Atmospheric Administration, 2024
3) Internal Revenue Service, 2024
January 24, 2024 Starts the 2023 Federal Tax Filing
IRS suggest steps to make tax filing easier
- Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2024. You may need to allow additional time for mail delivery.
- Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1959), and their instructions.
- File electronically and use direct deposit.
- Check irs.gov for the latest tax information.
Key dates to keep in mind
- January 12. IRS Free File opened. IRS Free File Guided Tax Software, available only at irs.gov, allows participating software companies to accept completed tax returns of any taxpayer or family with an adjusted gross income of $79,000 or less in 2023 and hold them until they can be electronically filed with the IRS starting January 29. Beginning January 29, Free File Fillable forms will be available to taxpayers of any income level to fill out and e-file themselves at no cost.
- January 29. IRS begins accepting and processing individual tax returns.
- April 15. Deadline for filing 2023 tax returns (or requesting an extension) for most taxpayers.
- April 17. Deadline for taxpayers living in Maine or Massachusetts.
- October 15. Deadline to file for those who requested an extension on their 2023 tax returns.
Tax refunds
The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS expects to issue most tax refunds within 21 days of their receiving a tax return if the return is filed electronically, the tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible.
IRS Releases Standard Mileage Rates for 2024
Due to recent increases in the price of fuel, the IRS has increased the optional standard mileage rates for computing the deductible costs of operating an automobile for business purposes for 2024. However, the standard mileage rates for medical and moving expense purposes are reduced for 2024. The standard mileage rate for computing the deductible costs of operating an automobile for charitable purposes is set by statute and remains unchanged.
For 2024, the standard mileage rates are as follows:
- Business use of auto: 67 cents per mile (up from 65.5 cents for 2023) may be deducted if an auto is used for business purposes. If you are an employee, your employer can reimburse you for your business travel expenses using the standard mileage rate. However, if you are an employee and your employer does not reimburse you for your business travel expenses, you cannot currently deduct your unreimbursed travel expenses as miscellaneous itemized deductions.
- Charitable use of auto: 14 cents per mile (the same as for 2023) may be deducted if an auto is used to provide services to a charitable organization if you itemize deductions on your income tax return. Your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity.
- Medical use of auto: 21 cents per mile (down from 22 cents for 2023) may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons) if you itemize deductions on your income tax return. You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income.
- Moving expense use of auto: 21 cents per mile (down from 22 cents for 2023) may be deducted if an auto is used by a member of the Armed Forces on active duty to move, pursuant to a military order, to a permanent change of station (unless such expenses are reimbursed). The deduction for moving expenses is not currently available for other taxpayers.
2024 Retirement Plan Limits
Some IRA and retirement plan limits are indexed for inflation each year. Several of these key numbers have increased once again for 2024.
How much can you save in an IRA?
The maximum amount you can contribute to a traditional IRA or a Roth IRA in 2024 will be $7,000 (or 100% of your earned income, if less), up from $6,500 in 2023. The maximum catch-up contribution for those age 50 or older remains $1,000. You can contribute to both a traditional IRA and a Roth IRA in 2024, but your total contributions cannot exceed these annual limits.
Can you deduct your traditional IRA contributions?
If you (or if you’re married, both you and your spouse) are not covered by a work-based retirement plan, your contributions to a traditional IRA are generally fully tax deductible.
If you’re married, filing jointly, and you’re not covered by an employer plan, but your spouse is, you may generally claim a full deduction if your modified adjusted gross income (MAGI) is $230,000 or less (up from $218,000 or less in 2023). Your deduction is limited if your MAGI is between $230,000 and $240,000 (up from $218,000 and $228,000 in 2023) and eliminated if your MAGI is $240,000 or more (up from $228,000 in 2023).
For those who are covered by an employer plan, deductibility depends on income and filing status. If your filing status is single or head of household, you can fully deduct your IRA contribution in 2024 if your MAGI is $77,000 or less (up from $73,000 in 2023). If you’re married and filing a joint return, you can fully deduct your contribution if your MAGI is $123,000 or less (up from $116,000 in 2023). For taxpayers earning more than these thresholds, the following phaseout limits apply.
|
If your 2024 federal income tax filing status is: |
Your IRA deduction is limited if your MAGI is between: |
Your deduction is eliminated if your MAGI is: |
|
Single or head of household |
$77,000 and $87,000 |
$87,000 or more |
|
Married filing jointly or qualifying widow(er) |
$123,000 and $143,000 (combined) |
$143,000 or more (combined) |
|
Married filing separately |
$0 and $10,000 |
$10,000 or more |
Can you contribute to a Roth IRA?
The income limits for determining whether you can contribute to a Roth IRA will also increase in 2024. If your filing status is single or head of household, you can contribute the full $7,000 ($8,000 if you are age 50 or older) to a Roth IRA if your MAGI is $146,000 or less (up from $138,000 in 2023). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $230,000 or less (up from $218,000 in 2023). For taxpayers earning more than these thresholds, the following phaseout limits apply.
|
If your 2024 federal income tax filing status is: |
Your Roth IRA contribution is limited if your MAGI is between: |
You cannot contribute to a Roth IRA if your MAGI is: |
|
Single or head of household |
$146,000 and $161,000 |
$161,000 or more |
|
Married filing jointly or qualifying widow(er) |
$230,000 and $240,000 (combined) |
$240,000 or more (combined) |
|
Married filing separately |
More than $0 but less than $10,000 |
$10,000 or more |
How much can you save in a work-based plan?
If you participate in an employer-sponsored retirement plan, you may be pleased to learn that you can save even more in 2024. The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan will increase to $23,000 in 2024 (up from $22,500 in 2023). This limit also applies to 403(b) and 457(b) plans, as well as the Federal Thrift Savings Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $7,500 to these plans in 2024 (unchanged from 2023). [Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.]
The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) will increase to $16,000 in 2024 (up from $15,500 in 2023), and the catch-up limit for those age 50 or older remains $3,500. (Note that in 2024, new rules take effect that permit certain small employers to allow additional contributions.)
|
Plan type: |
2024 deferral limit: |
Catch-up limit: |
|
401(k), 403(b), governmental 457(b), Federal Thrift Savings Plan |
$23,000 |
$7,500 |
|
SIMPLE plans |
$16,000 |
$3,500 |
Note: Contributions can’t exceed 100% of your income.
If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($23,000 in 2024 plus any applicable catch-up contributions). Deferrals to 401(k) plans, 403(b) plans, and SIMPLE plans are included in this aggregate limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can save the full amount in each plan — a total of $46,000 in 2024 (plus any catch-up contributions).
The maximum amount that can be allocated to your account in a defined contribution plan [for example, a 401(k) plan or profit-sharing plan] in 2024 is $69,000 (up from $66,000 in 2023) plus age 50 or older catch-up contributions. This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.
Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2024 is $345,000 (up from $330,000 in 2023), and the dollar threshold for determining highly compensated employees (when 2024 is the look-back year) increases to $155,000 (up from $150,000 when 2023 is the look-back year).
2023 Charitable Giving
There is still time in 2023 for year-end planning. Your planning may include charitable giving. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.
There may be tax benefits for making charitable gifts
If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help increase your gift.
Example: Assume you want to make a charitable gift of $1,000. One way to potentially enhance the gift is to increase it by the amount of any income taxes you save with the charitable deduction for the gift. At a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, at a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].
Tax benefits may be limited to certain percentages of your adjusted gross income (AGI). Your deduction for gifts to charity is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your AGI, depending on the type of property you give and the type of organization to which you contribute. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.
Make sure to retain proper substantiation of your charitable contributions. To claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit-card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.
Year-end tax planning
When making charitable gifts at the end of the year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.
For example, if you expect to be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.
There are other methods of making charitable gifts. These generally are subject to additional documentation and other complexities.
Using appreciated securities that have been held for more than year allows the appreciation (gains) to be included in the amount of the contribution without paying tax on the gains.
Making Qualified Charitable Distributions (QCD) is another technique. If you or your spouse are over 70 ½ the first $100,000 of each your required minimum distributions (RMD) will reduce the taxable amount of you RMD.
Caution
When making charitable contributions, be sure to deal with recognized charities and be wary of charities with names that sound like reputable charitable organizations. It is common for scam artists to impersonate reputable charities using bogus websites as well as misleading email, phone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax-Exempt Organization Search tool. And remember, don’t send cash; contribute by check or credit card.
2023 Year-End Tax Tips to Consider
This is a good time to review your tax situation for 2023. Allow enough time to complete the changes before year-end. Check with your custodian for the deadlines for completing by December 31, 2023. Following are some actions to consider before the end of the year. Many of these items will depend on your expected tax bracket in 2023 compared to 2024.
1. Defer income to next year
Consider opportunities to defer income to 2024, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.
2. Accelerate deductions
Consider opportunities to accelerate deductions into the current tax year. If you itemize deductions, making payments for deductible expenses such as qualifying interest, state taxes, and medical expenses before the end of the year rather early in 2024. Alternating, payments in 2014 may result in a benefit by exceeding the standard deduction.
3. Make deductible charitable contributions
If you itemize deductions on your federal income tax return, you can generally deduct charitable contributions, but the deduction is limited to 50% (currently increased to 60% for cash contributions to public charities), 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. (Excess amounts can be carried over for up to five years.)
There may be an advantage if you contribute appreciated securities. The gain on the securities will not be taxed if you held the security for more than a year.
For those 701/2 or older it may be beneficial to use direct payments using your required minimum distributions (Qualified Charitable Distributions.) To qualify for this strategy, it is important to meet the IRS requirement.
4. Increase withholding to cover a tax shortfall
If you will owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. Time may be limited for employees to request a Form W-4 change and for their employers to implement it in time for 2023. The biggest advantage in doing so is that withholding is considered as having been paid evenly throughout the year instead of when the dollars are taken from your paycheck. This strategy can be used to make up for low or missing quarterly estimated tax payments.
You can also have tax withheld from distributions from some financial accounts.
5. Save more for retirement
Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can reduce your 2023 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so. For 2023, you can contribute up to $22,500 to a 401(k) plan ($30,000 if you’re age 50 or older) and up to $6,500 to traditional and Roth IRAs combined ($7,500 if you’re age 50 or older).* The window to make 2023 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2024, to make 2023 IRA contributions.
*Roth contributions are not deductible, but Roth qualified distributions are not taxable.
6. Take required minimum distributions
If you are age 73 or older, you generally must take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans (special rules apply if you’re still working and participating in your employer’s retirement plan). You have to make the withdrawals by the date required — the end of the year for most individuals. The penalty for failing to do so is substantial: 25% of any amount that you failed to distribute as required (10% if corrected in a timely manner).
7. Weigh year-end investment moves
You should not let tax considerations drive your investment decisions. However, it’s worth considering the tax implications of any year-end investment moves that you make. For example, if you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 if your filing status is married filing separately) or carried forward to reduce your taxes in future years.
IRS Standard Mileage Rates for 2023
IRS has increased the optional standard mileage rates for computing the deductible costs of operating an automobile for business purposes for 2023. The rates for business use are revised to reflect recent increases in the price of fuel. Standard mileage rates for medical and moving expense purposes remain the same for 2023. The standard mileage rate for computing the deductible costs of operating an automobile for charitable purposes is set by statute and remains unchanged.
For 2023, the standard mileage rates are as follows:
Business use of auto: 65.5 cents per mile (up from 62.5 cents for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used for business purposes. If you are an employee, your employer can reimburse you for your business travel expenses using the standard mileage rate. However, if you are an employee and your employer does not reimburse you for your business travel expenses, you cannot currently deduct your unreimbursed travel expenses as miscellaneous itemized deductions.
Charitable use of auto: 14 cents per mile (the same as for 2022) may be deducted if an auto is used to provide services to a charitable organization if you itemize deductions on your income tax return. Your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity.
Medical use of auto: 22 cents per mile (the same as for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons) if you itemize deductions on your income tax return. You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income.
Moving expense use of auto: 22 cents per mile (the same as for the period July 1, 2022, to December 31, 2022*) may be deducted if an auto is used by a member of the Armed Forces on active duty to move, pursuant to a military order, to a permanent change of station (unless such expenses are reimbursed). The deduction for moving expenses is not currently available for other taxpayers.
*Last year, in a rare mid-year adjustment to the standard mileage rates, the IRS increased the rates for the second half of 2022.
Increased Standard Mileage Rates for July 1 through December 31, 2022
IRS , in response to the increased price of gas, increased optional standard mileage rates for the last half of 2022. The rates are used for computing the deduction for automobiles used for business, medical, and moving expense. The rate did not change for calculating the deduction for use of an automobile for charitable purposes as the rate is set by statute which did not change.
The change applies for the second half of 2022 are:
Business use of auto: 62.5 cents per mile (up from 58.5 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used for business purposes. If you are an employee, your employer can reimburse you for your business travel expenses using the standard mileage rate. However, if you are an employee and your employer does not reimburse you for your business travel expenses, you cannot currently deduct your unreimbursed travel expenses as miscellaneous itemized deductions.
Charitable use of auto: 14 cents per mile (the same as for January 1, 2022, to June 30, 2022) may be deducted if an auto is used to provide services to a charitable organization if you itemize deductions on your income tax return. Your charitable deduction may be limited to certain percentages of your adjusted gross income, depending on the type of charity.
Medical use of auto: 22 cents per mile (up from 18 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used to obtain medical care (or for other deductible medical reasons) if you itemize deductions on your income tax return. You can deduct only the part of your medical and dental expenses that exceeds 7.5% of the amount of your adjusted gross income.
Moving expense: 22 cents per mile (up from 18 cents for January 1, 2022, to June 30, 2022) may be deducted if an auto is used by a member of the Armed Forces on active duty to move, pursuant to a military order, to a permanent change of station (unless such expenses are reimbursed). The deduction for moving expenses is not currently available for other taxpayers.
The IRS normally updates the standard mileage rates once a year in the fall for the next calendar year. Mid-year increases in the standard mileage rates are rare — the last time the IRS made such an increase was in 2011.
IRS Announcement 2022-13
Roth Conversions are getting a lot of attention
Some consider the drop in the markets maybe a good time for some to consider converting traditional IRAs to Roth IRAs. The withdrawal of the assets from the traditional IRA would be taxed currently. The resulting tax would be lower as the value of the investment would be lower. The future growth of the assets would not be taxable in the Roth or to the beneficiaries of the Roth. There are many assumptions and conditions to achieve the desired benefits.
Tax rate assumptions
One assumption is that you will be in a lower tax bracket when you retire. A related assumption is that the tax laws will not change when the funds are distributed from the Roth. One approach would be to calculate your tax based on various assumptions. Depending on your current tax bracket and assumed future tax brackets to see how much to convert now.
Future values
There is a risk that the value of the investment will not grow or will drop in value.
Two five-year tests
To qualify for tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.
Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.
Roth account are not subject to Required Minimum Distributions (RMD)
Roth IRAs are not required to minimum distributions. Distributions are tax-free to the original owner of the Roth IRA and spouse beneficiaries who treat a Roth IRA as their own. Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.
There are many considerations and assumption in determining if a Roth Conversion is appropriate for anyone. The above is not intended as a complete discussion of the subject. A trusted advisor should be consulted to see if a conversion should be considered .
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
