On this episode of A Wiser Retirement™ Podcast, Casey Smith is joined by guest Jordan Sute Norton, CPA, to discuss new opportunities for tax credits in 2023. Together, we delve into the noteworthy updates to deductions for 2023, highlighting changes in mileage rate, retirement contributions, and teacher expenses. When talking about tax credits, we begin by explaining the difference between refundable and non-refundable tax credits, and how the former might give you that much-needed financial boost.
A lot of people use the 2 terms synonymously, they say deduction, when they mean credit, and vice versa. The truth is that while both strategies are very beneficial, they are also different from each other. A tax deduction reduces your income. A lot of people believe that their taxes are going to come down as a result of a tax deduction by whatever amount. That’s not the case. Instead, it reduces the income on which the tax is then levied. Whereas, if 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. Taxes are levied, and then you’re able to knock it down with tax credits. There are fewer tax credits than tax deductions because tax credits are more valuable.
An example of a tax deduction in Georgia would be when you save for a college education for a child or grandchild through a 529 plan. You get to deduct up to $8,000 per student for 529 plans. So, if you’re putting in eight thousand dollars for a child’s education in Georgia, taxes will call it 6%. That’s actually a $480 deduction in your tax. You “decrease” your income by $8,000, but then we still have to levy the 6%. Effectively, your savings is $480. On the other hand, if you took an $8,000 credit you would get $8,000 off the bottom line right.
2023 Tax Deduction Updates
Since the cost of living has gone up for everybody, the government is helping us out a little bit in taxes. The mileage rate actually went up in 2022, but it’s still in effect at $0.625 a mile, so it’s a good deduction there. Every year there’s a slight increase in retirement. If you’re participating in your company 401K you can put away $22,500 this year plus an extra $7,500 if you’re over 50. We always encourage you to max out your retirement savings when you can. It is always good to defer. Teachers usually get $250 of unreimbursed expenses, but for 2023 it’s up to $300. Even though it’s not nearly enough, it’s an increase.
Refundable vs. Non- Refundable Tax Credits
Tax credits are great because they reduce your tax liability. Some tax credits are non-refundable and some are refundable. The best kind are the refundable ones. For example, if 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, but whatever is left over is yours to keep. However, most of the credits we see are non-refundable. So, they can reduce you back to zero, but won’t allow you to keep any “leftover” amount. Often, they can also carry forward allowing you to use them in future years.
Current Opportunities for 2023 Tax Credits
With the new EV credit there are certain dates of when cars are placed in service, but the big one for this year was after April 18th 2023 for the new EV credit. The maximum credit is $7,500, but there are a few requirements like battery type, and mineral percentage. Also, tax credit only applies to individuals making less than $150,000 a year as a single person, or $300,00 as a couple.
Solar panels are debatably a good way to add value to your home and save on energy bills. Another great use of solar panels is the tax credit they generate. The tax credit for solar panel installation is 30% of your cost. If you invest $50,000 worth of solar panels in your house, that’s a $15,000 not refundable tax credit, that carries forward to following years.
The income limitation on education credits is pretty low which doesn’t allow for a substantial credit for most people putting their children through school. These credits end up being more beneficial to graduate students putting themselves through school.
Retirement Savers Credits
If you just started working and still have a low salary, but make it a point to put money into a retirement account anyway, the IRS will compensate you for that, as a way to encourage saving for retirement.
Georgia Specific Credits
If you access the Georgia Department of Revenue website and search for tax credits you will find out that there are many different ways to get tax credits transferred or sold to you.
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