Pending Legislation May Affect Your 2023 Tax Return

The 2023 tax filing season is here. The IRS opened for electronic filing on January 29. Most 1099s should have been mailed by January 31, with brokerage account 1099s being mailed by February 15 without an extension.

While there are many reasons to file early, there are two pieces of pending legislation in Congress that may affect your 2023 tax return, causing disruptions to this tax season.

Child Tax Credit

The Tax Relief for American Families and Workers Act of 2024 would expand the child tax credit by boosting the maximum refundable amount over the next three years if approved by the Senate and signed into law.

The proposed changes to the $2,000 child tax credit would cover three tax years: 2023, 2024 and 2025. The child tax credit would continue to be partially refundable, meaning that for a part of the credit, you could get a refund even if you didn’t owe any tax.

The new rules would increase the maximum refundable amount from $1,600 per child. For the tax year 2023, it would increase to $1,800; for the tax year 2024, to $1,900; and for the tax year 2025, to $2,000. The 2024 and 2025 amounts would be adjusted for inflation. The remainder of the $2,000 after the refundable amount ($200 for tax year 2023) would be nonrefundable, meaning you could only use the tax credit against taxes you owe — after your tax bill hit zero, you wouldn’t get additional money.

Rules around the new credit would also provide more money to families with multiple children, by taking into account the number of qualifying children when calculating the amount of the credit.

The eligibility rules around the new credit would be similar to the existing child tax credit. To be eligible for the tax break this year, you and your family would need to meet these requirements:

• You have a modified adjusted gross income, or MAGI, of $200,000 or less, or $400,000 or less if you’re filing jointly.

• The child you’re claiming the credit for was under the age of 17 on Dec. 31, 2023.

The House passed the child tax credit bill on Jan. 29, but Senate approval is uncertain. The bill also includes some tax breaks for businesses.

If this affects you, should you file now or wait?

Per the IRS Commissioner “Taxpayers should file their returns when they are ready and not wait for Congress to agree on a tax bill. …We urge and encourage taxpayers to file when they’re ready,” Werfel said. “If there’s a change that impacts your return, we will make the change, and we will send you the update whether it’s an additional refund or otherwise without you having to take any steps.”

State and Local Tax (SALT) deduction

If you itemize deductions, your state and local taxes (income, real estate) have been limited to $10,000 since the Tax Cuts and Jobs Act passed in 2017. This limit, combined with the increased standard deduction, results in many taxpayers not itemizing their deductions.

A new proposal would raise the SALT cap to $20,000 for married couples who file jointly and have incomes up to $500,000. The increase is retroactive to 2023, and only applies to tax year 2023.

House lawmakers are currently considering the bill — dubbed the SALT Marriage Penalty Elimination Tax — and are expected to vote on this soon. If the bill is passed into law, it would require taxpayers or the IRS to adjust already-submitted tax returns.

Unfortunately, it is unlikely the IRS would have the information they need to make this adjustment, as Schedule A is not going to be filed if a taxpayer is unable to itemize. If this bill passes, and you have already filed your return, you will likely need to amend the return later.

If the bill passes, it will take the IRS up to six weeks to modify their systems and forms.

Despite these two pieces of pending legislation, there are many reasons to file early.

Top 5 Reasons to File Early

Identity Theft
When your return is e-filed, you will know right away if anyone else has filed using your social security number. Filing your return early is one of the best ways to guard against tax-related identity theft. If you file your return before a fraudulent return using your social security number is filed, the fraudulent return will be rejected. Visit IRS Identity Theft Central.

Plan to Pay the Balance Due
Often taxpayers, fearing they owe money, will delay preparing their return. However, the tax bill may be inevitable, and knowing the exact amount due gives you some time to make a plan on how you will pay the tax and eliminate or reduce penalties.

Less Mistakes
Filing early allows you extra time to review your return. As the tax deadline nears, you may be rushed, stressed, and make mistakes, forget to report income or fail to take a deduction or credit you may be eligible for.

Planning for 2024
Once your 2023 tax return is prepared, you may want to adjust your tax withholding for 2024. If you owe a lot of tax, you may want to increase withholding, or if getting a large refund, reduce withholding. Making these changes early in the year rather than waiting until mid-year allows the change to be spread out more evenly through the year.

Funding IRAs or Health Savings Accounts
IRA and HSA contributions can be made by April 15 of the current year for a prior year deduction. To determine if the deductions are beneficial, the amount of tax savings, or IRA eligibility, at least a preliminary return needs to be prepared. If your return is on extension, you may miss the opportunity to contribute.

The information contained in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional for your specific situation.

Filed under: Dollars & Sense, Life, News
Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.