Legislative Update 2023

A key part of our job is to stay up-to-date on the continuously changing legislative and tax code environment that may impact our clients. Successful planning involves navigating new changes that come our way, both the good and bad. Towards the end of 2022, Congress passed the Secure Act 2.0, a bill that updated numerous retirement savings provisions with the hope of encouraging more retirement savings. In 2022, Congress also passed the Inflation Reduction Act which included new clean energy incentives. We’ve highlighted some items out of both bills that we think will have a potential impact on Mirus clients.

Retirement Account RMD & QCD Update

New RMD Age

Beginning January 1st, 2023, the age to begin taking Required Minimum Distribution (RMDs) out of retirement accounts has been increased an additional year to age 73. So if you are turning 72 in 2023 and were planning to take RMDs this year, this will be pushed back a year. Recall the RMD age used to be 70 ½ and was changed to age 72 in 2020 as part of the 1st Secure Act passing. This new Secure Act 2.0 also included a provision to increase this RMD age to 75 in the year 2033. We think this is positive news as it will provide clients with more flexibility as it pertains to retirement account distributions that are considered taxable income.

Qualified Charitable Distributions

One thing to note is that the age for allowable Qualified Charitable Distributions (QCDs), age 70 ½ , has not changed as part of this new law. The QCD is a mechanism that allows an individual to donate funds directly from their retirement accounts to a qualified charitable organization, and the distribution is not considered taxable income to the investor as it’s a direct donation to a charitable organization. These QCDs distributions however can be used to offset RMD requirements, so many people wait for their RMDs to begin before utilizing QCDs that can then offset those RMD requirements.

Employer Sponsored Retirement Plans Update

Roth 401k- Employer Matching Contributions

This new law has brought about the ability for employer contributions to go towards the Roth 401k component of the retirement account along with employee contributions. Previously, all employer matching contributions were only allowed to go into the pre-tax, Traditional-401k sleeve. Electing for employer match contributions to go into the Roth 401k sleeve will cause this this portion of the contribution to be considered taxable income to you this year, so this would impact your tax situation further by making this change. Consulting with us in conjunction with an accountant can really help determine the right course of action for each client with regards to this new tax law change. 

“Catch-up 401k Contributions”- Now Roth ONLY for High Income Earners

While certain changes in this law have added to planning flexibility for individuals, this one is reducing flexibility for certain clients. Historically, “Catch-up 401k Contributions”, the additional 401k savings you can do once you turn age 50, have been allowed in both pre-tax traditional 401ks, and after-tax Roth 401ks. Starting in 2025, if you have earned over $145k in income from your employer, your “catch-up” contributions must go towards the Roth 401k component, and thus those savings will be considered taxable income in that year. This is a clever way that the government is attempting to tax what they deem high-income earners. What is interesting to note here is that not all 401ks have a Roth 401k component. So as the law currently stands, if a plan doesn’t have a Roth 401k sleeve, then no one in the plan can make catch-up contributions. We’d expect to see Roth capabilities in 401k plans continue to expand their popularity given this change in tax law.

New Roth Retirement Accounts

Starting in 2023, SEP IRA & SIMPLE IRA accounts will have the ability to utilize Roth contribution capabilities. Previously, these small business retirement accounts have only allowed for pre-tax contributions. Going forward, these accounts will have the ability to save post-tax contributions in the same way that Roth 401k & Roth IRAs currently work.

Clean Energy Tax Credits in 2023

Starting January 1st, 2023, buyers of certain electric & hybrid vehicles will be eligible for tax credits up to $7,500. This tax credit does have income limits: $300k for joint tax filers & $150k for single tax filers. There is also going to be a used EV tax credit of up to $4,000; with income limits of $150k for joint filers, and $75k for single filers. Applicable tax credits also depend on the MSRP of the vehicle and the source of the vehicles manufacturing. These tax credits are essentially a rebate on your tax bill for the applicable tax year, and can be applied regardless whether you file via the standard deduction or itemized deduction. If you are interested in purchasing an EV or hybrid, it’s a good time to reach out to those applicable dealerships. For more specific details on these tax credits: https://fortune.com/2022/12/30/what-electric-vehicles-qualify-for-biden-federal-ev-tax-credit-cars-eligibility/

In a similar theme to the EV credits, solar panel instillation tax credits that have been in place in recent years are being extended through the year 2032. The Solar Investment Tax Credit is a 30% tax credit rebate on the purchase price of installing a solar system on your home or business. A $20k solar system would provide a $6k tax credit that can then be used to offset future tax payments.

New in 2023 however is the addition of stand-alone energy storage systems and heat pumps falling under this tax credit as well. Both battery storage systems and heat pumps have seen increased popularity in recent years given their convenience and environmental benefits. Again if you’re interested in these products, we suggest reaching out to applicable providers for more details.

Best regards,

Kyle Temple
CFP®, CPWA®