Are You Ready for the 2023 Filing Season?

On January 23, the IRS officially kicked off the 2023 tax filing season, and within days we began fielding inquiries about the information required for filing 2022 returns and the tax law changes that will impact those returns. Following is information in response to some of the common concerns:

Expired Tax Provisions

A number of tax provisions impacting personal returns have expired for the 2022 tax year, including:

• The 100 percent AGI limitation for qualified charitable contributions no longer applies.
• There is no longer an above-the-line deduction for qualified charitable contributions.
• There are no economic stimulus payments (or corresponding credit) for 2022.
• The Child Tax Credit has reverted back to 2020 levels, with a maximum of $2,000 per child.
• The Child and Dependent Care Credit returns to a maximum of $2,100 (from $8,000 in 2021).
• Mortgage insurance premiums are no longer deductible as mortgage interest.

Provisions that may impact your business return include:

• The Employee Retention Credit period has passed, though retroactive credits may be claimed on amended payroll tax returns.
• Research and development expenditures can no longer be expensed, and instead must be amortized under IRC § 174.
• Depreciation, amortization, and depletion do not get added back to the calculation of adjusted taxable income in 2022 for the limit on business interest expense under IRC § 163(j).

Hurricane Casualty Losses

Many people were impacted by Hurricanes Ian and Nicole in 2022. The Federal Emergency Management Agency (FEMA) officially declared the hurricanes disasters, which allows taxpayers to deduct three types of losses related to the hurricanes:

• Federal casualty loss: personal losses attributable to a federally declared disaster
• Disaster loss: business or personal losses attributable to a federally declared disaster in an area eligible for assistance pursuant to a presidential declaration; deductible either in the year of the disaster or the preceding year
• Qualified disaster loss: business or personal losses attributable to disasters as specifically identified in legislation passed by Congress

In general, the amount of loss you can deduct is the lesser of the decrease in fair market value of the property and the adjusted basis in the property immediately before the casualty occurred. That loss is then offset by any insurance or other reimbursements you receive.

Federal casualty losses and disaster losses may only be deducted to the extent they exceed $100 per casualty and 10 percent of the individual’s adjusted gross income (AGI). Qualified disaster losses are not subject to the 10 percent AGI limitation, but can only be deducted if they exceed $500 per casualty. Since Hurricane Ian and Hurricane Nicole do not currently meet the definition of a qualified disaster loss, the $100 and 10 percent AGI limitations apply to those losses sustained in 2022. We await additional guidance, and hopefully Congressional action to expand the deductibility of these losses. (For more information, read our article, “Emergency Declaration Makes Losses From Ian Deductible.”

Foreign Considerations

As the economy becomes more global, more taxpayer investments include foreign activity. Since noncompliance with the foreign reporting requirements may result in significant penalties, you should carefully review your assets and investments for foreign asset activity that could require special reporting. In particular, pay attention to the following:

• Foreign bank or brokerage accounts may require reporting if the total value exceeds $10,000.
• Foreign retirement accounts could be treated as foreign trusts requiring additional reporting.
• Investments in foreign partnerships may result in additional reporting under the passive foreign investment company (PFIC) rules.
• Investments in foreign corporations may require additional reporting under the Controlled Foreign Corporation (CFC) rules.
• Beneficiaries of foreign trusts or estates may be subject to additional reporting when distributions are received.
• Gifts or inheritances received from a foreign individual may be subject to additional reporting if the amount received exceeds a certain threshold.

If you are unsure whether an asset, investment, or item of income might be subject to foreign reporting, we encourage you to reach out to your HBK tax advisor for guidance.

Conclusion

Tax reporting and compliance become more complicated each year. Make sure you gather your tax documents carefully and reach out to your HBK tax advisor with any questions or if you are unsure about how certain items could impact your return.