Tax law changes for tax year 2023

On Dec. 23, 2023, President Biden signed into law the Securing a Strong Retirement Act of 2022 (Secure 2.0) as part of the Consolidated Appropriations Act of 2023. Tax advisors saw some of the effects of the new bill, which will require several changes for retirement plans. But there are also some new laws that became effective Jan. 1, 2023 and some changes that differ from tax year 2022. Here is a rundown of some significant changes for 2023.

Required minimum distribution age

The previous Secure Act moved the age for participants in employer­-sponsored 401(k) plans and other defined contribution plans from 70½ to 72 for their required minimum distributions (RMDs). The Secure Act 2.0 further moves the age from 72 to 73 years for terminated employees who are still participants, as well those who are 5% owners. These changes are effective for distributions after Dec. 31, 2022 for individuals who turn 72 after that date.

IRA catch-up limit adjusted for inflation

For those who are 50 years or older by the end of 2022 and participate in an IRA plan, the Secure Act. 2.0 increases the limit by $1,000.

For those who attain ages 60-63 for tax years beginning after Dec. 31, 2024, the current catch-up limit increased to the greater of $10,000 ($5,000 for SIMPLE plans) or 50% more than the regular catch-up amount in 2024 (2025 for SIMPLE plans).

RMD penalty reduced

The previous law in place had a penalty of 50% for not taking an RMD. The Secure Act 2.0 decreases the penalty from 50% to 25%.

Roth catch-up contributions

Catch-up contributions under Sec. 401(k), Sec. 403(6), or Sec. 457(6) plans are subject to mandatory Roth tax treatment, except those made by participants whose wages for the previous calendar year do not exceed $145,000 as annually indexed for inflation. Contributions will be made on an after-tax basis and qualified distributions will generally be tax free.

Roth matching or nonelective contributions

Sec. 401(k), Sec. 403(6), or Sec. 457(6) plans can now allow a participant to select some or all matching employer contributions as a Roth contribution. The only stipulation is that this applies only to the extent that a participant is fully vested in those contributions.

Information Returns Intake System (IRIS)

In an attempt to encourage small businesses to report Form 1099, the IRS created the Information Returns Intake System (IRIS) to facilitate filing. IRIS accepts Form 1099 starting with the 2022 tax year and beyond. Filers can use IRIS to create, upload, edit, and view information and download completed copies of 1099-series forms for distribution and verification. Businesses can e-file small and large volumes of 1099-series forms by either keying in information or uploading a template provided by IRIS.

Auto depreciation

The IRS has increased depreciation limitations for passenger automobiles. Rev. Proc. 2023-14 increases Sec. 280f(a) to $20,200 for the first tax year for passenger automobiles acquired and placed in service during calendar year 2023, for which bonus depreciation deduction applies.

Eligible tax-free rollovers from 529 accounts to Roth IRAs

The Secure Act 2.0 allows beneficiaries of Sec. 529 college savings accounts to make direct trustee-to-trustee rollovers from a 529 account to a Roth IRA without tax or penalty. In order to qualify, the Sec. 529 account must have been in place for more than 15 years at the time of the rollover. Aggregate rollovers cannot surpass $35,000.

Starter 401(k) and 403(b) plans are introduced

A “Starter 401(k)” plan allows for employee contributions with a total annual deferral limit of $6,000 and catch-up limit of $1,000. Starter 401(k) plans automatically satisfy nondiscrimination and top-heavy testing requirements, and they will most likely be subject to simplified annual reporting requirements. Employers of any size can participate, provided that they do not offer any other retirement options. Starter 403(6) plans are for tax­exempt employers that do not already maintain a qualified plan.

Part-time worker 401(k) plans

Before the Secure Act 2.0 plan, 401(k) plans had to allow long-term part-time employees to make deferrals if the employee had worked at least 500 hours per year for at least three consecutive years, and had made the minimum age requirement of 21 by the end of that three-year period. The Act reduces the three-year requirement to two years for plan years after Dec. 31, 2024.

Penalty-free emergency withdrawals

The Act adds a new exception from the Sec. 72(t) 10% tax on early distributions from retirement accounts. The new exception allows certain distributions used for emergency expenses, which are used for meeting unforeseeable or immediate financial needs relating to necessary personal or family emergencies. One distribution is allowed per year of up to $1,000. Taxpayers have the option to repay the distribution within three years. No further emergency distributions are allowed during the three-year repayment period unless repayment has been made. The exception is available for distributions made after Dec. 31, 2023. For domestic abuse victims, the Act amends Sec. 72(t) to take distributions of up to $10,000 (adjusted for inflation after 2024) from a qualified retirement plan without being subject to the 10% additional tax penalty for early withdrawals. “Domestic abuse” includes physical, psychological, sexual, emotional, or economic abuse by a spouse or domestic partner. Employees or participants can self-certify that they qualify for the exception. The provision is effective for distributions made after Dec. 31, 2023.

For those individuals with terminal illnesses, the Act amends Sec. 72(t) to allow individuals with a terminal illness to distribute from a qualified retirement plan without being subject to the 10% additional tax for early withdrawals. Employees or participants will need a physician’s certification to qualify for the exception. A terminally ill person is defined as someone who has an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. The provision is effective for distributions made after Dec. 31, 2023. 

Conservation easements limitation for passthrough entities

The Act disallows a charitable donation deduction for qualified conservation easement contributions made by a partnership, S Corporation or passthrough entity if the amount of the contribution exceeds 2.5 times the sum of each partner or member’s relevant basis in the entity contributing the conservation easement.

Gift Card as de minimis financial incentives

Employers can provide de minimis financial incentives such as a cash payment or gift card that are not paid with plan assets in order to encourage employees to contribute to their plan. Prior law prohibited employers from requiring employees to contribute to a plan as a condition for receiving a payment, and the only benefit that could be related to an employee participation was a matching contribution made to the plan.

Editor’s note: Stay up to date with all-things tax law on the Intuit® Tax Pro Center.