Be Aware of This Tax Updates for 2023

New changes in tax regulations are now in effect, potentially increasing paychecks and lowering income tax for many Americans who are still reeling from sky-high prices as the new year begins.

It’s understandable why many people feel uncertain going into 2023 after a year marked by high inflation, volatile stock markets, and rising interest rates.

However, rising prices have prompted updates from the IRS, which have a significant impact on Americans’ finances overall, including taxes and retirement savings. Additionally, recent legislation might offer additional options for the coming year. 

Thirty-eight states saw significant tax changes go into effect on January 1, 2023. As states react to booming revenues, increased tax competition in an era of increased mobility, and the impact of high inflation on citizens, the majority of these changes represent net tax reductions, the outcome of an unprecedented wave of rate reductions and other tax cuts in the past two years.

1.Standard deductions

In comparison to 2022, everyone will receive a larger standard deduction in 2023. If your income doesn’t increase by at least 7% in 2023, you might pay less in taxes thanks to a higher standard deduction.

  • It rises from $12,950 to $13,850 for single people and married couples filing separate returns.
  • For household heads, it rises to $20,800 from $19,400.
  • When married couples file jointly, the threshold increases to $27,700 from $25,900.

Your additional standard deduction increases if you are 65 years of age or older from $1,400 to $1,500 if you are married and from $1,750 to $1,850 if you are single or the head of household.

2.Tax brackets 2023

To prevent “bracket creep,” which occurs when inflation forces taxpayers into a higher income tax bracket without an increase in real income, the IRS adjusts the tax brackets annually.

As you earn more money, the United States taxes it at a higher rate. These rates, which range from 10% to 37%, will remain unchanged in 2023. What changes is the amount of income taxed at each rate.

For example, in 2023, the top rate for an unmarried filer with a taxable income of $95,000 will be 22%, down from 24% in 2022. Assuming no income changes between the two years amounts to a $429 tax savings.

Assume you were a single filer in 2022 and earned $89,000, putting you near the top of the 22% federal tax bracket. That bracket will reach $95,375 in 2023. Unless you receive a raise of $6,376 (about 7.2 percent) or more, none of your income will fall into the next tax bracket in 2023. This simplified example assumes no investments or other sources of income.

3.Charitable Deductions 

One of the most significant changes for the 2023 tax season is the amount of charitable contributions that can be deducted. Unfortunately, the changes eliminated the majority of the additional benefits provided in 2021 due to the pandemic. For example, the $600 charitable deduction for non-itemizers is no longer available.

However, if you itemize your deductions, you can still deduct qualified charitable contributions made in 2022. The maximum is 60% of your adjusted gross income (AGI), which is your total income less any other deductions you’ve already taken.

4. IRA contribution limits

For this year, the maximum amount you can contribute to a Roth or traditional IRA (or a combination of the two) is 100% of your taxable income or $6,500, whichever is less. This represents a $500 increase from 2022.

To save as much as possible for your future, consider setting up automatic contributions from your checking account to your IRA. If you are paid every two weeks, you should transfer $250 per pay period to contribute $6,500 by the end of the year.

You can save even more if you’re 50 or older by making an annual catchup contribution of up to $1,000.

5.Higher 104(k) Contribution 

Contributions to 401(k) plans will be limited to $20,500 for workers under 50 and $27,000 for those 50 and older in 2022. Contribution limits for 401(k) plans will increase to $22,500 for workers under 50 and $30,000 for those 50 and older in 2023. You should also be aware that if your employer provides a 401(k) match, the money put into your account by your employer will not count toward these limits.

6.Retirement Limit 

Americans can contribute up to $22,500 to 401(k), 403(b), and most 457 plans in 2022, which is $2,000 more than the previous year’s contribution limit of $20,500.

Meanwhile, the annual contribution limit to an IRA has been raised to $6,500, up from $6,000.

According to the IRS, the IRA catch-up contribution limit for individuals aged 50 and up remains $1,000 and is not subject to an annual cost-of-living adjustment.

The income ranges for making deductible contributions to traditional IRAs, Roth IRAs, and claiming the Saver’s Credit have all been raised for 2023, according to the IRS.

7. Child Tax Credit 

The Child Tax Credit was reduced to $2,000 per qualifying child, and the $300 advance monthly payments were discontinued. As of the writing of this article, the Child Tax Credit is set to remain at $2,000 per qualifying child for the tax year 2023, with no advance monthly payments.

8. Long-term capital gains taxes

For 2023, long-term capital gains will be taxed at 15% once your income reaches $44,625 if you’re single, $59,750 if you’re head of household, and $89,250 if you’re married and file jointly. In 2022, the respective income thresholds were $41,675, $55,800, and $83,350.

If your income falls below those thresholds, you are exempt from paying long-term capital gains tax. When your income reaches the mid-six figures, the tax rate rises to 20%.

9. Reporting rules changed for Form 1099-K.

Americans can contribute up to $22,500 to 401(k), 403(b), and most 457 plans in 2022, which is $2,000 more than the previous year’s contribution limit of $20,500.

If they received third-party payments for goods and services worth more than $600 in the tax year 2022, taxpayers should receive by January 31, Payment Card Form 1099-K, , and Third Party Network Transactions.

The taxability of income remains unchanged. All income, including that earned from side jobs, part-time work, or the sale of goods, is taxable. Whether they receive a Form 1099-K, a Form 1099-NEC, Nonemployee Compensation, or any other information return, taxpayers should report all income on their tax return unless it is legally exempt.

Knowing about tax changes like these can help you plan for your IRS bill and save more money. Keep these figures in mind if you want to increase your retirement savings, cover healthcare costs, or keep your taxes as low as possible

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