Tax Changes for the 2023 Tax Year

For most individuals, the deadline to file a personal tax return for the tax year 2023 is April 15, 2024. There are a few tax modifications, including inflation adjustments, to be aware of, just like in prior years. Here’s a summary of things to consider while you are ready to file your 2023 tax return.

It’s never too early to start organizing and planning for the approaching tax season. Before filing, it is crucial to be aware of 2023 changes that may impact your tax liability. These are some essential adjustments to be aware of when you start the process for the next season.

1. Tax brackets got wider

Experts state that there was a significant change to the federal income tax brackets between tax years 2022 and 2023. The amount of taxable income allowed in each tier was increased by almost 7% in the brackets despite the rates being the same. Deducting the higher standard or itemized deductions from your adjusted gross income yields taxable income.

2. The standard deduction increased slightly

After accounting for inflation, the 2023 standard deduction will rise to $13,850 for single individuals and married couples filing separately and $20,800 for single heads of household—unmarried individuals with one or more dependents. Married couples filing jointly can deduct an additional $27,700 from their standard deduction.

3. Long-term capital gains tax rates

For 2023, there was no change in the tax rates on eligible dividends and long-term capital gains, which are gains from the sale of capital assets held for more than a year. However, the income requirements to be eligible for each rate were updated to account for inflation.

In 2023, the 0% rate will be applied for individual taxpayers with taxable income up to $44,625 on single returns, $59,750 for head-of-household filers, and $89,250 for joint returns.

4. Itemized deductions remain mostly the same

Most filers find that opting for the greater standard deduction is more sensible as it eliminates the burden of maintaining receipts. However, itemizing may be advantageous if your tax-deductible expenses exceed a certain amount.

The following itemized deduction guidelines have remained the same for 2023 but are still essential to remember.

  • State and local taxes: There is a $10,000 cap on the deduction for real estate, property, and state and local income taxes.
  • Mortgage interest deduction: The amount of debt that can be written off in full is $750,000. However, the interest on a $1,000,000 home mortgage held before December 16, 2017, will still be deductible.
  • Medical costs: In 2023, a deduction will only be available for medical costs that surpass 7.5% of one’s adjusted gross income (AGI).
  • Gifts to public charities are eligible for an annual income tax deduction in 2023. The limits are 30% of AGI for non-monetary assets (if held for more than a year) and 60% of AGI for cash contributions. Cash and non-monetary assets typically have an aggregate cap of 50% of AGI.

5. Residential clean energy credit

This credit is yours if you install an alternative energy system in your house that uses suistainable energy sources,like fuel cells, geothermal, solar, or wind power. The credit is available for solar-powered wind turbines, water heaters, solar electric equipment, and solar panels.

Additionally, starting in 2023, battery storage technologies with a minimum three-kilowatt-hour capacity are eligible for the credit. Thirty percent of renewable energy system equipment and installation costs make up the credit amount.

6. Form 1099-K reporting changes are delayed

The IRS postponed a 2023 reporting change for company payments received through apps like Venmo or PayPal in November. Form 1099-K, which reports business payments to the IRS, would have been triggered by a single payment of $600 even before the change. The IRS described 2023 as a “transition year,” stating that the previous cap of more than 200 transactions with a combined value of more than $20,000 would apply.
But business income is still subject to taxes.

7. Retirement Savings

Owners of traditional IRAs, 401(k)s, and other employer retirement plans now have to start drawing required minimum distributions (RMDs) at age 73 instead of 72. Account holders who turn 72 after 2022 are covered by this. You have until April 1, 2024, to take your first RMD if you turn 73 this year. RMDs from a current employer’s 401(k) are often postponed until retirement for individuals who work past the age of 73.

People who forget to take their RMD are subject to a fine, albeit it is less than in previous years. The excise duty for such failures will drop from 50% to 25% of the missing RMD amount as of 2023. Additionally, promptly addressed failures result in a 10% reduction in penalty.

8. IRA and 401(k) limits are slightly higher

The 2023 Roth and traditional IRA contribution caps were higher than the 2022 levels. Contributions to an IRA are limited to $6,500 with an additional $1,000 catch-up contribution per person available to people 50 years of age and above. Furthermore, the tax-deferred and Roth 401(k) contribution caps for 2023 have been raised to $22,500. You are also eligible to make an additional $7,500 catch-up contribution for this tax year if you are 50 or older.

Consider contributing the maximum amount possible to these accounts. Doing this will significantly increase your retirement savings and receive a tax deduction.

9.  The alternative minimum tax (AMT) exemption is higher

The Tax Cuts and Jobs Act’s AMT exemption will remain in effect until 2025, mostly affecting people with incomes exceeding $500,000. The AMT exemption amounts for single taxpayers in 2023 are $81,300, and for married taxpayers filing jointly, they are $126,500. The phaseout criteria are $578,150 for all other taxpayers and $1,156,300 for married taxpayers filing a joint return.

10. The estate tax exemption is even higher

In 2023, the inflation-indexed exemption from estate and gift taxes increased to $12,920,000. However, if Congress does nothing, the now-higher exemption could effectively be halved when it expires at the end of 2025.

The yearly gift exclusion, which raises to $17,000 per recipient (up $1,000 from 2022) allows you to send money to your loved ones annually without paying taxes or depleting any of your lifetime estate and gift tax exemption.

11.  Alternative Minimum Tax (AMT)

There is good news for those concerned about being subject to the alternative minimum tax: exclusions from the AMT have increased for 2023. For couples filing jointly, the increases were from $118,100 to $126,500, while for single filers and heads of household were from $75,900 to $81,300. For the 2023 tax year, the phaseout zones for the exemptions also begin at higher income levels.

You can use this information to make plans for the tax year 2023 and beyond. Just be careful to monitor the 2024 modifications moving forward so you can prepare for the 2025 tax return deadline. Please don’t hesitate to contact us if you need help with your tax planning strategy for this year.

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