- April 28, 2023
- Posted by: Advince
- Categories: Blogs, USA Taxation
By knowing the tax changes for the 2023 tax year, you can plan better and make more money.
Income Tax Brackets 2023
Tax rates did not change in 2023, but the income tax brackets were much wider than in 2022, due to rising inflation during the 12-month period between September 2021 and August 2022.
|Tax Rate||Taxable Income (Single)||Taxable Income (Married Filing Jointly)||Taxable Income (Head of Household)|
|10%||Up to $11,000||Up to $22,000||Up to $15,700|
|12%||$11,001 to $44,725||$22,001 to $89,450||$15,701 to $59,850|
|22%||$44,726 to $95,375||$89,451 to $190,750||$59,851 to $95,350|
|24%||$95,376 to $182,100||$190,751 to $364,200||$95,351 to $182,100|
|32%||$182,101 to $231,250||$364,201 to $462,500||$182,101 to $231,250|
|35%||$231,251 to $578,125||$462,501 to $693,750||$231,251 to $578,100|
|37%||Over $578,125||Over $693,750||Over $5|
Long-Term Capital Gains Tax Rates
In 2023, the tax rates on long-term capital gains and qualified dividends remain unchanged; however, inflation has adjusted the income thresholds used to qualify for each rate. On single returns, the 0% rate applies for taxpayers with taxable income up to $44,625 ($41,675 in 2022), $59,750 for head-of-household filers ($55,800 from 2022), and $89,250 for joint returns ($83,350 in 2022). The 20% rate commences at $492,301 for singles ($459,751 in 2022), $523,051 for heads of household ($488,501 in 2022), and $553,851 for couples filing jointly ($517,201 in 2022). The 15% rate applies between these 0% and 20% breakpoints. Additionally, the 3.8% surtax on net investment income remains unchanged; it begins at modified AGI over $200K (singles) or over $250K (joint filers).
For those filing joint returns, the standard deduction is set at $27,700 for 2023, up from $25,900 in 2022. For single taxpayers and head-of-household filers, the amount is $13,850 and $20,800 respectively this year – both higher than the respective amounts of $12,950 and $19,400 in 2022. Blind persons and those aged 65 or above enjoy additional deductions of up to $1,500 ($1,450 and $1,750 respectively for 2022), while unmarried blind citizens not classified as surviving spouses can receive an extra allowance of up to $1,850 ($1,750 for 2022).
Residential Clean Energy Credit
If you are looking to install a renewable energy system in your home such as solar panels, solar electric equipment, solar-powered water heaters, or wind turbines, this credit is for you. This credit is worth 30% of the cost of the equipment and installation. Beginning in 2023, battery storage technology with at least three kilowatt hours of capacity will also be eligible for the credit. The full 30% credit is available through 2032 and then drops down to 26% in 2033 and 22% in 2034 before expiring in 2035.
Energy-Efficient Home Improvement Credit
This year marks the revamping of the tax credit for installing energy-efficient items in your home. Now through 2032, you can receive up to 30% back on certain types of insulation, boilers, air-conditioning systems, windows, doors, and more. Plus, there’s an annual limit of $1,200; external doors are capped at $500 aggregate and windows/skylights at $600 for other items. Moreover, a hot water boiler or heat pump earns a credit up to $2,000 and you can get up to $150 back for a home energy audit.
Clean Vehicle Credit
The Inflation Reduction Act has totally changed the electric vehicle tax credit, with a new name – the Clean Vehicle Credit. From 2023-2032, up to $7,500 is still available for brand new EVs that meet specified criteria, such as a battery capacity and critical minerals requirement. Other requisites include assembling in North America and MSRP not exceeding $55K/$80K (sedan/van, SUV or pickup). Single-filer income eligibility tops out at $150K and joint-filers at $300K. A lower credit is accessible for used EVs bought from dealers – up to 30% of sale price or $4k max – with a single-filer income cap at $75K.
In 2021, Congress passed a law that lowered the reporting threshold for third-party settlement networks like PayPal, Venmo and Square StubHub. This decision drew criticism from many sides, so the IRS have temporarily delayed it – now 1099-K forms sent out in 2024 will follow the new rules when used to fill out 2023 Form 1040s. This affects sellers of items like concert tickets or valuable toys on eBay who are paid more than $600 a year for their goods and services. However, transfers to family and friends via Zelle or Venmo are not covered by this requirement.
Good news for retirees: the age at which required minimum distributions (RMDs) must be taken has increased to 73 from 72, and this applies to owners of traditional IRAs, 401(k)s and other workplace retirement plans who turn 73 after 2022. The penalty for failing to take RMDs has also dropped; in 2023 it is 25% of the amount that was supposed to have been taken (down from 50%). In addition, those still putting money away for retirement have higher contribution limits and income ceilings for the various plan types for 2023. For example, the maximum contributions for a 401(k), 403(b), or 457 plan have jump up to $22,500 plus an extra $7,500 as a “catch-up” contribution for people age 50 or older. Meanwhile, tax incentives such as the saver’s credit are now more accessible to those with lower incomes.
Adoption of a Child
In 2023, you can claim a credit for up to $15,950 in qualified expenses ($14,890 in 2022). Special-needs adoptions get the full credit, regardless of cost. Filers with modified AGIs over $239,230 begin phasing out the credit, and it disappears at $279,230 ($223,410 and $263,410, respectively, for 2022). In 2023, the company-paid adoption aid exclusion was also increased from $14,890 to $15,950.
If a child is 18 years old or younger, or a full-time student under 24 years old, the first $1,250 of their unearned income will be tax-free in 2023. The next $1,250 will be taxed at the child’s rate. Excess over $2,500 will be taxed at the parent’s rate. For 2022, only the first $1,150 was exempt, and the next $1,150 was taxed at the child’s rate.)
Parking and Transportation Benefits
Parking and transportation-related fringe benefits can be provided by employers to their employees in 2023 to a greater extent. The cap for employer-provided tax-free parking in 2023 increases from $280 to $300 per month. In 2023, mass transit passes and commuter vans will also be excluded for $300 ($280).
Student Loan Interest Deduction
If you have college debt, you may be able to claim up to $2,500 of student loan interest paid on your annual return. You don’t need to itemize Schedule A either – just report it on Schedule 1 of Form 1040. However, the credit amount will likely be reduced to zero if your Modified Adjusted Gross Income (MAGI) goes above certain thresholds each year. For joint filers in 2023, this means between $155,000 and $185,000. Other filers must stay under $75,000 and $90,000 respectively for the same period. These limits are slightly lower for 2022 tax returns.
Bonds Used for Education
This year, cashing in savings bonds to help pay for college could free you from the federal income tax imposed on the accrued interest. However, there are various rules that apply to this exclusion. The modified Adjusted Gross Income thresholds for 2023 are $137,800 for joint filers and $91,850 for others ($128,650 and $85,800 respectively in 2022). This elimination phase continues until modified AGI reaches $167,800 and $106,850 (respectively, $158,650 and $100,800 in 2022). These limits adjust annually to keep up with inflation. Remember though: the exclusion applies only if the proceeds are used to finance tuition or related expenses for yourself, your spouse or a dependent.
Alternative Minimum Tax (AMT)
Good news for taxpayers concerned about AMT liability: the exemptions for the 2023 tax year have grown, to $126,500 for those filling out joint returns and up to $81,300 for single filers or households. Moreover, the thresholds where these exemptions begin to phase out are also higher than in 2022 — $1,156,300 for couples and $578,150 respectively. Furthermore, in 2023 the 28% rate of taxation applies to Alternative Minimum Taxable Income above $220,700— a greater figure than that which applied in 2022 ($206,100).
Americans Working Abroad
The foreign earned income exclusion for U.S. taxpayers working abroad is higher in 2023. It jumped from $112,000 in 2022 to $120,000 in 2023. For 2023, the standard foreign housing exclusion ceiling will also be increased from $15,680 to $16,800 (although overseas workers may qualify for significantly higher exclusions in many high-cost locations around the world).
Standard Mileage Rates
In 2023, the standard mileage rate for business driving jumped to 65.5 a mile. Medical travel and military moves also increased to 22 a mile. However, charity driving was fixed at 14 a mile.
Long-Term Care Insurance Premiums
For those in 2023, those older than 71 can deduct up to $5,960, 61-70 year olds going up to $4,770, 51-60 up to $1,790 and 41-50 as much as $890; lastly for those 40 or younger the maximum deduction is capped at $480. Those not itemizing their tax return on Schedule A can take advantage of deductions for self-employed people reported on Form 1040.
Health Savings Accounts (HSAs)
The allowable limit on deductible contributions to Health Savings Accounts (HSAs) has been raised in 2023. For self-only coverage, the cap is $3,850, a rise from the figure of $3,650 seen in 2022. Similarly, family coverage went up from $7,300 in 2022 to $7,750 in the current year. Meanwhile, those born prior to 1969 are entitled to an additional contribution of $1,000 for both years. In addition to this, for 2023 the minimum deductibles for family health plans have been set at $3,000 and individual policies require a deductible of no less than $1,500. Last year these figures stood at $2,800 and $1,400 respectively as well as respective out-of-pocket limits of $14,100 and $7,050 for families and individuals respectively.
Flexible Spending Accounts (FSAs)
In 2023, the employee contribution limit to a healthcare flexible spending account (FSA) will be $3,050, which is $200 more than the limit for 2022. If the employer’s plan allows carryovers, the maximum carryover amount will be $610 ($570 for 2022).
Those who are self-employed should be aware of relevant tax changes for 2023 that might affect their bottom line. The dollar threshold for the 20% deduction for pass-through income has been increased, and the standard mileage rate for business driving is now 65.5¢ per mile. Furthermore, the first-year bonus depreciation is lower than in 2022, allowing businesses to deduct 80% of the cost of new and used qualifying business assets with lives of under 20 years. There is also higher expensing of business assets this year; up to $ 1,160,000 can be expensed, although this limit phases out once more than $2,890,000 has been put in use. Finally, while there was a temporary 100% write-off for business meals in 2021 and 2022, those rules have now reverted back to 50%.
For 2023, the Social Security annual wage base increases to $160,200 — a $13,200 jump from 2022. Employers and employees are still subject to a 6.2% Social Security tax on all wages and no ceiling exists for the 1.45% Medicare levy that applies to both parties. Singles raking in more than $200,000 and married couples with incomes over $250,000 must pay an additional 0.9% Medicare surcharge on their salaries or self-employment income; employers do not confront this extra duty. Additionally, the nanny tax threshold has been lifted to $2,600 for 2023 — an increase of $200 from the prior year.
Estate and Gift Taxes
For decedents dying in 2023, the lifetime estate and gift tax exemption has increased to $12,920,000 million. Real estate that qualifies for a discounted valuation is now up to $1,310,000 million (in comparison with $1,230,000 in 2022). Those liable for more than 35% of the 2023 estate tax can opt to pay the debt in installments instead of at once and benefit from an interest rate of 2%, which goes up to a maximum of $700,000 (previously it was $656,000). Additionally, individuals are allowed to give up to $17,000 per recipient as a gift annually in 2023 (with no filing of gift tax returns or drawing on the lifetime estate and gift tax exemption) – double that figure if you have a spouse who agrees.