2023 tax season is in full swing and it’s a time of the year that brings to mind one of our favorite “paying your taxes” anecdotes:
One year, Albert Einstein’s tax preparer, Leo Mattersdorf, was at the professor’s Princeton home helping prepare the return of Einstein and his wife when the eccentric genius said, “The hardest thing in the world to understand is income taxes.”
Mattersdorf replied: “There is one thing more difficult, and that is your theory of relativity.”
“Oh, no,” replied Einstein. “That is easy.”
Einstein’s wife then quipped: “Yes, for you.”
E = mc2 might seem as arcane to many of us as understanding the IRS confounding tax code which is why relying on professional tax advice is always a good move.
Here’s what tax pros say we should look for during the 2023 tax season, and some things to keep in mind looking a full year ahead to 2024.
2022 Tax Year Highlights: Standard Deduction, Tax Bracket Increases
The first thing to know for 2023 is when your federal taxes are due: the regular tax deadline is April 18, 2023.
The normal tax day of April 15 falls on a Saturday in 2023 so normally the tax deadline is pushed to the next business day but Monday, April 17 is a holiday in some locations (Emancipation Day in Washington, D.C.; Patriot’s Day in Main and Massachusetts) so the IRS has scheduled Tuesday, April 18 as “tax day.”
The extension deadline is Oct. 16, 2023, for those that file for an extension. This is one day beyond the normal date of Oct. 15 because that day falls on a Sunday in 2023.
Of course, you can file your taxes once you have all your forms gathered with those expecting refunds wanting to file as early as possible, and those that owe, waiting until the deadline.
The folks at Ramsey Solutions say the two biggest 2023 Tax Season highlights to consider are increases to the standard deduction and to the tax brackets:
o $12,950 for single filers and married individuals filing separately, an increase of $400.
o $25,900 for married couples filing jointly, an increase of $800.
o $19,400 for heads of households, an increase of $600.
- 2022 Tax Bracket Increases: For the tax year 2022, the top rate remains at 37 percent for individual single taxpayers with incomes greater than $539,900 ($647,850 for married couples filing jointly). What changed is the income thresholds for all tax brackets to reflect the rise in inflation:
o Lowest rate is 10 percent for incomes of single individuals with income of $10,275 or less ($20,550 for married couples filing jointly; $14,650 for head of households).
o 12 percent for incomes over $10,275 ($20,550 for married couples filing jointly; $14,650 for head of household).
o 22 percent for incomes over $41,775 ($83,550 for married couples filing jointly; $55,900 for head of household).
o 24 percent for incomes over $89,075 ($178,150 for married couples filing jointly; $89,050 for head of household).
o 32 percent for incomes over $170,050 ($340,100 for married couples filing jointly; $170,050).
o 35 percent for incomes over $215,950 ($431,900 for married couples filing jointly; $215,950 for head of household).
o 37 percent for incomes over $539,900 ($647,850 for married couples filing jointly; $539,900 for head of household).
“Your tax rate (the percentage of your income you pay in taxes) is based on what tax bracket (income range) you’re in,” explains Ramsey Solutions. “For example, if you’re single and your income is $75,000, then you’re in the 22 percent tax bracket. But that doesn’t mean your tax rate is a flat 22 percent. Instead, part of your income is taxed at 10 percent, another part at 12 percent, and the last part at 22 percent.”
2023 Tax Year Highlights: Standard Deduction, Tax Bracket Increases
Since we are always looking back at the previous tax year during tax season (calculating our 2022 taxes, for example, in the first months of 2023), then we have to be aware of new changes already in place for the current tax year of 2023.
Once again, the IRS is raising standard deductions and the income thresholds to keep up with inflation. So, for the 2024 tax season in 12 months, you will need to know that:
o $13,850 for single filers and married individuals filing separately, an increase of $900.
o $27,700 for married couples filing jointly, an increase of $1800.
o $20,800 for head of households, an increase of $1400.
Remember that tax professionals can help you decide if taking the standard deduction each tax season is the right financial move for you versus itemizing your deductions.
- 2023 Tax Bracket Increases: For the tax year 2023, the marginal rates remain the same again: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. What changes is the income thresholds for all tax brackets to reflect the rise in inflation:
o Lowest rate 10 percent for incomes of single individuals with income of $11,000 or less ($22,000 for married couples filing jointly; $15,700 for head of households).
o 12 percent for incomes over $11,000 ($22,000 for married couples filing jointly; $15,700 for head of household).
o 22 percent for incomes over $44,725 ($89,450 for married couples filing jointly; $59,850 for head of household).
o 24 percent for incomes over $95,375 ($190,750 for married couples filing jointly; $95,350 for head of household).
o 32 percent for incomes over $182,100 ($364,200 for married couples filing jointly; $182,100).
o 35 percent for incomes over $231,250 ($462,500 for married couples filing jointly; $231,250 for head of household).
o 37 percent for incomes over $578,125 ($693,750 for married couples filing jointly; $578,100 for head of household).
Other Tax Year 2022 Changes to Consider When Filing in 2023
The IRS, in its highlights of changes for the 2022 tax year, points out the following:
- The personal exemption for the tax year 2022 remains at 0, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- For 2022, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
- The Alternative Minimum Tax exemption amount for the tax year 2022 is $75,900 and begins to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption begins to phase out at $1,079,800).
- The tax year 2022 maximum Earned Income Tax Credit amount is $6,935 for qualifying taxpayers who have three or more qualifying children, up from $6,728 for the tax year 2021. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
- For the tax year 2022, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $280.
- For the taxable years beginning in 2022, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $2,850. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $570, an increase of $20 from taxable years beginning in 2021.
- For the tax year 2022, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,450, up $50 from the tax year 2021; but not more than $3,700, an increase of $100 from the tax year 2021. For self-only coverage, the maximum out-of-pocket expense amount is $4,950, up $150 from 2021. For the tax year 2022, for family coverage, the annual deductible is not less than $4,950, up from $4,800 in 2021; however, the deductible cannot be more than $7,400, up $250 from the limit for the tax year 2021. For family coverage, the out-of-pocket expense limit is $9,050 for the tax year 2022, an increase of $300 from the tax year 2021.
- The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income of more than $80,000 ($160,000 for joint returns).
- For the tax year 2022, the foreign earned income exclusion is $112,000 up from $108,700 for the tax year 2021.
- Estates of decedents who die during 2022 have a basic exclusion amount of $12,060,000, up from a total of $11,700,000 for estates of decedents who died in 2021.
- The annual exclusion for gifts increases to $16,000 for the calendar year 2022, up from $15,000 for the calendar year 2021.
- The maximum credit allowed for adoptions for the tax year 2022 is the number of qualified adoption expenses up to $14,890, up from $14,440 for 2021.
Tax Year 2023 Changes to Consider When Filing in 2024
It is not too early to look ahead to these tax year 2023 changes that you need to be aware of when you file your taxes in 2024:
- The personal exemption for the tax year 2023 remains at 0, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- For 2023, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
- The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with a modified adjusted gross income of more than $80,000 ($160,000 for joint returns).
- The Alternative Minimum Tax exemption amount for the tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300).
- The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for the tax year 2022. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
- For the tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.
- For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
- For the tax year 2023, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from the tax year 2022; but not more than $3,950, an increase of $250 from the tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For the tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for the tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for the tax year 2023, an increase of $600 from the tax year 2022.
- For the tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for the tax year 2022.
- Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
- The annual exclusion for gifts increases to $17,000 for the calendar year 2023, up from $16,000 for the calendar year 2022.
- The maximum credit allowed for adoptions for the tax year 2023 is the number of qualified adoption expenses up to $15,950, up from $14,890 for 2022.