Amid Soaring Inflation, IRS Releases Higher Tax Brackets and Standard Deductions for 2023

Amid Soaring Inflation, IRS Releases Higher Tax Brackets and Standard Deductions for 2023

In response to soaring inflation, the IRS has released higher tax brackets and standard deductions for tax year 2023 and subsequent returns filed in 2024. This means that more taxpayers’ earnings will remain in lower tax brackets, which should reduce their income taxes.

Higher Tax Brackets for 2023

Tax brackets are the income ranges used to determine how much American’s owe in federal income tax. The IRS adjusts these brackets to reflect the impact of inflation on workers’ earnings with the aim of preventing inflation from pushing individuals into a higher tax bracket and potentially subjecting them to higher tax rates. The IRS is essentially trying to alleviate some of the financial strain caused by inflation.

Here Are the Newly Released Tax Brackets for Year 2023

The change in tax brackets means more taxpayers’ earnings will stay in lower tax brackets next year, which should reduce their income taxes.

Married filing jointly:

10% – $0 to $22,000

12% – $22,001 to $89,450

22% – $89,451 to $190,750

24% – $190,751 to $364,200

32% – $364,201 to $462,500

35% – $462,501 to $693,750

37% – Over $693,750

Single filers:

10% – $0 to $11,000

12% – $11,001 to $44,725

22% – $44,726 to $95,375

24% – $95,376 to $182,100

32% – $182,101 to $231,250

35% – $231,251 to 578,125

37% – Over $578,125

Standard Deductions

In an effort to acknowledge the recent rise of living costs and provide taxpayers with a bit of financial relief, the IRS has also increased the standard deductions for 2023. The standard deduction is a fixed amount that taxpayers can subtract from their taxable income tax.

The standard deduction is increasing for tax year 2023 to $27,700 for married couples filing jointly (up from $25,900 in 2022). Single filers can claim $13,850 (up from $12,950 in 2022).

Additional Deductions

Among the other deductions that will increase in 2024 are the foreign earned income exclusion, which rises from $120,000 to $126,500. This is a tax benefit that allows eligible U.S. citizens working abroad to exclude a certain amount of their foreign earned income from their U.S. federal income tax in order to prevent double taxation. Additionally, the annual exclusion for gifts will increase from $17,000 to $18,000.

Benefits to Taxpayers

These adjustments help to ensure that workers’ wages, which may have risen to keep up with inflation, are not eroded by higher tax rates. This means that individuals will not be penalized for earning more money to combat rising living costs. In fact, the changes can help stimulate the economy by putting more money in the hands of consumers.

Furthermore, the increased standard deductions provide financial relief by lowering the overall tax burden on taxpayers. This extra money can be used to offset the rising costs of everyday expenses, such as housing, transportation, and groceries.

 

 

How the IRS’s $80 Billion Funding Plan Will Affect Taxpayers

How the IRS’s $80 Billion Funding Plan Will Affect Taxpayers

The IRS has released a plan for the nearly $80 billion in funding enacted through the Inflation Reduction Act. The plan includes improvements to customer service, technology, and enforcement. In this article we will explore how the funding plan will affect taxpayers.

Boost Technology

The plan aims to help the IRS develop new technologies to make the tax filing process easier for taxpayers, such as tools to help identify errors before filing returns. These improvements could make it easier for taxpayers to comply with tax laws and reduce the likelihood of mistakes in filing their returns. Additionally, the IRS seeks to phase out its paper backlog within five years by moving to a fully digital correspondence process.

Focus on Customer Service

The IRS intends to hire more than 7,000 service representatives and 1,500 auditors with the aim of reducing wait times and being more accessible to taxpayers, leading to a more efficient and responsive system. Within the next five years, taxpayers should be able to file documents and respond to notices online as well as download their account information.

Lean In to Enforcement Efforts

The agency wants to crack down on tax evasion, and plans to utilize a portion of the funding to do so. This could mean an increase in audits. Taxpayers who may have cut corners in the past could face stricter penalties for non-compliance. However, increased enforcement could also lead to more compliance with tax laws, if there is a clearer standard of behavior and more deterrents for those who attempt to cheat the system.

Close the Tax Gap

The IRS plans to reduce the budget deficit by closing the tax gap, initially focusing on tax returns for large corporations, complex partnerships, and wealthy families. The boost in staffing will help to address these more complicated audits. The agency has been quick to point out that households making less than $400,000 will not be affected by an increase in audit rates.

Inflation Catches Up with Taxes: Here are the Tax Adjustments Released by the IRS for 2023

Inflation Catches Up with Taxes: Here are the Tax Adjustments Released by the IRS for 2023

The IRS makes tax adjustments every year but because of high inflation, the adjustments for the 2023 tax year are more significant, including changes to standard deduction amounts and tax brackets. Read on for an understanding of the most significant changes in order to plan your finances through 2023.

Standard Deduction

The standard tax deduction, which is based on filing status, is a fixed amount that the IRS allows taxpayers to deduct from their taxable income, thus reducing their tax liability. It is adjusted each year for inflation. Most taxpayers already take the standard deduction rather than itemizing their deductions, and with the inflation adjustments for 2023, even more taxpayers may move into claiming the standard deduction.

For single taxpayers and married couples filing separately, the standard deduction increased from $12,950 in 2022 to $13,850 in 2023. For married taxpayers filing jointly, the standard deduction increased from $25,900 in 2022 to $27,700 in 2023. For those filing head of household, the standard deduction increased from $19,400 in 2022 to $20,800 in 2023.

Additionally, taxpayers who are blind or at least age 65 can claim a further standard deduction of $1,500 per person (an increase of $1,400 from tax year 2022) or $1,850 if they are unmarried and not a surviving spouse.

Tax Bracket Thresholds

Because of inflation, the federal income tax brackets for both ordinary income and capital gains increased by roughly 7% for tax year 2023. For example, the top tax rate of 37% applies to individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly, which is up from $647,850 in 2022), and the lowest tax rate of 10% applies to individual single payers with incomes of $11,000 or less ($22,000 for married couples filing jointly, which is up from 20,550 in 2022).

Retirement Plan Contribution Limits

The IRS has also increased contribution limits for several retirement plans in 2023. For 401(k), 403(b), and most 457 plans, the contribution limit will increase to $20,500 in 2023 (up from $19,500 in 2022). For catch-up contributions for taxpayers age 50 and older, the limit will increase from $6,500 in 2022 to $7,500 in 2023. Traditional and Roth IRA accounts will also see an increase in contribution limits from $6,000 in 2022 to $7,000 in 2023 (the catch-up contribution limits for taxpayers age 50 and older will not change).

Gift Tax Exclusion

In 2023, the annual exclusion for gifts increases by $1,000, from $16,000 in 2022 to $17,000 in 2023. This means that taxpayers can now give up to $17,000 to each recipient without having to pay gift tax.

Earned Income Tax Credit

The maximum EITC amount for qualifying taxpayers who have three or more qualifying children was $6,935 for tax year 2022. In 2023, this amount increases to $7,430 for qualifying taxpayers.

Alternative Minimum Tax

This tax for high-income earners is imposed on taxpayers who make a certain income. In addition to their income tax, the AMT ensures that they pay their fair share in taxes even when taking many deductions. The AMT exemption amount increases from $75,900 for tax year 2022 to $81,300 for tax year 2023. The AMT for joint filers is $126,500.

Health Flexible Savings Account

For tax year 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that approve of the carryover of unused amounts, the maximum carryover amount will be $610.

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Small Businesses Can Dodge the Attention of the IRS by Avoiding These Tax Mistakes

Filing taxes puts stress on small business owners, because most know that mistakes on business tax returns can affect your business’s success. Here are some common tax mistakes to avoid.

Mixing Business and Personal Expenses

Be sure not to report personal expenses on your small business’s tax return. It’s always a good idea to have separate credit cards, bank accounts, and filing folders for each. Sometimes an expense isn’t as cut-and-dry and you may have difficulty determining if it is indeed business or personal. In this case, turn to the IRS’s Publication 535 at www.irs.gov, which provides an overview of expenses that are and are not deductible.

Being Disorganized with Recordkeeping

This may seem like second nature to some business owners, but staying on top of tax documents, receipts, and copies of bank and credit card statements will go a long way toward avoiding overwhelm at tax time. While you don’t need to submit receipts or other proof of tax deductions to the IRS, you will need them on hand if the IRS decides to probe into your taxes further. If you get audited and you don’t have required documentation on hand to prove any claimed deductions, your tax bill could increase significantly.

Filing the Wrong Tax Forms

There are different types of tax forms required for different types of businesses (C corporations, S corporations, etc.), and if you have employees, you’ll need to fill out additional forms that document their payment through the year. Simply put, it can be a lot to track. A tax advisor can help you determine which forms you should be filling out.

Taking Too Many Deductions

Simply stated, taking deductions means that you get money back for certain purchases that assisted your business. Just keep in mind that too many deductions could raise a red flag for the IRS. If you’re unsure, a tax advisor can ensure that you’re adhering to deduction limitations and only claiming expenses that qualify.

Forgetting or Underestimating Your Tax Payments

Many small business owners are required to make quarterly estimated tax payments. Typically, the deadlines for these payments are the 15h of April, June, September, and January of the following year. How much you owe is based on your income. If you miss a payment, or if your payment falls short of your actual tax liability for the year, the government could saddle you with penalties, thereby increasing your tax liability. Furthermore, if the IRS suspects an intention to defraud it, the fine can be as high as 75%, and you could face criminal tax fraud charges.

Why the IRS is Warning of the Possibility of a Smaller Tax Refund in 2023

Why the IRS is Warning of the Possibility of a Smaller Tax Refund in 2023

The IRS wants American taxpayers to be prepared for a potentially smaller tax refund in 2023. There are a few contributing factors that prompted the warning from the IRS in a recent statement, and we go over those below.

Economic Impact Payments

In a recent statement, the IRS cited the lack of Economic Impact Payments in 2022 as the main factor in lower tax refunds for next year. In 2020 and 2021, many taxpayers received additional refunds due to Economic Impact Payments (also known as stimulus payments), which were issued in response the financial impact Americans experienced during the COVID-19 pandemic. The final stimulus payment was distributed in March 2021. With no stimulus payment issued in 2022, taxpayers won’t see the additional money in their refunds.

Charitable Contribution Deductions

Additionally, in 2020 and 2021, taxpayers who take the standard deduction could claim a tax deduction of up to $300 for cash donations to charity. This pandemic-era exception hasn’t been extended for 2022. In order to write off gifts to charity, taxpayers must once again itemize. Almost 90% of taxpayers use the standard deduction, which means most Americans won’t be able to deduct charitable contributions.

An Additional Hurdle for Side Hustles and Small Gigs

The American Rescue Plan enacted a new rule that will affect those who rely on side hustles using third-party payment services like PayPal or Venmo – or sell on sites like eBay, Etsy, and Facebook Marketplace. Taxpayers who used these platforms to sell more than $600 worth of goods or services will be receiving a 1099-K form from whichever platform they used. Prior to the American Rescue Plan, the threshold that would trigger the need for a 1099-K form was either 200 transactions or $20,000. With this new requirement, many Americans will be filing taxes on their side hustles for the first time in 2023, which could also contribute to a lower tax refund for some filers. Note that money received from friends or family via a third-party app as a gift or reimbursement for personal expenses is not taxable.

NOTE: On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions.

How the Inflation Reduction Act Could Affect Your Taxes

How the Inflation Reduction Act Could Affect Your Taxes

On August 16, 2022, President Biden signed into law the Inflation Reduction Act. It’s a wide-sweeping bill that addresses climate, health care, and some mix of tax breaks and tax hikes, as well as additional funding for the IRS. Below you’ll find a summary of how the Inflation Reduction Act could affect you.

Health Care

Funding for the Affordable Care Act (ACA) was due to expire at the end of 2022, but the Inflation Reduction Act extends funding through 2025. This will allow eligible individuals to continue to purchase insurance with lower premiums through the federal Health Insurance Marketplace.

The Inflation Reduction Act also extends the temporary exception from the American Rescue Plan Act (ARPA) that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit (PTC). The PTC makes health insurance more affordable by helping eligible consumers pay premiums for coverage purchased through the Health Insurance Marketplace. To get this credit, you can claim the PTC on your tax return, or you can choose to have amounts paid directly to the insurance provider as long as you qualify for advance payments of the premium tax credit.

Energy Efficient Home Improvement Credit

Previously known as the Nonbusiness Energy Property Credit, the renamed Energy Efficient Home Improvement credit was extended through 2032. Beginning next year, the credit will be equal to 30 percent of the costs of all qualified home improvements made during the year. Furthermore:

  • A $1,200 annual limit on the total credit amount will replace the current $500 lifetime limit.
  • Annual limits for particular types of qualifying home improvements will be as follows:
    • $150 for home energy audits;
    • $250 for any exterior door ($500 total for all exterior doors) that satisfy appropriate Energy Star requirements;
    • $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
    • $600 for other eligible energy property, including central air conditioners; electric panels and various similar equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
    • $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This group of upgrades is not restricted by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
    • Roofing and air circulating fans will no longer be eligible for the credit.

So, if you stretch your qualifying home projects over a few years, you can claim the maximum credit each year.

Electric Vehicle Tax Credits

The Inflation Reduction Act extends the Clean Vehicle Credit for ten years — until December 2032 — and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles. Taxpayers can qualify for a credit of up to $7,500 for a new electric car or $4,000 for a used one. However, in order to qualify for the tax credit, electric vehicles must be assembled in North America, and the Biden administration has already prepared a list of 20 EVs that qualify.

IRS Funding

The Inflation Reduction Act also includes about $80 billion of additional funding over ten years for the IRS. The exact plans for those funds aren’t clear yet, but we know that $25 billion is intended to improve IRS operations. Additionally, law makers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This could include expanding staff and modernizing outdated processing systems.