by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
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.
by Pete McAllister | Accounting News, News, Tax, Tax Planning - Individual, Tax Preparation - Individual
Congress originally designed the Alternative Minimum Tax (AMT) to make sure wealthy taxpayers who take advantage of multiple tax breaks and itemized deductions would still pay their fair share in federal income taxes each year. The AMT produces around $60 billion a year in federal taxes from the top one percent of taxpayers. However, because the AMT wasn’t tied to inflation, the tax has extended down to a growing number of middle-income taxpayers. Here’s what to do about it.
AMT Primer
It’s called the Alternative Minimum Tax because it is a mandatory alternative to the standard income tax. If you are a high-income earner, you are required to calculate your taxes twice – once under standard tax rules and again under the stricter AMT rules (the AMT disallows many deductions, such as state and local tax, childcare credits, and property taxes). Ultimately, you are required to pay the higher amount.
Are You at Risk?
First, be aware of the triggers for AMT, as earning a higher income isn’t the only factor. For example, it can also affect those who are married and file jointly, have a large family (more than four dependents), enjoy profits from stock options, or live in a high-tax state. Therefore, any move that reduces your adjusted gross income (AGI) – like upping your contributions to qualified retirement accounts such as IRAs, 401(k)s, and health savings accounts – might help avoid the AMT. Additionally, aim to reduce your itemized deductions and increase your charitable contributions. Finally, pay attention to long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
If you practice careful year-round preparation while being mindful of the above triggers, you’ll have a better chance of avoiding the AMT.
by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
Although it came a few days later than expected, the Republican Party has finally released its most recent version of their tax bill. Below are 12 major changes that would affect most taxpayers:
- Lowering the number of income tax brackets
Currently, our tax code has seven brackets, but the new bill would lower that to four: 12% for those making less than $45,000, 25% for those making between $45-$200,000, 35% for those making between $200-$500,000, and 39.6% for those making over $500,000.
- Doubling the standard deduction
Singles would see their standard deduction rise from $6,350 to $12,000 and couples filing jointly would see an increase from $12,700 to $24,000.
- Child tax credit expansion
The credit itself would increase from $1000 to $1,600 for every child under 17, although low income families with no income tax would still be given the standard $1000 as a return. However, the phase out income for this tax would increase from $75,000 to $115,00 for single parents and from $110,000 to $230,000 for married parents.
- New family credits
Both credits are in the amount of $300. One credit is for each parent (so $600 for those filing jointly and $300 for single parents). The other would be for any non-child dependents, including elderly parents, adult children with disabilities or a child over 17 whom you are still supporting.
- Elimination of tax exclusion for dependent care FSA’s
Our current tax code allows parents to save up to $5,000 to place into a dependent care flexible spending account, which is considered nontaxable income. The new bill would make that income taxable.
- Elimination of personal exemptions
Current code permits a $4,050 personal exemption for each member of your family, but the new bill would eliminate personal exemptions entirely.
- Does not change 401K’s
Previous proposals had considered lowering the cap on pre-tax contributions to a 401K, but it appears that enough opposed this move so 401K’s were left alone.
- Deductible mortgage interest limited
If you already have an existing mortgage, your deduction would remain the same. However, new mortgages would only be allowed to claim a deduction for interest on mortgage debt up to $500,000, a drop from $1 million.
- Repeals the Alternative Minimum Tax
The tax intended to ensure the highest filers pay some tax by disallowing many breaks, although it usually affects those who make between $200,000 and $1 million, would be repealed in the new code.
- Repeals state and local deductions
The new bill would remove the deduction for state and local income or sales tax. However, in the light of strong opposition, the new bill would preserve a property tax break as an itemized deduction for property taxes up to $10,000.
- Estate tax repealed
The current estate tax only affects those with assets over $5.5 million, but the new proposal would eliminate this tax beginning in 2024 and would raise the exemption amount in the meantime.
- Other deductions repealed
Deductions for student loan interest, moving expenses, alimony payments, medical payments and tax preparation fees would all be removed.
