by Daniel Kittell | Accounting News, IRS, News, Newsletter, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
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.
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 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.
by Stephen Reed | Accounting News, IRS, News, Resources, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
Now that our 45th President has officially been inaugurated, many of his campaign claims are beginning to take shape, including his tax plan. However, it seems that President Trump’s plan does not align as closely as one might think with the GOP’s plan, which has primarily been outlined by Republican leader Kevin Brady, Chairman of the House Ways and Means Committee. Below is a brief summary of the ways Trump and Brady’s plans differ and what each could mean for taxpayers.
Tax Brackets
Trump and Brady agree in decreasing the number of tax brackets from seven to three, at 12%, 25% and 33% respectively, but they differ in the income ranges for each bracket. Brady’s rates would simply align with the current rates and brackets, meaning taxes would only increase for those who fall under the 10% tax bracket of current law; they would see their rate rise to 12%. Under Trump’s plan, not only would those in the 10% bracket rise to 12%, but some middle classers could see their rate rise to 33%, namely those who make more than $112,500 per year, whereas presently, the 33% rate was not effective until individual income reached $191,651.
Gains/Dividends Rates
Trump would seek to keep the current capital gains and dividend rates, 0%, 15% and 20%, grouping them with his three desired tax brackets. But, aligning the gains and dividends rates would mean both a tax increase as well as an increase from 15% to 20% in gain and dividend rates for many in that middle tax bracket. Brady’s plan varies in that he would apply his tax rates, 12%, 25% and 33%, to gains and dividends rates, while also allowing taxpayers to deduct 50% of their capital gains and dividends and 50% for interest income. Essentially, while certain taxpayers could see an increase in capital gains and dividends rates under Trump’s plan, all taxpayers would see a decrease in their interest/capital gains/dividends rates under Brady’s plan.
Itemized Deductions
While Trump would look to simplify deductions by capping them all at $100,000 if single and $200,000 if married filing jointly, Brady’s would look to eliminate all itemized deductions other than charitable contributions and mortgage interest deductions. Neither plan would be necessarily problematic for lower and middle classes, but some upper classers may take issue with Trump’s deduction caps, and many states and lobbyists may dislike Brady’s elimination of certain deductions altogether.
Standard Deductions/Personal Exemptions
Trump and Brady do agree on increasing the standard deduction, but Brady would increase the deduction from the current $6,300 to $12,000 (if single); Trump would jump up to $15,000. Both plans would also do away with personal exemptions. Taking away personal exemptions could be problematic for families though, which Trump would seek to alleviate by adding child care incentives (although paying for child care in the first place is necessary to get the incentive), while Brady would simply increase the current child tax credit from $1000 to $1,500.
Trump and Brady do align in their desire to lower business tax rates and eliminate estate taxes, but the execution of both differ as well. President Trump has stayed busy signing executive orders in his first weeks in office, but it does not appear that immediate tax reform is among his changes just yet. It does appear, though, that the Trump administration and the GOP need to refine and better align their respective proposals before presenting a finalized plan for tax reform to the American public.
