As the April 18 deadline approaches, many American citizens are busy gearing up as they finish their last-minute preparation for tax year 2022. However, before you submit your tax return to the IRS, be sure you are aware of any tax changes that may affect your filing in 2023.
With inflation on the rise and the pandemic in decline, the IRS has made several adjustments to its tax rules. These changes may have either positive or negative implications on your tax return. As such, staying up-to-date on the latest changes to the tax code is crucial. This way, you can take advantage of all the tax breaks and avoid making costly mistakes.
Tax Changes in 2023
You should be aware of the following significant tax changes before filing your tax return in 2023.
1. Income Tax Brackets
There are still seven federal tax brackets for tax year 2022. Although the income tax rates have remained unchanged this year, the income ranges for each tax bracket have been slightly widened to account for inflation. The highest tax rate remains at 37%, while the lowest remains at 10%.
Below is a chart detailing the tax rates and brackets for tax year 2022.
|Single||Married filing Separately||Married filing Jointly & Qualifying Widows or Widowers||Head of household|
|10%,||$0 to $10,275||$0 to $10,275||$0 to $20,550||$0 to $14,650|
|12%||$10,276 to $41,775||$10,276 to $41,775||$20,551 to $83,550||$14,651 to $55,900|
|22%||$41,776 to $89,075||$41,776 to $89,075||$83,551 to $178,150||$55,901 to $89,050|
|24%||$89,076 to $170,050||$89,076 to $170,050||$178,151 to $340,100||$89,051 to $170,050|
|32%||$170,051 to $215,950||$170,051 to $215,950||$340,101 to $431,900||$170,050 to $215,950|
|35%||$215,951 to $539,900||$215,951 to $323,925||$431,901 to $647,850||$215,951 to $539,900|
|37%||$539,901 or more||$323,926 or more||$647,851 or more||$539,901 or more|
2. Standard Deduction
The standard deduction is a fixed income amount not subject to income tax. It can be claimed by taxpayers who opt not to itemize their deductions. For the tax year 2022, the IRS has increased the standard deductions by nearly 7%. The increase is due to inflation adjustments and is intended to account for the rising cost of living.
Below are the standard deductions for each filing status for the tax year 2022.
- For single filers and married individuals filing separately, the standard deduction was increased from $12,550 in 2021 to $12,950 in 2022.
- The standard deduction for married couples filing jointly was upped from $25,100 in 2021 to $25,900 in 2022.
- Additionally, for heads of households, the standard deduction was increased to $19,400 in 2022 from $18,800 in 2021.
3. Capital Gains
Capital gains are the profits made from selling an asset, like real estate, stocks, or bonds, for a higher price than the original purchase price. The tax rates for tax year 2022 have remained unchanged from the previous years. However, the income thresholds have been adjusted to compensate for inflation. Taxpayers’ specific capital gains rates are determined based on their filing status and taxable income.
Taxpayers whose income does not exceed certain amounts are eligible for a 0% capital gains rate in 2022. Specifically, $83,350 for married couples filing jointly, $41,675 for married couples filing separately, $55,800 for the head of a household, and $41,675 for single.
On the other hand, the 15% rate applies to adjusted net capital gains for joint returns of up to $517,200, married couples filing separately of up to $258,600, head of household returns of up to $488,500, and single individual returns of up to $459,750.
If your income exceeds the income threshold mentioned above, the applicable capital gains tax rate is 20%.
4. Earned Income Credit
The EITC is a tax credit that aids low to middle-income households. The amount of tax due is reduced by the credit, and in some instances, it may even result in a refund if the credit amount is more than what is owed in taxes. Similar to the Child Tax Credit, the EITC has reversed to its pre-pandemic levels in 2023.
For tax year 2022, the maximum credit amount for single filers earning less than $16,480 and married couples filing jointly earning less than $22,610 is $560. This is a decrease compared to the maximum credit amount of $1,502 in the previous year.
The table below compares the adjusted gross income (AGI) and maximum credit amount for tax years 2021 and 2022.
|Dependents||Maximum AGI (Single, Widowed, Head of Household, or Married Filing Separately)||Maximum AGI (Married Filing Jointly)||Maximum Credit Amounts|
|3 or more||$51,464||$53,057||$57,414||$59,187||$6,728||$6,935|
5. Child Tax Credit
The Child Tax Credit (CTC) is a substantial tax benefit for families with children who are dependents. Due to the COVID-19 pandemic, it was dramatically increased for the 2021 tax year, providing up to $3,600 per child under the age of six and up to $3,000 for each child between the ages of six and seventeen. However, the Child Tax Credit will return to its pre-pandemic levels in 2023.
The maximum credit amount is cut from $3,600 to $2,000 per child aged 16 and under for tax year 2022. Families with multiple children may see their overall credit amount decline significantly. The credit will also begin to taper down for single filers with MAGI of more than $200,000 and married couples filing jointly with MAGI of more than $400,000.
6. Child and Dependent Care Credit
The Child and Dependent Care Credit is a tax benefit that aims to support employed individuals in covering the expenses involved in caring for a child or dependent with disabilities. In 2021, taxpayers were eligible to receive a fully refundable credit, which meant they could receive a refund even if they didn’t owe any taxes. However, there are some tax changes in 2023.
For one, the credit is no longer refundable, unlike last year. Moreover, the maximum credit percentage has been reduced from 50% to 35%. If you have one child under the age of 13, you can claim up to $3,000 in expenses. If you have two or more children under 13, you can claim up to $6,000.
7. Recovery Rebate Credit
The Recovery Rebate Credit will no longer be available to taxpayers in 2023. The credit was initially designed to help people financially impacted by the COVID-19 pandemic. However, it was only applicable for the 2020 and 2021 tax years. Therefore, individuals filing their taxes in 2022 will not benefit from this credit.
8. Foreign Earned Income Exclusion
The Foreign Earned Income Exclusion (FEIE) is a tax break allowing you to exempt income earned in a foreign country from taxing in the United States. The IRS has raised the FEIE limit this year from $108,700 to $112,000.
9. Gift Tax Exclusion
The annual gift tax exclusion allows you to give someone a certain amount of money without having to pay any gift or estate taxes. In 2023, the cap is $17,000 per person or $34,000 per married couple. This means you can give up to $17,000 to your child, grandchild, or anyone else without worrying about taxes.
10. Retirement Plans
There are several changes to retirement plans in 2023. The contribution limit for certain plans, including 401(k), 403(b), most 457 plans, and the Thrift Savings Plan, has been increased from $20,500 to $22,500. Employees aged 50 and over can now contribute up to $7,500 as catch-up contributions, up from $6,500.
The limit on annual contributions to an IRA has also been raised from $6,000 to $6,500. Finally, the contribution limit for SIMPLE retirement accounts has increased to $15,500 from $14,000.
11. Health Savings Accounts (HSAs)
Changes were made to Health Savings Accounts (HSAs) in 2023. Individuals will be able to contribute up to $3,850 with an increase of $200 from the previous year, and families can contribute up to $7,750, an increase of $450. Those over 55 can add an extra $1,000 as a catch-up contribution. It is important to note that HSA plan qualification requires meeting the minimum deductibles, which are $1,500 for individuals and $3,000 for families.
File Your 2022 Taxes with Peace of Mind
As the 2023 tax filing deadline approaches, it’s essential to be aware of the changes and updates that may affect your tax return. Staying up-to-date on these changes can help you maximize your tax benefits while avoiding potential pitfalls.
If you have any questions or concerns about the significant tax changes, don’t hesitate to reach out to a tax professional, such as Peace of Mind Tax Help. We can provide expert guidance and help you make informed decisions that align with your financial situation and future goals.