The 2023 tax season will be here before you know it, which means it’s time to start preparing for the changes and updates to the tax law. To help make sense of it all, we’ve compiled the latest news and updates when it comes to taxes in 2023. From new tax credits to changes in deductions, here’s what you need to know to stay ahead of the tax game before April.
1099-K Forms
In 2021, Congress passed a law requiring third-party settlement networks to send Form 1099-Ks to any payees who are making over $600 for goods and services. Originally, this requirement was to kick in for 2022’s 1099-K forms. But, due to criticism, the IRS delayed it for one year, with new rules coming into effect for the 2023 1099-Ks sent out in 2024. This means that more people than ever before will receive 1099-K forms when filling out their 2023 Form 1040. However, this does not apply to transfers of money between family and friends, such as Zelle or Venmo.
Alternative Minimum Tax
For the 2023 tax year, the Alternative Minimum Tax (AMT) exemptions have risen and the phaseout zones have started at higher income levels. Additionally, the AMT tax rate of 28 percent now kicks in at higher incomes.
Americans Abroad
In 2023, U.S. taxpayers working abroad can benefit from a larger foreign-earned income exclusion, as well as a higher standard ceiling on foreign housing exclusion. Overseas workers, in particular, in high-cost locations around the world will have access to an even greater foreign housing exclusion.
Bonds Used for Education
The Interest Income Exclusion allows for federal income tax to be avoided on accrued I Bond or EE Bond interest if the bonds are cashed in prior to maturity and the proceeds are used towards higher education expenses for the taxpayer, spouse, or dependent.
Child Adoption
For 2023, the Adoption Credit is available for up to $15,950 of qualified expenses. Special-needs adoptions are eligible for the full credit, regardless of the cost. Additionally, the exclusion for company-paid adoption aid has increased from $14,890 to $15,950 for 2023.
Clean Vehicle Credit
The Inflation Reduction Act of last year has completely revised the tax credit for electric vehicles, formerly known as the electric vehicle tax credit, to the Clean Vehicle Credit. The maximum tax reduction remains at a maximum of $7,500 for the purchase of a new EV from 2023-2032. However, the credit calculation has been revised.
Energy-Efficient Home Improvement Credit
This year, the federal tax credit for installing energy-efficient windows, doors, and other items in your home is being revised. The new credit offers homeowners a larger lifetime limit of $500 and offers more coverage for many items. This revision is effective from 2023 through 2032.
Estate and Gift Taxes
In 2023, the lifetime estate and gift tax exemption for decedents has increased to $12,920,000. The annual gift tax exclusion has risen to $17,000 per donee.
Flexible Spending Accounts
The limit on employee contributions for healthcare flexible spending accounts in 2023 has increased to $3,050. If the employer allows it, employees can carry over up to $610 of unused funds from 2022 into 2023.
Health Savings Accounts
In 2023 the annual cap on deductible contributions to health savings accounts (HSAs) for self-only coverage increased to $3,850 and for family coverage increased to $7,750. In addition, the maximum out-of-pocket costs for family health plans is set at $15,000, and for individual coverage is set at $7,500. Minimum policy deductibles increased to $3,000 for families and $1,500 for individual coverage.
Income Tax Brackets
The 2023 federal income tax brackets adjusted significantly from 2022 due to inflation, giving many taxpayers a potentially lower bracket and reducing the effect of bracket creep. This way, if your income remains the same or only grows with the rate of inflation, you won’t be pushed into a higher tax bracket.
Kiddie Tax
In 2023, the first $1,250 of a child’s unearned income is tax-free if they are either 18 or younger or a full-time student under 24. The next $1,250 is taxed at the child’s rate, and any income higher than $2,500 is taxed at the parent’s rate.
Long-Term Care Insurance Premiums
In 2023, the limits for deducting long-term care insurance premiums are higher. Those who are not self-employed can deduct these premiums on Schedule A of the 1040. This is provided they exceed 7.5 percent of adjusted gross income.
Parking and Transportation Benefits
In 2023, employers can provide more tax-free parking, mass transit passes, and commuter van benefits of up to $300 a month for their employees.
Payroll Taxes
In 2023, the Social Security annual wage base is set at $160,200, a $13,200 increase from the previous year. Additionally, the nanny tax threshold has been raised to $2,600.
Residential Clean Energy Credit
This credit is for people who install renewable energy systems such as solar panels, solar electric equipment, solar-powered water heaters, and wind turbines in their homes and qualify for the credit. Beginning in 2023, the credit will also cover battery storage technology with a capacity of at least three kilowatt hours.
Retirement Savings
Starting in 2023, the beginning age for required minimum distributions also rises to 73 from 72. Additionally, the penalty for failing to take an RMD is 25 percent. However, it can be reduced to 10 percent if corrected in a timely manner.
Self-Employment
Self-employed individuals should be aware of the various tax changes for 2023 that could affect their earnings. The 20 percent deduction for pass-through income has been increased for 2023, but the first-year bonus depreciation has fallen from 100 percent to 80 percent. Additionally, business asset expensing is higher in 2023 and the temporary 100 percent write-off for business meals has expired.
Standard Deduction
The standard deduction amounts were increased for 2023 to account for inflation.
Standard Mileage Rates
In 2023, the standard deduction amounts have been increased to account for inflation.
Student Loan Interest Deduction
It is possible to deduct up to $2,500 of student loan interest paid each year if you have college debt. This deduction does not require itemizing on Schedule A, instead, it is claimed on Schedule 1 of Form 1040.
Our team of experienced tax professionals can help you prepare for tax season. Our experts are knowledgeable in every aspect of taxation and understand the complexity of the ever-changing rules set in place. We can help you make the best of your returns, maximize deductions, and give advice to secure future tax savings. Let us take the stress away and help you prepare for your taxes next April.
