The Biggest Tax Changes for 2023

Tax season is coming, and with it, changes to the tax brackets and rates can be confusing and daunting for many people.

With the new tax brackets working differently than in previous years, there are several rate adjustments that you should be aware of.

January 23 is the official start of the 2023 tax filing season so it’s important to get a head start when calculating your taxes this year.

This guide will outline all of the major tax changes for 2023, including income thresholds, deductions and exemptions, and tax rates. Keep this page close at hand as you prepare your taxes this year!

Here’s what we’ll cover in this guide:

• The tax brackets for 2022
• The tax changes for 2023
• How tax deductions will change in 2023
• How capital gains affect tax savings
• Changes to minimum gross income amounts
• And more

Let’s start with a quick recap of the 2022 tax season:

What Are the Tax Brackets for 2022?

There are seven tax brackets for individual filers, ranging from 10% up to 37%. Here is a quick summary of the tax brackets for 2022:

Keep in mind that your tax status will depend on your taxable income as well as your filing status.

What Are the Tax Changes for 2023?

1. Dollar Limitations

In 2023, the employee deferral limit for 401(k)s, 403(b)s, most 457 plans, and Thrift Savings Plans is $22,500, with a catch-up contribution of $7,500 for those aged 50 and older.

For traditional and Roth IRAs, the contribution limit is $6,500, with an additional $1,000 catch-up contribution for those aged 50 and over.

Additionally, the Internal Revenue Service (IRS) has increased the annual exclusion for gifts up to $17,000, the foreign earned income exclusion up to $120,000, the maximum tax credit for qualified adoption expenses up to $15,950, and the basic estate tax exclusion for inheritances up to $12,920,000.

For HSAs, the contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage, with a $1,000 catch-up for those aged 55 and over.

In terms of tax brackets, the dollar limitations on the tax brackets in 2023 vary based on the tax filer’s income.

For example, for single filers, the 10% tax bracket is for income up to $9,950, the 12% tax bracket is for income between $9,951 to $40,525, and so on.

It is important to look at specific income levels for determining which bracket a tax filer falls in for 2023.

2. Tax Brackets

The 2023 federal tax brackets will remain unchanged from 2022 at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

However, the IRS is making substantial changes to the thresholds that inform these brackets, meaning that some taxpayers may find themselves in a lower tax bracket, or those who receive a cost of living raise may be able to avoid having part of their income pushed into a higher bracket.

For the 2023 tax year, the income thresholds for each tax bracket are 10% for single taxpayers with income of $11,000 or less; 12% for income over $11,000; 22% for income over $44,725; 24% for incomes over $95,375; 32% for income over $182,100; 35% for income over $231,250; and 37% for income over $578,125.

Here’s a summary:

Note: For married couples filing joint returns, the dollar amounts can be doubled for each bracket.

Income taxes are progressive, meaning the more a taxpayer earns, the more their earnings are subject to higher rates.

This means that even if you stay in the same tax bracket, the rate of tax you pay on your highest dollar earnings will be higher than the rate you pay on your lowest dollar earnings.

It’s important to note that these tax brackets are not static. The IRS adjusts the thresholds that apply to the various federal income tax brackets each year to account for inflation, so taxpayers should always stay aware of the current tax brackets and rates to make sure they are paying the correct amount of taxes.

3. Retirement Savings Plans

Contributing to a retirement savings plan can have several positive tax consequences.

For starters, 401(k)s, IRAs, and other employer-sponsored retirement plans allow you to save money on a pre-tax basis, meaning you can defer paying taxes on those contributions until you withdraw funds during retirement.

Additionally, most states provide a tax break for those who make contributions to a retirement plan.

Additionally, the Retirement Savings Contributions Credit (Saver’s Credit) can help lower-income taxpayers receive a tax break for retirement contributions up to 50%, with the amount phasing out entirely at $36,500 for single filers and $73,000 for married couples filing jointly.

Finally, recent legislation, including “Secure 2.0” provisions, may present further options for 2023.

4. Itemized Deductions

In 2023, the itemized deductions will include things such as medical expenses above 7.5% of your adjusted gross income, charitable donations, and other deductions that can be written off on your tax return.

Additionally, the standard deduction for individual taxpayers will rise by $900 to $13,850; increase by $1,800 for married taxpayers filing joint returns to $27,700; and climb to $20,800 for heads of households, up $1,400 from 2022.

Taxpayers who are at least 65 years old or blind can claim additional amounts depending on their filing status.

5. Personal Exemption

The personal exemption is an amount that taxpayers can subtract from their taxable income. This amount is set by the IRS each year, and in 2021, the personal exemption was $4,050.

Unfortunately, for 2023, the personal exemption will remain at $0 due to the Tax Cuts and Jobs Act.

This means that taxpayers may not be able to deduct the amount from their taxable income, resulting in a higher overall tax bill.

Additionally, the modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in 25A(d)(2) is also not adjusted for inflation for taxable years beginning after December 31, 2020.

6. Income Tax Exemption

In 2023, the income tax exemption rate will be the same as it was in the previous year. The exemption amount for single filers will start at $126,500, and the phase-out starts at $1,156,300.

For married taxpayers filing joint returns, the exemption amount will start at $81,300, and the phase-out starts at $578,150.

Additionally, the standard deduction for individual taxpayers will increase by $900 to $13,850; for married couples, it will increase by $1,800 to $27,700; and for heads of households, it will increase by $1,400 to $20,800.

7. Surtaxes

Surtaxes are additional taxes that are levied on top of existing ones.

In 2023, Massachusetts will have a 4% surtax on income above $1 million, while Kentucky will have a 6% excise tax on ride-sharing, car rental, limousine, and taxi services.

Additionally, Colorado will have a 10-cent state fee on each recycled paper bag or single-use plastic bag that stores provide to customers, and New Jersey will have a $1.52 per ounce excise tax on recreational marijuana.

Finally, Missouri will require out-of-state businesses with more than $100,000 in annual sales in the state to collect state and local taxes.

8. Phase-Outs

Phase-outs are reductions in tax benefits that occur as incomes increase.

They are often used to limit the number of certain tax benefits that higher-income individuals can claim to ensure that those with higher incomes do not receive an unfair tax advantage.

In 2023, various states will have tax phase-outs that affect income tax brackets.

• New Hampshire is phasing out its income tax on interest and dividends income, reducing the rate from 5% to 4% over the course of four years.

• Vermont is also expanding its corporate alternative minimum tax schedule and reducing its Business Profits Tax rate from 7.6% to 7.5% starting in 2023.

• Additionally, Alaska will be increasing tax liability for some companies with fields that began production before 2017 due to changes in its production tax.

• Other states such as Arkansas, Iowa, Nebraska, New Hampshire, and Pennsylvania are enacting corporate income tax rate reductions that take effect in 2023.

• Finally, Oklahoma will offer permanent 100% bonus depreciation, while Louisiana and North Carolina are making their capital stock taxes less burdensome.

10. Capital Gains Tax Brackets

In 2023, the IRS adjusted the standard deductions and income thresholds for long-term capital gains tax brackets.

This means investors are more likely to qualify for the 0% rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing together.

For capital gains from assets held for more than one year, the tax rate can be 0%, 15%, or 20%, depending on the taxpayer’s taxable income.

By focusing on five elements such as sustainability, maximizing, automation, reinvestment, and tax efficiency, investors can maximize their income potential.

It’s important to note that the tax rates on capital gains are different from the tax rates for wages and other “ordinary” income.

Understanding the changes to the capital gains tax brackets in 2023 can help investors make smart decisions when filing their taxes.

How Will Tax Deductions Change in 2023?

1. Tax Bracket for Ordinary Income

The tax brackets for ordinary income in 2023 will be adjusted to account for inflation.

The income thresholds for each bracket are 10% for single taxpayers with income of $11,000 or less; 12% for income over $11,000; 22% for income over $44,725; 24% for incomes over $95,375; 32% for income over $182,100; 35% for income over $231,250; and 37% for income over $578,125.

For married couples filing joint returns, the dollar amounts can be doubled for each bracket.

The marginal tax rates for the seven federal tax brackets will remain the same at 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

2. Tax Bracket for Capital Gains

With the higher standard deductions and income thresholds for long-term capital gains in 2023, you may qualify for the 0% rate if your taxable income is $44,625 or less for single filers and $89,250 or less for married couples filing together.

The tax rate on capital gains from the sale of stocks, bonds, cryptocurrency, real estate, and other capital assets depends on how long you held the capital asset before selling it.

If you hold a capital asset for one year or less, any gain from the sale is considered short-term capital gain and taxed using the rates for ordinary income.

However, if you hold the asset for more than one year, the gain is treated as long-term capital gain and taxed at a lower rate – either 0%, 15%, or 20%. The exact rate that applies depends on your taxable income.

3. Tax Bracket for Unearned Income:

The 2023 tax brackets for unearned income will vary depending on the filing status of the taxpayer.

For single taxpayers, the 10% tax bracket applies to income up to $11,000, the 12% tax bracket to income from $11,001 to $44,725, the 22% rate to income from $44,726 to $95,375, the 24% rate to income from $95,376 to $182,100, the 32% rate to income from $182,101 to $231,250, the 35% rate to income from $231,251 to $578,125, and the 37% rate to income over $578,125.

For married couples filing jointly, the dollar amounts can be doubled for each bracket.

For married couples filing separately, the 10% rate applies to income up to $11,000, the 12% rate to income from $11,001 to $44,725, the 22% rate to income from $44,726 to $95,375, the 24% rate to income from $95,376 to $182,100, the 32% rate to income from $182,101 to $231,250, the 35% rate to income from $231,251 to $346,875, and the 37% rate to income over $346,875.

For heads of households, the 10% rate applies to income up to $15,700, the 12% rate to income from $15,701 to $59,850, the 22% rate to income from $59,851 to $95,350, the 24% rate to income from $95,351 to $182,100, the 32% rate to income from $182,101 to $231,250, the 35% rate to income from $231,251 to $578,100, and the 37% rate to income over $578,100.

4. Standard Deduction:

The standard deduction for tax returns in 2023 is increasing for all filing statuses.

For married couples filing jointly, the standard deduction is $27,700 (an increase of $1,800). All tax filers can choose to take the standard deduction or itemize deductions in order to reduce their taxable income.

Additionally, Georgia’s standard deduction will increase from $4,600 to $5,400 for single filers and from $6,000 to $7,100 for joint filers as a result of H.B. 593.

Timber equipment will also be exempted from ad valorem property taxes as of January 1 due to the approval of Referendum A in November.

5. Personal Exemption:

The personal exemption is an amount of money that can be deducted from a taxpayer’s income to reduce the amount of taxable income.

However, there are still other deductions and credits that may be applicable, such as the Earned Income Credit, Advance Child Tax Credit, and Standard Deduction.

Additionally, some states may have their own provisions for personal exemptions, such as Virginia which will exempt certain essential hygiene products, including menstrual products, from its sales tax base.

6. Child Tax Credit:

In 2023, the Child Tax Credit (CTC) will drop back to its pre-pandemic amount of $2,000 per child or dependent, and will only be available for children under 17 years of age.

The credit will also only be partially refundable to some lower-income parents, and advance payments will no longer be offered.

In addition to the CTC, the Earned Income Tax Credit (EITC) is available for low- to moderate-income filers.

The EITC tax credit for the 2023 tax year ranges from $600 to $7,430, depending on your income and family size.

The complete phase out income under the tax credit is $17,640 for filers with no children, $46,560 for filers with one child, $52,918 for filers with two children and $56,838 for filers with three or more children.

It is important to note that the income requirements for both credits are subject to change each year.

To ensure you are taking advantage of all the possible tax credits and deductions available, it is recommended you work with a tax advisor to make sure you’re not missing out on any savings.

7. Household Credit:

In 2023, the EITC will provide a maximum credit of $600 for households with no qualifying children, and up to $7,430 for households with three or more qualifying children, an increase of $207 from the 2022 tax year.

The Retirement Savings Contribution Credit (Saver’s Credit) will phase out at $36,500 for single filers and $73,000 for married couples filing jointly, an increase of $2,500 and $5,000 respectively.

The Child Tax Credit (CTC) will remain unchanged, allowing taxpayers to credit up to $2,000 per dependent child under the age of 17.

The Child and Dependent Care Credit is a nonrefundable credit that allows taxpayers to offset some of the costs of paying for services like babysitters, day care and in-home caregivers for older dependents, with a maximum of $3,000 ($6,000 for two or more dependents) and a credit of 20-35%, depending on the taxpayer’s Adjusted Gross Income (AGI).

8. Qualified ZECs:

The tax consequences of purchasing qualified ZECs (Zero Emission Credits) in 2023 will depend on several factors, such as the individual or business’s state of residence and any applicable credits or exemptions.

Washington residents may see price increases resulting from an increase in the state’s carbon emissions fee, as part of Initiative 1631, and on January 1, 2023, qualified transfers of real property to be used for low-income housing will be exempt from the real estate excise tax (REET).

In April 2022, H.B. 8 was enacted, reducing individual income tax rates while broadening the sales tax base.

Many of the law’s provisions will take effect on January 1, 2023, including the reduction in the individual income tax rate from 5 to 4.5% and the application of the sales tax to additional services, including many personal consumption services and some business inputs.

Additionally, starting in 2023, electric and hybrid vehicles will be subject to a new registration and renewal fee, and a new excise tax of 3 cents per kilowatt hour will be applied to electric vehicle power.

Finally, the Inflation Reduction Act extended certain energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction beginning with the tax year 2023.

Hawaii’s earned income tax credit (EITC) will also become refundable beginning in 2023.

Summary

The changes to the tax brackets and rates for 2023 are significant, but with careful planning, you can minimize the impact on your own finances.

Stay up to date on the latest changes and use this guide as a resource as you prepare your taxes this year.

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