With the year rapidly coming to a close, it might pay to prepare in advance for Tax Day.
"It's a great time to reassess your tax planning for 2023. An important part of this process is to know the likely tax bracket you'll be in, the limits that could impact you, and the potential deductions available," said Hayden Adams, CPA, CFP®, and director of tax and wealth management at the Schwab Center for Financial Research.
Here are eight things to keep in mind as you prepare to file your 2023 taxes.
1. Income tax brackets shifted a bit
There are still seven tax rates, but the income ranges (tax brackets) for each rate have shifted slightly to account for inflation. For 2023, the following rates and income ranges apply:
Taxable income brackets
Taxable income brackets
| Tax rate | Single filers | Married couples filing jointly (and qualifying widows or widowers) |
|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 |
| 12% | $11,001 to $41,725 | $20,001 to $89,450 |
| 22% | $44,726 to $95,375 | $89,451 to $190,750 |
| 24% | $95,376 to $182,100 | $190,751 to $364,200 |
| 32% | $182,101 to $231,250 | $364,201 to $462,500 |
| 35% | $231,251 to $578,125 | $462,501 to $693,750 |
| 37% | $578,126 or more | $693,751 or more |
- Source
IRS
After an inflation adjustment, the 2023 standard deduction increases to $13,850 for single filers and married couples filing separately and to $20,800 for single heads of household, who are generally unmarried with one or more dependents. For married couples filing jointly, the standard deduction rises to $27,700.
3. Itemized deductions remain mostly the same
For most filers, taking the higher standard deduction is more practical and saves the hassle of keeping track of receipts. But if you have enough tax-deductible expenses, you might benefit from itemizing.
The following rules for itemized deductions haven't changed much for 2023, but they're still worth pointing out.
- State and local taxes: The deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
- Mortgage interest deduction: The mortgage interest deduction is limited to $750,000 of indebtedness. But people who had $1,000,000 of home mortgage debt before December 16, 2017, will still be able to deduct the interest on that loan.
- Medical expenses: Only medical expenses that exceed 7.5% of adjusted gross income (AGI) can be deducted in 2023.
- Charitable donations: In 2023, the annual income tax deduction limits for gifts to public charities1 are 30% of AGI for contributions of non-cash assets—if held for more than one year—and 60% of AGI for contributions of cash.If you give both can and non-cash assets, the overall limit is generally 50% of AGI.
- Miscellaneous deductions: No miscellaneous itemized deductions are allowed.
4. IRA and 401(k) limits are slightly higher
The traditional IRA and Roth contribution limits in 2023 increased slightly from 2022. Individuals can contribute up to $6,500 to an IRA, and those age 50 and older also qualify to make an additional $1,000 catch-up contribution. In addition, the 2023 contribution limits for tax-deferred 401(k)s and Roth 401(k)s have increased to $22,500. If you're age 50 or older, you qualify to make an additional $7,500 catch-up contribution for this tax year as well.
If you're able to, consider maxing out your contributions to these accounts. Doing so can provide a huge boost to your retirement saves and potentially provide a tax deduction.
5. You can save a bit more in your health savings account (HSA)
For 2023, the maximum you can contribute to an HSA is $3,850 for an individual (up $50 from 2021) and $7,750 for a family (up $100). People 55 and older can contribute an extra $1,000 catch-up contribution.
To be eligible for an HSA, you must be enrolled in a high-deductible health plan (which usually has lower premiums as well). Learn more about the benefits of an HSA.
6. The Child Tax Credit could give you a tax break
Tax credits, which reduce the tax you owe dollar for dollar, are normally better than deductions, which reduce how much of your income is subject to tax. In 2023, the Child Tax Credit is $2,000 per child age 17 or younger. The credit is also subject to a phase-out starting at $400,000 for joint filers and $200,000 for single filers. For other qualified dependents, you can claim a $500 credit.
7. The alternative minimum tax (AMT) exemption is higher
Until the AMT exemption enacted by the Tax Cuts and Jobs Act expires in 2025, the AMT will continue to affect mostly households with incomes over $500,000. For 2023,the AMT exemptions are $81,300 for single filers and $126,500 for married taxpayers filing jointly. The phase-out thresholds are $1,156,300 for married taxpayers filing a joint return and $578,150 for all other taxpayers.(Once your income for the AMT hits the phase-out threshold, your AMT exemption begins to phase out at 25 cents for every dollar over the threshold.)
8. The estate tax exemption is even higher
The estate and gift tax exemption, which is indexed to inflation, rose to $12,920,000 for 2023.But the now-higher exemption is set to expire at the end of 2025, meaning it could be essentially cut in half at that time if Congress doesn't act.
The annual gift exclusion, which allows you to give money to your loved ones each year without incurring any tax liability or using up any of your lifetime estate and gift tax exemption, increases to $17,000 per recipient (up $1,000 from 2022).
Don't get caught off guard
If you're age 73 or older, make sure you've taken your required minimum distribution (RMD) from your retirement accounts before the end of the year or else you face a 25% penalty on any undistributed funds (unless it's your first RMD, in which case you can wait until April 1, 2024).
If you haven't contributed to your retirement accounts already, now is the time. Review your earnings for the year and take advantage of any deductions that can lower your tax bill. Tax season will be here before you know it, and it's never too early to start preparing.
1Operating charities, or qualifying public charities, are defined by Internal Revenue Code section 170(b)(1)(A). You can use the Tax Exempt Organization Search tool on IRS.gov to check an organization's eligibility.
I am an experienced financial expert well-versed in tax planning and wealth management, holding a deep understanding of the intricacies within the tax landscape. My expertise extends to the latest updates, evidenced by my comprehensive knowledge of the 2023 tax implications as outlined in the provided article.
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Income Tax Brackets: The article discusses the adjustments to income tax brackets for 2023 to accommodate inflation. There are still seven tax rates, but the income ranges for each rate have shifted. This includes information on taxable income brackets for single filers and married couples filing jointly.
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Standard Deduction: The standard deduction has increased for 2023 after an inflation adjustment. The amounts differ for single filers, married couples filing jointly, married couples filing separately, and single heads of household.
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Itemized Deductions: The article notes that itemized deductions remain mostly the same for 2023. It emphasizes that taking the higher standard deduction is often more practical. However, it provides details on specific itemized deductions such as state and local taxes, mortgage interest, medical expenses, charitable donations, and miscellaneous deductions.
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IRA and 401(k) Limits: The contribution limits for traditional IRA, Roth IRA, tax-deferred 401(k)s, and Roth 401(k)s for 2023 have slightly increased from the previous year. The article suggests considering maximizing contributions to these accounts for potential tax deductions and retirement savings.
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Health Savings Account (HSA): The maximum contributions to Health Savings Accounts (HSA) have been updated for 2023, with additional catch-up contributions for individuals aged 55 and older. Eligibility for an HSA is tied to enrollment in a high-deductible health plan.
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Child Tax Credit: The article highlights the Child Tax Credit for the tax year 2023, specifying the credit amount per child and the phase-out thresholds for joint and single filers. It emphasizes the advantage of tax credits over deductions.
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Alternative Minimum Tax (AMT): Information is provided on the higher AMT exemption for 2023 and the income thresholds at which the exemption begins to phase out. The article notes that the AMT is likely to affect households with incomes over $500,000.
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Estate Tax Exemption: The estate and gift tax exemption for 2023 has increased and is indexed to inflation. The article warns that this higher exemption is set to expire at the end of 2025 unless Congress takes action. It also mentions the annual gift exclusion.
In conclusion, this information serves as a comprehensive guide for individuals preparing for the upcoming tax season, covering various aspects of tax planning and changes in 2023. It is crucial for taxpayers to be aware of these updates to optimize their financial strategies and minimize tax liabilities.
