2023 Tax Updates: Important Changes


2023 Tax Updates: Important Changes

With the frequent changes in tax laws and regulations, it’s critical to stay current on tax changes for the 2023 tax year.

1. Standard deduction

In 2023, the standard deduction amounts have increased. Married couples filing jointly now get $27,700, with an additional $1,500 for each spouse aged 65 or older. Single filers have a standard deduction of $13,850, which increases to $15,700 for those 65 or older. Head-of-household filers can claim $20,800, plus an extra $1,850 after turning 65. Additionally, blind individuals receive an additional $1,500, or $1,850 if unmarried and not a surviving spouse. These increases are to adjust for inflation.

2. IRS again delays $600 threshold for 1099-K

Freelancers and small business owners who use PayPal, Venmo, or Square may be familiar with IRS Form 1099-K. The IRS planned to change the rules for 1099-K forms in 2023, lowering the threshold to $600 for online sellers. This meant more people, including casual sellers, would get these tax forms. But, the IRS is delaying this change. For 2023, the old rule stays: You only get a 1099-K if you exceed $20,000 and have more than 200 transactions. This delay is to help everyone adjust. But remember, you still need to report all income to the IRS, even if you don’t get a 1099-K.

3. Retirement savings

Starting in 2023, retirees can now begin taking required minimum distributions (RMDs) at age 73 instead of 72. This applies if you turned 72 after 2022. For individuals turning 73 this year, the first RMD is due April 1, 2024. Working past 73? You can usually delay RMDs from your current employer’s 401(k) until retirement.

For 2023, retirement savings limits have increased. For example, the maximum contribution limits for 401(k), 403(b), and 457 plans jump from $20,500 to $22,500 for 2023 ($23,000 in 2024). Those aged 50 or above can add an extra $7,500 (up from $6,500 for 2022) as a catch-up contribution, totaling a possible $30,000 pretax contribution.

An employer’s SEP-IRA contributions cannot exceed 25% of the employee’s compensation or $66,000 for 2023 ($69,000 in 2024).

For 2023, the annual contribution limit for SIMPLE IRAs is $15,500 ($16,000 in 2024) with a $3,500 catch-up for those 50+.

Traditional and Roth IRA contribution limits have risen to $6,500, with an additional $1,000 catch-up for those over 50. Roth IRA contribution phase-outs for higher incomes have also increased. You can contribute to your 2023 IRA until April 15, 2024, the federal tax-filing date. Traditional and Roth IRA contribution limits for 2024 are $7,000 for under-50s and $8,000 for over-50s.

4. Alternative Minimum Tax (AMT) exemption is higher

The Alternative Minimum Tax (AMT) is a separate tax calculation that ensures high-income individuals pay their fair share of taxes. For 2023, there’s less worry about the Alternative Minimum Tax (AMT) as exemptions have increased. Joint filers now have an exemption of $126,500 and single filers and heads of household get $81,300. These exemptions start phasing out at higher incomes: $1,156,300 for couples and $578,150 for singles and heads. Also, the 28% AMT tax rate now applies to higher incomes, starting above $220,700 of alternative minimum taxable income.

5. Energy-efficient home improvement credit

The tax credit for energy-efficient home improvements has significantly improved for 2023 through 2032. If you make home improvements for energy efficiency, you may qualify for an annual tax credit up to $3200.

The maximum credit you can claim each year is:

(i) $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)

(ii) $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers

The credit has no lifetime dollar limit. You can claim the maximum annual credit every year.

The tax credit for energy-efficient home improvements has significantly improved for 2023 through 2032. The credit now covers 30% of the cost of certain insulation, boilers, air-conditioning systems, windows, doors, etc. An annual limit of $1,200 replaces the lifetime limit of $500, with specific caps for items like exterior doors and windows. Additionally, the annual limit increases to $2,000 for biomass stoves or heat pumps. Also, the home energy audit tax credit offers 30% of the cost for a home energy audit, up to $150 per year.

6. Student loan interest deduction

For those paying off student loans, you can deduct up to $2,500 of interest annually without needing to itemize deductions. This deduction is available on Schedule 1 of Form 1040. However, income limits apply. For 2023, the deduction phases out for joint filers with modified AGIs over $155,000 (ending at $185,000) and for single filers over $75,000 (ending at $90,000). These thresholds have increased from 2022.

7. Tax Saving through the 2023 Child Tax Credit

The Child Tax Credit for 2023 remains a valuable tax break, offering $2,000 for each child under 17. It’s especially beneficial as it directly reduces your tax bill dollar for dollar. Be aware, though, the credit begins to phase out for higher-income families – at $400,000 for joint filers and $200,000 for single filers. Additionally, a $500 credit is available for other qualified dependents.

8. Estate and Gift Tax Exemptions Rise in 2023

For 2023, the estate and gift tax lifetime exclusion has increased to $12.92 million ($13.61 million in 2024) per individual, reflecting inflation adjustments.

9. Gift Tax Annual Exclusion

The annual gift exclusion has risen to $17,000 ($18,000 in 2024) per recipient, a $1,000 increase from 2022, allowing for tax-free gifting within this limit without affecting your lifetime estate and gift tax exemption. That means you could give any child, grandchild, or other individual up to $17,000 (or $34,000 if married) in annual exclusion gifts in 2023.

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