The IRS has announced new tax brackets and standard deductions for 2023. Here’s what we know so far about the most recent 2023 tax changes.
1. Tax Brackets Are Changing
The IRS has announced that there will be a 5.4% bump in income thresholds to reach each new tax bracket. Below is a link to the IRS website with the 2023 tax brackets. Federal income tax rates and brackets | Internal Revenue Service (irs.gov)
2. Standard Deductions Will Increase
Most Americans (86%, in fact) take the standard deduction instead of itemizing their deductions at tax time. The amount we’ll be able to deduct in 2024 is increasing. For the 2023 tax season the standard deduction will be $13,850 for single and Married Filing Separately, $27,700 for Married Filing Jointly, and $20,800 for Head of Household.
3. The Alternative Minimum Tax (AMT) Exemption Will Be Higher
Under tax law, “average” taxpayers receive tax breaks that can significantly reduce the amount of income tax they must pay. To help ensure that all taxpayers pay their fair share, high-income earners are subject to the alternative minimum tax. Due to AMT, wealthy taxpayers must drop certain deductions available to average taxpayers and add back some sources of income. Once the math is done and the taxpayer is left with a total, they get to deduct the AMT exemption.
4. The Earned Income Tax Credit (EITC) Has Been Boosted
Qualifying taxpayers with three or more qualifying children will see the EITC increase to $7,430. The EITC is a federal tax credit for low- to moderate-income taxpayers, particularly those with children.
5. Foreign Earned Income Exclusion Increase
There was also an increase in the foreign-earned income exclusion. The new exclusion is $120,000 for 2023. In short, U.S. citizens working outside the U.S. can reduce their tax bill by excluding an additional $8,000 from income earned in other countries.
6. Beneficiaries Can Exclude More
Beneficiaries will be able to exclude $12,920,000 of the decedent’s estate in 2023. While receiving part of a multi-million dollar estate is not the norm for most of us, this tax change helps the wealthy preserve more of their money for the family, friends, and charitable organizations it’s left to upon their death.
7. Annual Exclusion for Gifts Is Getting a Bump
In 2024, the new annual exclusion for gifts is increasing to $18,000, an increase of $1,000 from 2023. The annual exclusion for gifts refers to the amount of money one person can “gift” another without being hit with a gift tax. Typically, the gift giver is responsible for paying the tax bill, which makes this change welcome news to those who would like to share a bit more of their money.
8. Adoption Credits Are on the Rise
The maximum allowable adoption credit for 2023 is ratcheting up to $15,950. The adoption credit is designed to help offset the high costs associated with adopting a child. In addition to court costs and attorney fees, the credit can be applied to travel expenses and any other expense directly related to a legal adoption.
Tax Planning for 2026 and Beyond
As we start to head into 2024 be aware that All of the individual tax provisions of the 2017 Tax Cuts and Jobs Act (TCJA) expire at the end of 2025. Among the changes: Individual income tax rates will revert to their 2017 levels. The standard deduction will be cut roughly in half, the personal exemption will return while the child tax credit (CTC) will be cut, the estate tax exemption will be reduced, the special 20 percent tax deduction for many pass-through businesses will disappear, the cap on the state and local income Tax (SALT) deduction will dissolve.
Bottom line: Taxes would increase for most US households. And instead of lawmakers looking at tax hikes to slow the growth in the national debt, they’ll likely to be trying to stave them off.
As you explore the updates in tax brackets and deductions for 2023, don’t miss the chance to discover Ohio Homebuyers Plus—a tailored savings plan for Ohioans pursuing tax-smart homeownership.
A big thank you for the “tax facts” to:
Chuck Lehman, CPA
Lehman Bookkeeping Solutions, Inc
PO Box 328
Milford Center, OH 43045