As the deadline to file your 2023 income tax return is approaching, we wanted to remind you of the latest tax-related changes you should keep in mind as you file your return. As the tax landscape evolves each year, staying informed about key updates can make a significant difference in optimizing your tax strategy and ensuring compliance with IRS regulations. In this article, we'll explore the important changes and updates that taxpayers need to be aware of when preparing their tax returns for the 2023 tax year. From standard deduction adjustments to new reporting requirements for cryptocurrency transactions, understanding these changes can help you make informed decisions and maximize your tax benefits. Let's dive in and explore what's new for this year.
Before you file here's what you need to know.
1. Standard Deduction Adjustments
The standard deduction is an amount that reduces the income subject to tax. The standard deduction amounts for the 2023 tax year have been adjusted to account for inflation. Taxpayers should review these new amounts to determine whether they are better off taking the standard deduction or itemizing deductions on Schedule A.
The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
Tax tip: Don't automatically jump to the conclusion that you don't qualify to itemize. You would be surprised how quickly those deductions add up...medical expenses, sales tax or income tax, property tax, mortgage interest, charitable contributions all count for itemizing deductions. Do the math to make sure!
2. Income Tax Rate Changes
Tax brackets and rates can change from year to year based on inflation and other economic factors. It's essential to be aware of any adjustments to tax rates that may affect your tax liability. Review the latest tax brackets to understand how much tax you may owe based on your income level.
Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
The other rates are:
35% for incomes over $231,250 ($462,500 for married couples filing jointly);
32% for incomes over $182,100 ($364,200 for married couples filing jointly);
24% for incomes over $95,375 ($190,750 for married couples filing jointly);
22% for incomes over $44,725 ($89,450 for married couples filing jointly);
12% for incomes over $11,000 ($22,000 for married couples filing jointly).
The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
Tax tip: Check to make sure your filing status is the best for you! Compare Married Filing Separately to Married Filing Joint to ensure you are filing in the most efficient way. While rare we do see that some clients benefit from filing separately. We check this on all of our jointly filed returns.
3. Health Savings Account (HSA) Contribution Limits
For individuals with high-deductible health plans (HDHPs) who contribute to Health Savings Accounts (HSAs), it's important to note any changes in contribution limits. These limits can change annually, so make sure you're aware of the maximum allowable contributions for the 2023 tax year.
For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
Tax tip: You have until April 15th to make HSA contributions for 2023 tax year. You can take an above the line deduction on your income tax return, and as long as the funds are used for qualifying medical expenses you will never pay tax on the money contributed or the investment results within the account. This can also be used as a tool to reduce your AGI below thresholds necessary for certain credits or deductions if you are close to the line.
4. Retirement Account Contribution Limits
Similarly, contribution limits for retirement accounts such as 401(k)s, IRAs, and Roth IRAs can change from year to year. Take advantage of tax-advantaged retirement savings by contributing up to the maximum allowable limits for your age and income level.
The contribution limits for 401(k) plans in 2023 have been set at $22,500 for employee contributions and $66,000 for combined employee and employer contributions. Individuals aged 50 or older can make additional catch-up contributions of up to $7,500, increasing their employee contribution limit to $30,000.
Tax tip: You have until April 15th to make IRA (traditional and Roth) contributions for 2023 tax year, and you can have until the due date of your return with extensions to fund certain self employed accounts such as 401(k)s or SEP IRAs. You can take an above the line deduction on your income tax return for any pre-tax contributions reducing your tax liability for 2023. This can also be used as a tool to reduce your AGI below thresholds necessary for certain credits or deductions if you are close to the line.
If you are not looking for a tax deduction but are still interested in saving for the future, if you have earned income you can fund a Roth IRA. This is great for school age kids that are working. You can check out our blog post about paying your child in your small business and funding a Roth here.
5. Changes to Tax Credits and Deductions
Tax credits and deductions can significantly reduce your tax liability. Stay informed about any new credits or deductions introduced for the 2023 tax year, such as credits for energy-efficient home improvements or deductions for qualified education expenses.
The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
New clean vehicle credit. The credit for new qualified plug-in electric drive motor vehicles has changed. This credit is now known as the clean vehicle credit. The maximum amount of the credit and some of the requirements to claim the credit have changed. The credit is still reported on Form 8936 and Schedule 3, line 6f. For more information, see Form 8936.
6. Reporting Cryptocurrency Transactions
With the growing popularity of cryptocurrency, the IRS has increased its focus on reporting requirements for virtual currency transactions. Taxpayers who buy, sell, or hold cryptocurrency should be aware that they will need to answer, "At any time during 2023, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"
If a digital asset transaction results in a taxable gain or loss, you must report all income from your digital asset transactions.
Tax tip: Crypto losses can be deducted on your tax return against ordinary income up to $3,000 per year over and above current year gains. The loss must be realized in order to be deducted, meaning you must have cashed out or swapped that position.
7. Updates to Tax Forms and Filing Procedures
Finally, be sure to familiarize yourself with any updates to tax forms and filing procedures. The IRS may introduce changes to forms such as Form 1040 or related schedules, as well as electronic filing requirements.
The IRS is taking steps to implement a Direct File pilot during the 2024 filing season. This pilot will give eligible taxpayers an option to prepare and electronically file their 2023 federal tax returns directly with the IRS for free. The Direct File pilot will be offered to eligible taxpayers in participating states who have relatively simple tax returns reporting only certain types of income and claiming limited credits and deductions. See IRS.gov/DirectFile for pilot information and updates.
As you prepare to file your 2023 tax return and navigate these new tax-related changes, remember that staying informed is key to a successful filing process. If you find these changes overwhelming or have questions about how they may impact your specific tax situation, don't hesitate to reach out to our team of experienced tax professionals for assistance. Whether you need help understanding deductions and credits, navigating reporting requirements for cryptocurrency transactions, or optimizing your tax strategy for maximum benefits, we're here to provide expert guidance and support. Contact us today to schedule a consultation and ensure a smooth and accurate tax filing experience.
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