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 a seasoned financial expert with a deep understanding of tax planning and wealth management. My expertise is demonstrated by years of hands-on experience and a comprehensive knowledge of the intricacies of the financial landscape. As someone well-versed in taxation, I can offer valuable insights into the complexities of tax brackets, deductions, and other critical aspects of financial planning.
Now, let's delve into the information provided in the article:
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Income Tax Brackets:
- The article outlines the seven income tax brackets for the year 2023, providing details for both single filers and married couples filing jointly. These brackets have been adjusted to accommodate inflation.
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Standard Deduction:
- The standard deduction has increased for 2023 after an inflation adjustment. The amounts vary for different filing statuses, such as single filers, married couples filing jointly, and heads of households.
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Itemized Deductions:
- While the standard deduction is often more practical for most filers, the article emphasizes that itemizing deductions might be beneficial in certain cases. It covers key rules for itemized deductions, including limitations on state and local tax deductions, mortgage interest deductions, medical expense deductions, and charitable donations.
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IRA and 401(k) Limits:
- The contribution limits for traditional IRAs and Roth IRAs in 2023 have slightly increased. Additionally, the article mentions higher contribution limits for tax-deferred 401(k)s and Roth 401(k)s, with additional catch-up contributions for individuals aged 50 and older.
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Health Savings Account (HSA):
- The maximum contributions to Health Savings Accounts (HSA) have been updated for 2023, with increased limits for individuals and families. The article advises on the eligibility criteria for HSAs, including enrollment in a high-deductible health plan.
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Child Tax Credit:
- The article highlights the Child Tax Credit for the year 2023, providing information on the credit amount per child and the phase-out thresholds for joint and single filers. It also mentions a $500 credit for other qualified dependents.
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Alternative Minimum Tax (AMT):
- The article notes that the AMT exemption is higher for 2023 and provides exemption amounts for single filers and married taxpayers filing jointly. It mentions the phase-out thresholds for the AMT.
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Estate and Gift Tax:
- The estate and gift tax exemption for 2023 is mentioned, indexed to inflation and set at $12,920,000. The article also notes the potential expiration of the higher exemption at the end of 2025.
In conclusion, the information provided in the article serves as a comprehensive guide for individuals preparing to file their taxes in 2023. It covers key aspects such as income tax brackets, deductions, contribution limits for retirement accounts, and updates on various tax credits and exemptions. As a financial expert, I would recommend individuals to carefully consider these factors to optimize their tax planning strategies for the upcoming year.
