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When comparing tax years 2022 and 2023, experts say there was a major adjustment in federal income tax brackets.
While tax rates didn't change, there was an increase of about 7% in tax brackets, increasing the amount of taxable income you can have in each bracket. You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
“This was a larger increase than usual,” Kyle Pomerleau, senior fellow and federal tax expert at the American Enterprise Institute, previously told CNBC. “And that’s because inflation has been higher than usual.”
Inflation has also increased the standard deduction for 2023, reducing your taxable income but making it harder to claim itemized tax breaks for charitable donations or medical expenses.
For 2023, the standard deduction increased to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers can claim $13,850 for 2023, an increase from $12,950.
The higher standard deduction enacted by the Tax Cuts and Jobs Act of 2017, along with lower tax rates, is scheduled to expire in 2026. Some taxpayers may have tax planning options in the meantime, such as: Such as accelerating income or converting individual Roth retirement accounts, said CFP Nicholas Gertsema, CEO and wealth advisor at Gertsema Wealth Advisors in St. Joseph, Missouri.
The IRS in November postponed a reporting change for business payments through apps like PayPal or Venmo until 2023.
Before the change, even a single payment of $600 would have triggered Form 1099-K, which reports business payments to the IRS.
The IRS designated 2023 as a “transition year” and said the old limit of more than 200 transactions with a total value of over $20,000 would apply in 2023.
However, business income is still taxable, warned Tommy Lucas, a CFP based in Orlando, Florida and registered agent at Moisand Fitzgerald Tamayo. “If you want to follow the law, then [have] must still report it, even if a third party does not do so.
If you purchased a vehicle or made energy efficiency improvements to your home in 2023, you could be eligible for tax breaks, according to the IRS.
The Clean Vehicle Tax Credit caps the break at $7,500, while eligible green home improvements could be worth thousands more.
For more complicated tax relief, it is important to “have everything under control” before meeting with a tax advisor, said Jastrem.
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