The Internal Revenue Service (IRS) has recently released the tax year 2023 annual inflation adjustments for over 60 tax provisions. These adjustments include changes to tax rate schedules and other tax-related modifications. In this article, we will explore the key updates provided by the IRS and how they may impact taxpayers.
New for 2023
One notable change for tax year 2023 is the extension of certain energy-related tax breaks and the indexing for inflation of the energy-efficient commercial buildings deduction. The applicable dollar value used to determine the maximum allowance of the deduction has increased to $0.54 (not exceeding $1.07) for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by over 25 percent. Additionally, the applicable dollar value used to determine the increased deduction amount for certain property has increased to $2.68 (not exceeding $5.36) for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by over 25 percent.
Highlights of Changes in Revenue Procedure 2022-38
The tax year 2023 adjustments, outlined in Revenue Procedure 2022-38, generally apply to tax returns filed in 2024. Here are some of the key changes:
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Standard Deduction: The standard deduction for married couples filing jointly has increased to $27,700, up $1,800 from the previous year. For single taxpayers and married individuals filing separately, the standard deduction has risen to $13,850, an increase of $900. 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.
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Marginal Rates: The top tax rate of 37% remains unchanged for individual single taxpayers with incomes exceeding $578,125 ($693,750 for married couples filing jointly). The other tax rates are as follows: 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), and 12% for incomes over $11,000 ($22,000 for married couples filing jointly). The lowest rate remains at 10% for single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
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Alternative Minimum Tax (AMT): The AMT exemption amount for tax year 2023 is $81,300. It begins to phase out at $578,150 ($126,500 for married couples filing jointly) with the exemption completely phased out at $1,156,300. The 2022 exemption amount was $75,900, with a phase-out threshold of $539,900 ($118,100 for married couples filing jointly) and a complete phase-out at $1,079,800.
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Earned Income Tax Credit (EITC): The maximum EITC amount for tax year 2023 is $7,430 for qualifying taxpayers with three or more qualifying children, an increase from $6,935 in tax year 2022. The revenue procedure includes a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
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Qualified Transportation Fringe Benefit and Qualified Parking: The monthly limitation for the qualified transportation fringe benefit and qualified parking has increased to $300 for tax year 2023, up $20 from the limit for 2022.
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Health Flexible Spending Arrangements: The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements has increased to $3,050 for taxable years beginning in 2023. For cafeteria plans that allow the carryover of unused amounts, the maximum carryover amount is $610, a $40 increase from taxable years beginning in 2022.
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Medical Savings Accounts: Individuals with self-only coverage in a Medical Savings Account must have an annual deductible between $2,650 and $3,950 for tax year 2023. For family coverage, the annual deductible ranges from $5,300 to $7,900. The maximum out-of-pocket expense amounts have also increased.
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Foreign Earned Income Exclusion: The foreign earned income exclusion has increased to $120,000 for tax year 2023, up from $112,000 for tax year 2022.
These are just a few of the adjustments made by the IRS for tax year 2023. For a comprehensive list of changes, taxpayers can refer to Revenue Procedure 2022-38.
Items Unaffected by Indexing
Certain items are not adjusted for inflation, as mandated by statute. The following items remain unchanged:
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Personal Exemption: The personal exemption for tax year 2023 remains at 0, as it was in 2022. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
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Itemized Deductions: Similar to 2022, 2021, 2020, 2019, and 2018, there is no limitation on itemized deductions, as the limitation was eliminated by the Tax Cuts and Jobs Act.
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Lifetime Learning Credit: The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is not adjusted for inflation for taxable years beginning after December 31, 2020. The credit is phased out for taxpayers with modified adjusted gross income exceeding $80,000 ($160,000 for joint returns).
FAQs
Q: When will the tax adjustments for tax year 2023 take effect?
A: The tax adjustments announced by the IRS will generally apply to tax returns filed in 2024.
Q: Are there any changes to the standard deduction for tax year 2023?
A: Yes, the standard deduction has increased for various filing statuses. For married couples filing jointly, it is now $27,700. For single taxpayers and married individuals filing separately, it is $13,850. For heads of households, the standard deduction is $20,800.
Q: Has the top tax rate changed for tax year 2023?
A: No, the top tax rate remains 37% for individual single taxpayers with incomes exceeding $578,125 ($693,750 for married couples filing jointly).
Q: Are there any adjustments to the Earned Income Tax Credit for tax year 2023?
A: Yes, the maximum EITC amount for qualifying taxpayers with three or more qualifying children has increased to $7,430 for tax year 2023.
Conclusion
The IRS has provided tax inflation adjustments for tax year 2023, which include changes to tax rate schedules and various tax provisions. Taxpayers should familiarize themselves with these adjustments to ensure their tax returns are accurate and up to date. For more detailed information, taxpayers can refer to the official Revenue Procedure 2022-38. Stay informed and consult with a tax professional if needed to navigate the changing tax landscape.
Sources: News Explorer Today