The Coronavirus tossed several wrenches into the 2021 and 2022 tax seasons, including giving all of us an extra month to file, but the 2023 tax season is back to business as usual in some instances. In other instances, there are additional changes, including new rules on deductions and an expanded Child Tax Credit.
We will dig into both of those changes, plus a few more, a little later. First, we will cover some details you need to know for the 2023 tax season:
- Tax filing deadline: April 17, 2023, is the tax deadline for all federal tax and state tax returns.
- Extension deadline: October 16, 2023, is the deadline if you requested an extension.
- Standard deduction increase: the standard deduction for 2022, which will be useful when you file in 2023, increased to $12,950 for single filers and $25,900 for married couples filing jointly.
- Income Tax bracket increase: Most income tax brackets were adjusted for income earned during 2022.
It’s never too early to start planning for the tax season, so here is what you need to know before you file taxes in 2023!
Income Tax Bracket and Rates for the 2023 Tax Season
The tax bracket you fall into will determine the amount of money you pay in taxes (your taxable income) as a percentage of your gross income.
Which tax bracket(s) apply to you this year?
First, calculate your gross income. If you are self-employed, take the amount you made last year and deduct your expenses.
With your Gross income calculated and your filing status you can determine your tax bracket by referring to the table below:
2022 Marginal Income Tax Rates and Brackets
Knowing your tax bracket and tax rates is essential for several reasons. First, it can help you to minimize your tax liability. No matter what tax bracket you are in, taking advantage of deductions and tax credits is beneficial in lowering your taxable income and potentially reducing your overall tax bill.
Additionally, understanding your tax bracket can help you make better financial decisions.
Higher Standard Deductions in 2023
When you pay taxes, you can take the standard deduction or itemize your deductions.
Itemizing is more of a burden as you have to calculate your deductions one by one, but it may be worth it if your itemized deductions exceed the amount of the standard deduction.
It’s important to note that for the 2020 and 2022 tax years, the standard deduction went up to adjust for inflation and will carry over into the 2023 tax season.
Standard Deduction from 2022
If you are unsure whether to take the standard deduction or to itemize, you may want to consult a tax professional.
If you need help finding a tax professional, Visit ACE’s tax services to find one in your area.
Tax Deductions and Credits to consider for the 2023 Tax Season
A tax deduction is an expense subtracted from your taxable income. These deductions lower the income subject to taxation and, therefore, reduce the amount of taxes you owe. For example, if you have a taxable income of $50,000 and are eligible for $5,000 in deductions, you will reduce your taxable income to $45,000. There are many different types of deductions, including those for business expenses, charitable donations, and medical expenses.
In contrast, a tax credit is an amount of money a taxpayer can subtract from the total tax bill. These tax credits are often used to encourage engagement in activities the government wants to promote. Examples include purchasing energy-efficient appliances or installing solar panels in your home.
Here are some deductions and credits you might be able to claim on your 2023 tax return:
Claiming charitable deductions can be a great way to lower your tax bill while helping a cause you believe in. However, it’s important to know the rules and regulations regarding these deductions. For example, you can only deduct donations of money or property made to qualifying organizations for religious, educational, scientific, literary, or fine arts purposes or those that do research into specific diseases. Also included are charities that prevent cruelty to children or animals, provide legal services for the poor, and assist veterans.
Taxpayers cannot deduct donations made directly to individuals from taxes unless the donation goes directly toward medical care expenses.
Additionally, you’ll need documentation of your donation in the form of a canceled check, bank statement, or charitable receipt from the charity. Keep in mind that you can only deduct the portion of your donation up to 50% of your adjusted gross income (AGI). With these things in mind, claiming a charitable deduction can be a simple and effective way to reduce your taxable income.
You may deduct only the amount of your total medical expenses that exceed 7.5% of your adjusted gross income (AGI). The IRS defines medical expenses as any costs related to diagnosing, treating, or preventing disease.
Here are a few more criteria for deductible medical expenses:
- Any medical services provided by physicians, surgeons, dentists, and other medical professionals
- Medical devices, equipment, and other medical supplies
- Health and dental insurance premiums—as long as they’re not reimbursed by your employer and the premiums are paid using after-tax dollars
- Long-term care and long-term care insurance
However, to write off these expenses on your tax return, you will need to itemize your deductions.
If you’re self-employed, there are many deductions you can claim on your tax return, including travel expenses and home office expenses if you use part of your home for your business.
If you transitioned from an in-office employee to a work-from-home employee, you would not be able to claim the home office deduction as it is reserved for self-employed workers only.
Child and Dependent Care Tax Credit
The Child and Dependent Care Tax Credit is a tax credit that may help taxpayers pay for the care of eligible children and other dependents (qualifying persons). This credit is calculated based on your income and a percentage of expenses that you incur for the care of qualifying persons to enable you to go to work, look for work, or attend school. The Rescue Plant Act of 2021, enacted March 11, 2021, made it possible for taxpayers to claim an annual tax credit for up to $4,000 for one qualifying dependent and $8,000 for two or more qualifying dependents.
However, taxpayers with an AGI over $438,000 are not eligible for this credit even though they may have previously been able to claim this credit.
Earned Income Tax Credit (EITC)
The earned income tax credit (EITC) is a refundable tax credit for low and moderate-income workers. The credit is based on earned income, so it increases as workers earn more money. The EITC can also boost the pay of workers who are just above the poverty line by making them eligible for other benefits, such as the childcare tax credit.
Education Tax Credit
These education tax credits are a great way to save on your taxes while getting back money for your educational expenses.
The American Opportunity Tax Credit (ATOC) is a partially refundable credit available to full-time and part-time students. It can be used for various expenses, including tuition, fees, books, and supplies for the first four years of college. The credit is worth up to $2,500 per year for an eligible student, and the student can apply it to federal and state taxes.
The Lifetime Learning Credit (LLC) is not refundable and covers up to 2,000 in qualified educational expenses per term. If you’re looking for a way to reduce your tax burden and get back money for your education, the education tax credit is a great option.
The 2023 tax season is right around the corner. As you prepare to file your taxes, it’s important to stay up-to-date on the latest changes. There are various deductions and credits to be aware of, so make sure you plan and consult with a tax professional if you have any questions. And remember, if you want to receive your tax refund faster than a paper check,1 apply2 for the Flare Account® today, to have your tax refund electronically deposited!
This blog is not intended to provide any tax, legal, financial planning, insurance, accounting, investment, or any other kind of professional advice or services. To make sure that any information or suggestions in this blog fit your particular circumstances, you should consult with an appropriate tax or legal professional before taking action based on any suggestions or information that we provide.