New IRS Rules for 2023
Rising prices and stock market volatility are taking a toll on Americans’ finances, but the IRS has rolled out updates that can help you better plan for your future.
Inflation adjustments to 2023 tax brackets and other provisions can make a big difference in your take-home pay, especially if you’re paying taxes through the standard deduction. In addition, the new Secure 2.0 rule changes the starting age for required minimum distributions from 72 to 73 in 2023.
Tax brackets
Tax brackets determine the tax rate you’ll pay on your income. Each bracket starts at a lower tax rate and increases progressively as your income rises.
For example, single taxpayers in 2023 will pay 10% of the first $11,000 they earn, 12% of the next $44,725 they earn, and 22% of the last $95,375 they earn. That’s a $3,350 increase in the 22% singles bracket from 2022 to 2023.
These brackets are adjusted each year to account for inflation. This is a good thing because it prevents “bracket creep,” which occurs when your income goes up faster than inflation does.
Standard deduction
The standard deduction is the amount of money you can deduct from your taxable income. The IRS adjusts the standard deduction each year to account for inflation.
You can either take the standard deduction or itemize your deductions, which is a little more work but could save you a lot of money. But you need to weigh your options carefully and talk to a tax professional if you have a complicated situation with many possible deductions.
In 2023, the standard deduction will rise to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers and heads of households will also get an increase.
In addition, the additional standard deduction will increase to $1,500 for married couples 65 or older and blind or partially sighted, up from $1,400 in 2022. This can be a great help for senior citizens and the blind, who often struggle to come up with enough itemized deductions to cover their taxes.
AMT thresholds
If your income exceeds certain thresholds, you may be required to pay the alternative minimum tax (AMT). The AMT is an additional tax system that limits some deductions and doesn’t permit others. It also has higher rates than regular taxes, starting at 26% and capping at 28%.
If you have a high income, consider using IRS Form 6251, which will help you figure out your AMT liability. You can complete it by hand, use a tax software program, or hire a professional to do it for you.
You could also get hit by the AMT if you realize a large capital gain on a home or other investment. In addition, you might trigger the AMT if you exercise incentive stock options.
The AMT phaseout thresholds for 2023 increased to $578,150 for single filers and $1,156,300 for married couples filing jointly. These amounts are indexed for inflation every year.
Earned income tax credit
The earned income tax credit is a federal and state work credit that may give you money back at tax time or reduce the amount of taxes you owe. It can be worth up to $11,000 for most taxpayers.
The credit is available to low- and middle-income wage earners, including families with children. It helps boost income and is a key source of economic security for many Americans.
Its eligibility rules are adjusted annually to comply with changes in law and inflation. The 2023 IRS adjustments show the latest ranges and amounts for qualifying workers based on recent tax years and new legislation.
The credit is refundable, meaning you can get a refund if the credit exceeds your tax liability. Refundable credits are critical to the EITC’s ability to boost income and reduce poverty.