2023 Tax Changes: Essential Updates That Could Impact Your Wallet

The Internal Revenue Service (IRS) has announced new tax laws and changes for 2023 that could have a significant impact on your wallet. It's crucial to stay informed and prepared, especially when it comes to filing tax returns for the 2023 tax year.

To help navigate these changes, our expert Maryland business tax lawyer is here to answer any questions you may have. Keep reading for a breakdown of the key updates you need to know.

What Are the New IRS Changes for 2023 for Taxable Income?

On October 18, 2022, the IRS issued a News Release outlining some of the changes for the tax year 2023. The 2023 tax changes mainly deal with tax inflation adjustments for more than 60 tax provisions. That includes the tax rate schedules and other changes.

However, other changes include higher standard deductions, changes to some deductions and credits, and changes in retirement plans. Let’s look at some key changes that could cause you to have a smaller tax refund when tax time rolls around in 2024.

What Are the Major Tax Changes for 2023 Capital Gains?

Experts say individuals who sell investments from their taxable portfolio in 2023 might not face a bill for long-term capital gains taxes because of the 2023 tax changes. The IRS increased the thresholds for the long-term capital gains brackets for tax year 2023. The long-term gains tax applies to assets held for more than one year.

The affected long-term capital gains brackets adjusted for tax year 2023 are:

Single Filers Rate and New Tax Brackets

0%                                        $0 to $44,625

15%  $44,626 to $492,300

20%                                      $492,301 and higher

Married Couples Filing Jointly Rate and New Tax Brackets

0%                                         $0 to $89,250

15%                                        $89,251 to $553,850

20%                                       $553,851 and higher

Many people will fall into the 0% bracket because of increased income thresholds and standard deductions in 2023, so they will not receive a tax bill for the sale. The tax savings could be substantial depending on the long-term assets being sold.

IRS Provides Tax Inflation Adjustments for Tax Year 2023

The changes included in the annual inflation adjustments for the 2023 tax year include an increase of about 7% for the federal tax brackets. The increase is to account for the high inflation consumers are still experiencing at the cash register.

The highest tax bracket remains at 37%, and the lowest rate is still 10%. However, the income thresholds have increased. The new tax brackets for 2023 can be found in IRS Publication 15-T Federal Income Tax Withholding Methods for 2023.

The changes in the tax brackets impact the income you earn during 2023. The rates are in effect now in your paychecks. However, the changes could impact the taxes you might owe or a refund you could receive when you file in 2024.

Refunds Will Be Smaller in 2023

The IRS adjustments could mean that your paychecks this year might increase beginning in January 2023. For higher wager earners, they might not see a drastic change.

However, the bad news is that many people may receive significantly smaller tax refunds in 2023 because of changes to the 2022 tax brackets and the expiration of pandemic tax credits. The credits might still exist, but the amounts reverted to their pre-pandemic levels. So those expecting a large refund might experience tax refund shock when they file their 2022 tax returns.

What Else Will Change For Tax Year 2023?

In addition to the change in tax brackets and long-term capital gains, taxpayers should also take note of other tax changes for tax year 2023:   

Higher Contribution Limits on Retirement Accounts

The IRS increased the limits for contributions to 401(k) and individual retirement accounts for 2023.

In 2023, employee deferment increases to $22,500. Catch-up deposits for people over 50 years old increase to $7,500. The increases apply to Thrift Savings Plans, 403(b) plans, and most 457 plans, in addition to 401(k) accounts.

The contribution limits for individual retirement accounts also increase for 2023. You can now save up to $6,500. If you are over 50, the catch-up deposit remains at $1,000.

Increases in Standard Deductions for 2023

The IRS also announced increases in the standard deductions. Married couples filing jointly can claim a standard deduction of $27,700 for 2023. The 2023 standard deduction for single filers increases to $13,850. The standard deduction for heads of household increases to $20,800 for the 2023 tax year. Most taxpayers use the standard deduction, but some still benefit from itemized deductions.

Higher Income Limit for Roth IRA Contributions

The 2023 tax changes include a higher income limit for Roth IRA contributions, making these investment options available to more investors. The income phaseout range increases to between $218,000 and $228,000 for married couples filing jointly. Single filers now have an adjusted gross income phaseout range of $138,000 and $153,000 for 2023.

More Time For Required Minimum Distributions

The tax changes in 2023 include changes to the required minimum distributions (RMDs) that apply to certain retirement accounts. Beginning in 2023, RMDs will begin a year later at 73 years old. In 2033, the age for RMDs will increase to 75 years old.

Earned Income Tax Credit

Low-income wage earners will notice an increase in the earned income tax credit for 2023. The 2023 tax change for EIC increases the credit from $6,935 for a person with at least three children to $7,430. 

Bigger Gift Exclusion

Many people use the gift exclusion to avoid paying taxes on gifts. In 2023, the amount will increase by $1,000 to $17,000.

Estate Tax Limit

The estate tax exemption will increase in 2023. Estates can exempt up to $12.92 million from federal estate tax. The new rate is a 7.1% increase from the exemption amount for individuals who died in 2022.

Health Flexible Spending Accounts

Many workers use flexible spending accounts to place pre-tax money in savings accounts to use for medical expenses. The new IRS limit for FSAs in 2023 will increase by about 7% to $3,050. 

How To Maximize Your Refund With Tax Bracket Changes

The change in the tax brackets for 2023 could result in some taxpayers falling into lower tax brackets. Additionally, they can use the higher standard deduction to reduce their taxable income even lower. However, you might not see much change if your income increases substantially in 2023.

However, you could lower your taxable income by taking advantage of the increases in retirement savings and flexible spending accounts. The income is pre-tax, which reduces how much of your income is subject to taxes.

Tax professionals assist individuals in identifying ways to minimize tax liability each year for the maximum tax benefit possible. 

Get Help with Business Taxes from a Maryland Business Tax Lawyer

Tax law is complicated. The laws change yearly, making it challenging to keep up with the changes. In addition to changes in individual tax laws, corporate tax laws can change. Our Maryland business tax lawyer can help you navigate tax laws to avoid costly mistakes and errors. Schedule a consult today.