- It’s never too early to start planning for the upcoming tax season by getting organized.
- Before filing, it’s important to know 2023 changes that could affect your tax liability.
- “You really need to be your own advocate,” said certified financial planner Edward Jastrem, chief planning officer at Heritage Financial Services.
1. Tax brackets got wider
When comparing tax year 2022 to 2023, there was a big adjustment to the federal income tax brackets, according to experts.
While the rates didn’t change, there was roughly a 7% increase in the brackets, which expanded the amount of taxable income you can have in each tier. You calculate taxable income by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
“That was a larger increase than usual,” Kyle Pomerleau, senior fellow and federal tax expert with the American Enterprise Institute, previously told CNBC. “And that is because inflation has been higher than usual.”
2. There’s a bigger standard deduction
Inflation also boosted the standard deduction for 2023, which reduces your taxable income, but makes it harder to claim itemized tax breaks for charitable giving 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 may claim $13,850 for 2023, an increase from $12,950.
Enacted via the Tax Cuts and Jobs Act of 2017, the higher standard deduction is slated to sunset in 2026, along with lower tax rates. Some filers may have tax planning opportunities in the meantime, such as accelerating income or making Roth individual retirement account conversions, said CFP Nicholas Gertsema, CEO and wealth advisor at Gertsema Wealth Advisors in St. Joseph, Missouri.
3. Form 1099-K reporting changes are delayed
The IRS in November delayed a 2023 reporting change for business payments made via apps such as PayPal or Venmo.
Prior to the change, even a single payment of $600 would have triggered Form 1099-K, which reports business payments to the IRS.
Referring to 2023 as a “transition year,” the IRS said 2023 would have the old limit of more than 200 transactions worth an aggregate above $20,000.
However, business income is still taxable, warned Tommy Lucas, an Orlando, Florida-based CFP and enrolled agent at Moisand Fitzgerald Tamayo. “If you want to follow the law, you [have] still got to report it, even if a third party is not.”
4. Energy tax credits are in play
If you purchased a vehicle in 2023 or made energy improvements to your home, you could qualify for tax breaks, according to the IRS.
The clean vehicle tax credit caps the break at $7,500, while eligible eco-friendly home improvements could be worth thousands more.
With more complicated tax breaks, it’s critical to “have your ducks in a row” prior to meeting with a tax preparer, Jastrem said.
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