IRS Changes will reduce taxes
The IRS announced that it is making adjustments due to the increase in inflation.
People are struggling with inflation which impacts their buying power. Prices for gas, rent, and groceries have increased more than at any time in the last 40 years.
The new tax changes are a welcome relief for people who have been impacted by inflation.
The changes include an increase in the standard deduction and the income tax brackets.
The standard deduction is increased every year. However, the changes are more significant for 2023. The larger standard deduction will decrease taxable income.
Tax brackets determine the tax rate you’ll pay on each portion of your income. For example, expanding the 10 percent bracket will allow you to pay more tax at a lower 10% rate than the 12% rate which is the next tax bracket.
The standard deduction will increase by $1,800 for married couples filing jointly, by $1,400 for heads of households, and by $900 for single taxpayers and married taxpayers filing separately.
The IRS said that about 60 tax provisions would be updated to counter the rising inflation.
The individual tax brackets for capital gains will also be increasing in 2023.
The higher income tax brackets are intended to prevent “bracket creep” due to inflation. Bracket creep can push people who received cost-of-living pay increases into higher tax brackets.
The standard deduction, which is the baseline amount of income that people can receive tax-free will increase to $13,850 for individuals and $27,700 for married couples. This is the largest increase in deductions since 1985 when the IRS began annual automatic inflationary adjustments.
For the tax year 2021, the child tax credit increased from $2,000 to $3,600 for qualifying children under age 6 and $3,000 for other qualifying children under age 18. The entire amount was refundable.
In 2022, the tax credit will be refundable only up to $1,500 (up from $1,400 in 2020 to adjust for inflation), depending on your income, and you must have earned income of at least $2,500 to even be eligible for the refund.
The 2023 child credit amount will remain at $2,00 per qualifying child. The maximum refundable portion of the credit for a qualifying child will increase from $1500 in 2022 to $1,600.
Refundable tax credits are credits that enable you to receive a credit that is larger than the tax you owe. For example, if you owe $600 in taxes and qualify for a $1,00 refundable credit, you would receive a $400 refund.
The maximum child tax credit is $2,000 per qualifying child and is not adjusted for inflation. The refundable portion of the child tax credit is adjusted for inflation and will increase from $1,500 to $1,600 for 2023.
The earned-income tax credit for low-income workers will be worth as much as $7,430 (for qualifying taxpayers with three or more children), which is a $495 increase from last year.
The new tax changes should result in tax savings for many people next year.
David Zubler is a tax accountant and Enrolled Agent in East Tennessee, providing tax strategies and representing clients before the IRS and has over 25 years of tax experience. He is the author of six tax books and has shared tax advice on national TV. He is the founder and president of Your Tax Care. The company provides business and tax education, including David’s one-minute tax tip radio recordings at YourTaxCare.com. David can be reached at (865) 363-3019 or contacted by email at firstname.lastname@example.org.