2023 Tax Changes

Comprehensive Tax Changes for Tax Year 2023

Income Tax Brackets 2023

 Although the tax rates didn't change, the income tax brackets for 2023 are much wider than for 2022. The difference is due to the rising inflation during the 12-month period from September 2021 through August 2022, which is used to calculate the adjustments. 

2022 Tax Brackets for Single/Married Filing Jointly/Head of Household

Tax Rate	Taxable Incme (Single)	Taxable Income (Married Filing Jointly)	Taxable Income (Head of Household)
10%	Up to $11,000	Up to $22,000	Up to $15,700
12%	$11,001 to $44,725	$22,001 to $89,450	$15,701 to $59,850
22%	$44,726 to $95,375	$89,451 to $190,750	$59,851 to $95,350
24%	$95,376 to $182,100	$190,751 to $364,200	$95,351 to $182,100
32%	$182,101 to $231,250	$364,201 to $462,500	$182,101 to $231,250
35%	$231,251 to $578,125	$462,501 to $693,750	$231,251 to $578,100
37%	Over $578,125	Over $693,750	Over $578,100

Long-Term Capital Gains Tax Rates

Tax rates on long-term capital gains (i.e., gains from the sale of capital assets held for more than one year) and qualified dividends did not change for 2023. However, the income thresholds to qualify for the various rates were adjusted for inflation.

In 2023, the 0% rate applies for individual taxpayers with taxable income up to $44,625 on single returns ($41,675 for 2022), $59,750 for head-of-household filers ($55,800 for 2022), and $89,250 for joint returns ($83,350 for 2023).

The 20% rate for 2023 starts at $492,301 for singles ($459,751 for 2022), $523,051 for heads of household ($488,501 for 2022), and $553,851 for couples filing jointly ($517,201 for 2022).

The 15% rate is for filers with taxable incomes between the 0% and 20% breakpoints.

The 3.8% surtax on net investment income stays the same for 2023. It kicks in for single people with modified adjusted gross income over $200,000 and for joint filers with modified AGI over $250,000.

Standard Deduction

The standard deduction amounts were increased for 2023 to account for inflation. Married couples filing jointly get $27,700 ($25,900 for 2022), plus $1,500 for each spouse age 65 or older ($1,450 for 2022). Singles can claim a $13,850 standard deduction ($12,950 for 2022) — $15,700 if they're at least 65 years old ($14,700 for 2022). Head-of-household filers get $20,800 for their standard deduction ($19,400 for 2022), plus an additional $1,850 once they reach age 65 ($1,750 for 2022). Blind people can tack on an extra $1,500 to their standard deduction ($1,400 for 2022). That jumps to $1,850 if they're unmarried and not a surviving spouse ($1,750 for 2022). 

Residential Clean Energy Credit

If you install an alternative energy system in your home that relies on a renewable energy source, such as solar, wind, geothermal, or fuel cell technology, this credit is for you. Solar panels, solar electric equipment, solar-powered water heaters, and wind turbines are eligible for the credit. And beginning in 2023, the credit also applies to battery storage technology with a capacity of at least three kilowatt hours. The size of the credit is 30% of the cost of the equipment and installation for renewable energy systems. The full credit goes through 2032. After that, it drops to 26% in 2033 and 22% in 2034, before it expires in 2035.

Energy-Efficient Home Improvement Credit

The tax credit for installing energy-efficient windows, doors, etc. in your home has been completely revamped, beginning this year. For 2022, the credit applied to 10% of the cost of certain types of insulation, plus external windows, doors, and skylights. It also included the cost of electric heat pumps and water heaters, some central air-conditioning systems, and similar energy-saving investments. There was a lifetime credit limitation of $500. And the credit was capped for many items.

This credit is now bigger and better for 2023 through 2032. First, the credit percentage increases to 30% of the cost of certain types of insulation, boilers, air-conditioning systems, windows, doors, etc. added to your residence. Second, the  $500 lifetime limit is replaced with a $1,200 annual limit. This $1,200 annual limit is lowered to $500 in the aggregate for exterior doors and $600 for exterior windows and skylights and for other items. The annual limit increases to $2,000 for a biomass stove or hot water boiler, or an electric or natural gas heat pump put in the home. Third, you can also get a credit of up to $150 for the cost of a home energy audit.

Clean Vehicle Credit

The tax credit for buying an electric vehicle has been completely revamped by last year’s Inflation Reduction Act (including a name change from the electric vehicle tax credit to the clean vehicle credit). For 2023 through 2032, the maximum tax break remains $7,500 for buying a new EV. But the factors for figuring the credit are new. To be eligible for the full $7,500 credit, EVs put in use after April 17, 2023, must meet a critical minerals requirement and a battery component rule. If only one factor is met, then the credit is capped at $3,750. Eligibility for the full $7,500 credit for EVs put in use before April 18 is based on the vehicle’s battery capacity. Also, the final assembly of the EV must take place in North America. This last rule applies to all EVs first placed in service after Aug. 16, 2022.

The manufacturer sales threshold limit is gone. Under pre-2023 rules, some popular car brands didn’t qualify for the credit because it started to phase out for vehicles manufactured by a car company that sold over 200,000 EVs in the U.S. This limitation has been removed for electric vehicles purchased in 2023 and later.

But there are two new rules that could prevent you from claiming the tax break if you buy a new EV. First, the manufacturer’s suggested retail price can’t exceed $55,000 for sedans and $80,000 for vans, SUVs, and pickup trucks. An EV’s classification as a sedan a van, SUV, or pickup truck is based on the vehicle’s fuel economy label on the window sticker and the EPA size class published at the website Fueleconomy.gov. Second, there is an income limit. You can’t claim the credit for purchasing a new EV if your modified adjusted gross income exceeds $300,000 for joint filers, $225,000 for head-of-household filers, or $150,000 for single filers.

The government has a list of eligible clean vehicles, including EVs and fuel cell vehicles, that qualified manufacturers have indicated to the IRS meet the requirements to claim the credit. The government will update the page on an ongoing basis. You can find the list at https://fueleconomy.gov/feg/tax2023.shtml.

Used EVs bought from a dealer qualify for a smaller credit, equal to the lesser of $4,000 or 30% of the sales price. The credit isn’t available if your modified AGI is more than $150,000 for joint filers, $112,500 for head-of-household filers, or $75,000 for single filers.

1099-K Forms

In 2021, Congress enacted a law requiring third-party settlement networks (e.g., PayPal, Venmo, Square, StubHub) to send forms 1099-K to payees who are paid over $600 a year for goods and services. This reporting threshold, which is much lower than in prior years, was slated to kick in for 1099-Ks for 2022. The lower reporting thresholds received lots of criticism from across the spectrum, so the IRS decided to delay them for one year. The new rules now kick in for 2023 1099-K forms sent out in 2024. This means more people than ever will receive 1099-K forms early next year that they will use when filling out the 2023 Form 1040. This includes, for example, people who sell tickets to a sporting event or concert on StubHub for more than cost, or people selling valuable toys on eBay. However, remember that 1099-K reporting is only for money received for goods and services. It doesn't apply, for example, to people who use Zelle or Venmo to transfer money to family and friends.

Retirement Savings

Here's some good news for retirees: The beginning age for taking required minimum distributions (RMDs) rises to 73 from 72 for owners of traditional IRAs, 401(k)s and other workplace retirement plans. This applies to account owners who turn 72 after 2022. If your turn 73 this year, you must take your first RMD by April 1, 2024. People who work past 73 can generally delay taking RMDs from their current employer’s 401(k) until they retire. 

There is a penalty for people who fail to take their RMD, but that penalty is lower than in past years. Starting in 2023, the excise tax for such failures is 25% of the missing RMD amount, which is down from 50%. Additionally, the penalty goes down to 10% for failures that are corrected in a timely manner.

For people who are still saving for retirement, many key dollar limits on retirement plans and IRAs are higher in 2023. For example, the maximum contribution limits for 401(k), 403(b), and 457 plans jump from $20,500 to $22,500 for 2023. People born before 1974 can put in $7,500 more as a “catch-up" contribution (up from $6,500 for 2022). That means a person who is age 50 or older in 2023 can stash up to $30,000 pretax in a 401(k), 403(b), or 457. The 2023 cap on contributions to SIMPLE IRAs is $15,500 ($14,000 for 2022), plus an extra $3,500 ($3,000 for 2022) for people age 50 and up.

The 2023 contribution limit for traditional IRAs and Roth IRAs increased from $6,000 to $6,500, plus $1,000 as an additional catch-up contribution for individuals aged 50 and up. The income ceilings on Roth IRA contributions went up. Contributions phase out in 2023 at adjusted gross incomes (AGIs) of $218,000 to $228,000 for couples and $138,000 to $153,000 for singles (up from $204,000 to $214,000 and $129,000 to $144,000, respectively, for 2022).

Deduction phaseouts for traditional IRAs also start at higher levels in 2023, from AGIs of $116,000 to $136,000 for couples and $73,000 to $83,000 for single filers (up from $109,000 to $129,000 and $68,000 to $78,000 for 2022). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $218,000 of AGI and ends at $228,000 (they were $204,000 and $214,000 for 2022).

More lower-income individuals may be able to claim the saver’s credit in 2023, too. This tax break can be worth up to $1,000 ($2,000 for joint filers), but you must contribute to a retirement account and your AGI must be at or below a certain threshold to qualify. For 2023, the AGI thresholds are $36,500 for single filers and married people filing a separate return ($34,000 for 2022), $73,000 for married couples filing jointly ($68,000 for 2022), and $54,750 for head-of-household filers ($51,000 for 2022).

Adoption of a Child

For 2023, the adoption credit can be taken on up to $15,950 of qualified expenses ($14,890 for 2022). The full credit is available for a special-needs adoption, even if it costs less. The credit begins to phase out for filers with modified AGIs over $239,230 and disappears at $279,230 ($223,410 and $263,410, respectively, for 2022).

The exclusion for company-paid adoption aid was also increased from $14,890 to $15,950 for 2023.

Kiddie Tax

The kiddie tax has less bite in 2023. The first $1,250 of a child's unearned income is tax-free if the child is 18 years old or younger, or a full-time student under 24. The next $1,250 is taxed at the child's rate. Any excess over $2,500 is taxed at the parent's rate. (For 2022, only the first $1,150 was exempt and the next $1,150 was taxed at the child's rate.) 

Parking and Transportation Benefits

Employers can provide more to their workers in 2023 when it comes to parking and transportation-related fringe benefits. The 2023 cap on employer-provided tax-free parking goes up from $280 to $300 per month. The 2023 exclusion for mass transit passes and commuter vans is also $300 ($280 in 2022). 

Student Loan Interest Deduction

If you have college debt that you are paying down, you may be able to deduct up to $2,500 of student loan interest paid each year. And you don’t have to itemize on Schedule A to get this money saver. The break is instead claimed on Schedule 1 of  Form 1040.

But there is an income limitation. The credit amount is generally reduced to zero if your modified AGI is over a certain amount. And these income amounts have gone up for 2023. For joint filers, the credit begins to phase out at modified AGIs over $155,000 ($145,000 for 2022) and ends at modified AGIs that exceed $185,000 ($175,000 for 2022). For other filers, the credit phaseout begins at a modified AGI over $75,000 ($70,000 for 2022) and ends at a modified AGI over $90,000 ($85,000 for 2022).

Bonds Used for Education

One way to avoid paying federal income tax on accrued I bond or EE bond interest is to cash in the bonds before maturity and use the proceeds to help pay for college or other higher education expenses. But there are lots of hurdles to jump through to take advantage of this interest income exclusion. For example, the exclusion is subject to strict income limits, which are indexed each year for inflation. For 2023, the exclusion starts phasing out above $137,800 of modified AGI for joint filers and $91,850 for others ($128,650 and $85,800 for 2022). It ends at a modified AGI of $167,800 and $106,850, respectively ($158,650 and $100,800 for 2022). The savings bonds must be redeemed to help pay for tuition and fees for college, graduate school, or vocational school for the taxpayer, spouse, or a dependent. 

Alternative Minimum Tax (AMT)

There's good news for anyone worried about getting hit with the alternative minimum tax: AMT exemptions ticked upward for 2023. They increased from $118,100 to $126,500 for couples filing a joint return and from $75,900 to $81,300 for single filers and heads of household. The phaseout zones for the exemptions start at higher income levels for the 2023 tax year as well — $1,156,300 for couples and $578,150 for singles and household heads ($1,079,800 and $539,900, respectively, for 2022).

In addition, the 28% AMT tax rate kicks in at higher incomes in 2023 — above $220,700 of alternative minimum taxable income. The 28% rate for 2022 applied to AMTI over $206,100.

Americans Working Abroad

U.S. taxpayers working abroad have a larger foreign earned income exclusion in 2023. It jumped from $112,000 for 2022 to $120,000 for 2023. (Taxpayers claim the exclusion on Form 2555.)

The standard ceiling on the foreign housing exclusion is also increased from $15,680 to $16,800 for 2023 (although overseas workers in many high-cost locations around the world qualify for a significantly higher exclusion).

Standard Mileage Rates

The 2023 standard mileage rate for business driving rose to 65.5¢ a mile. The mileage allowance for medical travel and military moves also increased to 22¢ a mile in 2023. However, the charitable driving rate stayed put at 14¢ a mile — it's fixed by law. 

Long-Term Care Insurance Premiums

The limits on deducting long-term care insurance premiums are higher in 2023. Taxpayers who are age 71 to 80 can deduct up to $5,960 ($5,640 for 2022). Taxpayers ages 61 to 70 can deduct up to $4,770 ($4,510 for 2022). Individuals who are 51 to 60 can take up to $1,790 ($1,690 for 2022). Taxpayers who are 41 to 50 can deduct up to $890 ($850 for 2022). People who are 40 or younger can take up to $480 ($450 for 2022).

For most people, long-term care premiums are medical expenses deductible only by itemizers on Schedule A and only to the extent that their total amount of medical expenses exceeds 7.5% of adjusted gross income. However, self-employed people can deduct them on Schedule 1 of the 1040.

Health Savings Accounts (HSAs)

The annual cap on deductible contributions to health savings accounts (HSAs) rose in 2023 from $3,650 to $3,850 for self-only coverage and from $7,300 to $7,750 for family coverage. People born before 1969 can put in $1,000 more (same as for 2022).

Qualifying insurance policies must limit out-of-pocket costs in 2023 to $15,000 for family health plans ($14,100 in 2022) and $7,500 for people with individual coverage ($7,050 in 2022). Minimum policy deductibles increase for 2023 to $3,000 for families and $1,500 for individual coverage ($2,800 and $1,400, respectively in 2022).

Flexible Spending Accounts (FSAs)

For 2023, the limit on employee contributions to a healthcare flexible spending account (FSA) is $3,050, which is $200 more than the 2022 limit. If the employer's plan allows the carryover of unused amounts, the maximum carryover amount for 2023 is $610 ($570 for 2022). 

Self-Employed People

If you're self-employed, there are some important tax changes for 2023 that could impact your bottom line. First, a key dollar threshold on the 20% deduction for pass-through income was increased for 2023. Self-employed people (along with partners in partnerships, members of LLCs, shareholders of S corporations, and other owners of pass-through entities) can deduct 20% of their qualified business income, subject to limitations for individuals with taxable incomes in excess of $364,200 for joint filers and $182,100 for others ($340,100 and $170,050, respectively, for 2022).

Second, the standard mileage rate for business driving went up to 65.5¢ per mile.

Third, first-year bonus depreciation isn’t as valuable in 2023 as it was in 2022. Last year, businesses could deduct the full cost of new and used qualifying business assets with lives of 20 years or less. For 2023, the 100% write-off fell to 80%.

Fourth, expensing of business assets is higher in 2023. Up to $1,160,000 of assets can be expensed this year. This limit phases out dollar for dollar once more than $2,890,000 of assets are put in use during 2023. The amount of business assets expensed can’t exceed your business’s self-employed income.

Fifth, the temporary 100% write-off for business meals has expired. For 2021 and 2022, businesses, including self-employed people, were able to deduct 100% of business restaurant meals, provided the cost wasn’t lavish. This COVID-related easing was temporary. Starting this year, 50% of the cost of most business meals is deductible, reverting back to the rules that were in place before 2021.

Payroll Taxes

The Social Security annual wage base is $160,200 for 2023 (that's a $13,200 hike from 2022). The Social Security tax rate on employers and employees stays at 6.2%. Both workers and employers continue to pay the 1.45% Medicare tax on all compensation in 2023, with no cap. Workers also pay the 0.9% Medicare surtax on 2023 wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn't hit employers, though.

The nanny tax threshold went up to $2,600 for 2023, a $200 increase from 2022.

Estate and Gift Taxes

The lifetime estate and gift tax exemption for decedents who die in 2023 jumped from $12,060,000 to $12,920,000 million.

The special estate tax valuation of real estate also increases for 2023. For the estate of a person dying this year, up to $1,310,000 million of farm or business real estate can receive a discount valuation (up to $1,230,000 in 2022), letting the estate value the realty at its current use instead of fair market value.

More estate tax liability qualifies for an installment payment tax break, too. If one or more closely held businesses make up greater than 35% of a 2023 estate, as much as $700,000 of tax can be deferred and the IRS will charge only 2% interest (up to $656,000 for 2022).

Finally, the annual gift tax exclusion for 2023 rises from $16,000 to $17,000 per donee. So, you can give up to $17,000 ($34,000 if your spouse agrees) to each child, grandchild or any other person in 2023 without having to file a gift tax return or tap your lifetime estate and gift tax exemption.

(Kiplinger 2023)

What You Should Know about Updates to 1099-K Third Party Payments

The American Rescue Plan changed Form 1099-K reporting requirements for third-party payment networks like Venmo and Cash App beginning with calendar year 2023. These networks process credit and debit card payments or electronic payment transfers, and their use has exploded over the last several years. 

What is a 1099-K? 

Form 1099-K details all payments received through payment settlement entities (PSEs). These entities include payment cards such as credit and debit cards as well as third-party payment networks like Venmo and Cash App. The form can be sent to individuals (using their Social Security number) and businesses (using their TIN). Your clients should receive a separate Form 1099-K from each PSE where the client’s gross payments or the number of transactions exceeded the reporting threshold. 

How has Form 1099-K changed for 2022? 

In a recent release, the IRS has announced that the requirements around the Form 1099-K will not change for calendar year 2022. Instead, the changes described below will apply to 2023 tax returns. 

The most significant change to the 1099-K requirements concerns the de minimis threshold for third-party payment networks. For tax years 2022 and prior, these networks are required to send a Form 1099-K if an individual or business: 

• Received more than $20,000 in gross payments and 
• Had more than 200 transactions 

Beginning in 2023, third-party payment networks will be required to send 1099-Ks to anyone with: 

• More than $600 in gross payments and 
• Any number of transactions 

Since the reporting threshold will be dramatically decreased, you can expect to see more Form 1099-Ks when filing 2023 tax returns. In addition, the new laws attempt to ensure more accurate tax returns from small businesses and individuals in the gig economy or who didn’t meet the previous 1099-K reporting threshold.  

Note that these changes only apply to third-party payment networks, and reporting requirements for card payments have remained unchanged. Payments received through a credit or debit card have never had a de minimis threshold, so PSEs are required to send a Form 1099-K to anyone who receives them.  

Will individuals receive 1099-Ks for personal transactions? 

Yes, third-party platforms will be required to send 1099-Ks for personal transactions. Even if an individual is not a business owner, they can expect to receive Form 1099-K reporting funds through payment platforms like Poshmark, Cash App, or PayPal. Consider any personal transactions resulting in the receipt of payment on platforms like:   

• Peer-to-peer payment platform or digital wallet  
• Online marketplace (sale or resale of clothing, furniture, and other items)  
• Craft or maker marketplace  
• Auction site  
• Car sharing or ride-hailing platform  
• Real estate marketplace  
• Ticket exchange or resale site  
• Crowdfunding platform  
• Freelance marketplace

For individuals who are not self-employed, personal transactions totaling more than $600 are taxable and should be reported as a capital gain. Although personal items cannot be claimed as a loss, they can be reported as a wash. There are two different ways you can account for a wash on the sale of a personal item:  

• Schedule 1 Adjustments, Subtraction from Income: The amount reported on the 1099-K should match the subtraction amount.  

• Form 8949, Capital Gains and Losses: The amount listed as the loss should not exceed the sale price listed on the 1099-K.  

Either option will result in a $0 net being carried over to the Adjusted Gross Income. While the IRS does not seem to prefer either option, if you will be reporting other capital gains, you may consider reporting the wash on Form 8949 so all transactions are listed on the same form.   

What should not be included on the 1099-K? 

There are personal transactions that are not considered taxable. Third-party payment platforms should not include transactions for gifts or reimbursement of personal expenses like sending money between family and friends. For example, let’s say that throughout the year, your client receives over $600 in reimbursements from friends and family for eating out and other events via an app like Venmo. These types of transactions are excluded from reporting requirements, so you shouldn't receive a 1099-K for this.

Payment platforms and networks typically distinguish between business and personal transactions based on user agreements or short questionnaires that ask whether a specific transaction is for a good or service. However, your clients should review their platform accounts to access 1099-Ks and verify the accuracy of reported transactions.  

If there is a transaction reported on the 1099-K that is considered a gift or reimbursement of a personal expense, you should contact the issuer to request a corrected form.  

What should you do with a 1099-K? 

Check Accuracy of TIN or Social Security Number 

Anyone who receives a Form 1099-K should always check it for accuracy and pay special attention to the TIN or Social Security number. It’s not uncommon for taxpayers to receive a 1099-K that uses their Social Security number when it should use their business TIN instead. They’ll need to get in touch with the PSE to request an accurate 1099-K before they file their return.  

They’ll also want to compare the amounts on the form to their business records for the year to ensure the form is accurate. 

For Individuals who are Self-Employed: File a Schedule C 

Most sole proprietors and gig or sharing economy workers will receive Form 1099-Ks that list their Social Security number. The information from their 1099-K should be used to complete their Schedule C (Form 1040). 

For Individuals who are NOT Self-Employed: File a Schedule D 

For those who receive Form 1099-K and are not self-employed, use Schedule D to file the capital gain or loss (wash) for their taxable personal transactions. The 1099-K will provide information on the platform where the payment was received and the sales price. Calculate the gain or loss using taxpayer records on the item description, date sold, and purchase price.  (TS Pro)