2022 TAX UPDATES

Child Tax Credit

For 2023, a taxpayer with a child under Age 17 may be eligible for a Child Tax Credit up to $2,000 with up to $1,600 being refundable. 

 Earned Income Tax Credit

For 2023, the maximum earned income credit amounts are $600, $3,995, $6,604, and $7,430, depending on your filing status and how many children you have. The earned income tax credit for the 2023 tax year is claimed on tax returns filed by April 15, 2024.
 

Child and Dependent Care Credit

You can claim from 20% to 35% of your care expenses up to a maximum of $3,000 for one person, or $6,000 for two or more people.

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.

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). 

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 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.

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).

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). 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.

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).

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. 

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 tax changes for 2023 that could impact your bottom line. First, a key 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 to the rules that were in place before 2021.