How the 2023 Tax Code Affects You: A Comprehensive Guide
Introduction: The tax year 2023 brings some significant changes and adjustments to the federal income tax system, affecting both individuals and businesses. These changes are the result of various legislation passed by Congress in the past few years, as well as the inflation adjustments made by the IRS. In this article, we will summarize some of the most important tax law changes and updates for 2023 that you need to know.
Standard Deduction Increases
The standard deduction is the amount that reduces your taxable income if you do not itemize deductions. For 2023, the standard deduction increased to $13,850 for single filers and married couples filing separately, $20,800 for head of household filers, and $27,700 for married couples filing jointly.
The standard deduction is also higher for taxpayers 65 or older, blind, or both. For 2023, the additional standard deduction amount is $1,750 for single and head-of-household filers and $1,400 for married filers.
The standard deduction is generally available to anyone who does not itemize unless they are married and file separately from a spouse who itemizes or a nonresident or dual-status alien.
Income Tax Brackets and Rates
The income tax brackets and rates for 2023 are the same as for 2022, but the income thresholds to qualify for each bracket are higher due to inflation. The top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
The other rates are: 35% for incomes over $231,250 ($462,500 for married couples filing jointly); 32% for incomes over $182,100 ($364,200 for married couples filing jointly); 24% for incomes over $95,375 ($190,750 for married couples filing jointly); 22% for incomes over $44,725 ($89,450 for married couples filing jointly); 12% for incomes over $11,000 ($22,000 for married couples filing jointly); and 10% for incomes of $11,000 or less ($22,000 for married couples filing jointly).
The tax brackets and rates apply to your taxable income, which is your gross income minus your standard or itemized deductions and any adjustments or credits you may qualify for.
Long-Term Capital Gains and Qualified Dividends
Long-term capital gains are profits from the sale of capital assets held for more than one year, such as stocks, bonds, real estate, or collectibles. Qualified dividends are dividends paid by U.S. corporations or qualified foreign corporations that meet certain requirements.
The tax rates on long-term capital gains and qualified dividends did not change for 2023, but 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.
Other Tax Law Changes and Updates
Besides the standard deduction, income tax brackets, and capital gains tax rates, there are many other tax law changes and updates for 2023 that affect various aspects of the tax system, such as deductions, credits, retirement plans, business taxes, and more. Some of these changes are the result of new legislation passed by Congress, such as the Inflation Reduction Act, which extended certain energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction1. Others are the result of the IRS’s annual inflation adjustments, such as the alternative minimum tax exemption, the earned income tax credit, the child tax credit, and the health savings account contribution limits1.
To learn more about these and other tax law changes and updates for 2023, you can visit the IRS website or consult a qualified tax professional. You can also use online tools and calculators to estimate your tax liability and plan ahead for the next tax season. Remember, proper tax planning requires an awareness of what’s new and changed from last year, and how it can impact your bottom line.
