As 2022 approaches, tax season is just around the corner, but it’s never too early to start planning ahead for changes to tax policy in 2023 and how they will affect your finances. Although the changes will not affect 2022 taxes due April 18, it is important for taxpayers to be aware of their 2023 budget and plan for retirement contributions.
Mark Steber, Chief Tax Information Officer at Jackson Hewitt Tax Services, told Fox Business that “tax law changes can happen at any time throughout the year; and We’ve seen in recent years that they can even be delayed. That’s why it’s important to listen throughout the year because it can affect your personal income tax situation. because of national or state laws, or at least talk to a tax activist who understands the changes.”
Here’s a look at five of the biggest changes taxpayers will know before 2023 begins:
Income Tax Limits
The Internal Revenue Service (IRS) adjusts the threshold that applies to federal income taxes each year to take account of inflation, and with inflation nearing a four-decade high , the change will be more visible in 2023. Steber notes, “There is a possibility that taxpayers will change their tax rate in a year because of this, which means that they can pay another tax on their income as well they are.”
Income tax rates are progressive, so the higher a taxpayer’s income, the higher the rate. 10% for single taxpayers with income of $11,000 or less the income limit for each bracket; 12% for income over $11,000; 22% for income over $44,725; 24% for income over $95,375; 32% for income over $182,100; 35% for income over $231,250; and 37% for income over $578,125. For married couples filing a joint return, the dollar amount can be doubled in each bracket.
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Amount of standard deduction
The IRS also adjusts the annual standard deduction amount based on inflation. Most taxpayers choose to claim the standard deduction instead of itemizing, or itemizing expenses such as interest, taxes and charitable contributions. The share of taxpayers who qualify has increased to about 90% in the years since the Tax and Jobs Act of 2017 doubled the standard deduction.
In 2023, the standard deduction for individual taxpayers will increase from $900 to $13,850; increase by $1,800 for married taxpayers who file a joint income tax return of $27,700; and up to $20,800 for the head of the household, up $1,400 starting in 2022. Taxpayers who are at least 65 years old or blind can claim additional amounts depending on your application status.
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Contribution requirements for retirement accounts
The IRS is raising contribution limits for retirement accounts, including employer-sponsored plans like 401(k)s and individual retirement accounts (IRAs). 2023 to take into account inflation.
Caps for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s savings plans will increase from $2,000 to $22,500. – at least. The contribution limit for workers age 50 and older participating in such plans will also increase to $7,500.
The IRA contribution limit will increase from $500 to $6,500 – a figure that represents the maximum combined amount that can be contributed to a traditional IRA and a Roth IRA. The final income limit for traditional IRA contributions, which allows taxpayers to claim an advance tax year deduction for contributions, will rise to $68,000 and $78,000 for single taxpayers; $116,000 and $136,000 for married couples filing joint returns.
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Earned income tax credit
The Income Tax Credit (EITC) is still available to low- to moderate-income workers and families to reduce their tax burden and potentially increase their tax refund.
For taxpayers with no children, the EITC will provide a maximum credit of $600 in 2023. The EITC is larger for taxpayers with qualifying children, reaching $3,995 for single households; $6,604 for two children; and $7,430 for three or more children – up from $6,935 in the 2022 income year.
The IRS has an application that will let you see if you qualify for the EITC and how much you owe.
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Another tax policy aimed at helping low to moderate income taxpayers is the Savings Contribution Credit, better known as the Saver’s Credit. The Saver’s Credit gives taxpayers who contribute to a retirement account a tax deduction of up to 50% of their contributions. The amount owed is greater for lower income taxpayers and gradually
In 2023, the Saver’s Credit is phased out entirely to $36,500 for a single saver, an increase of $2,500; and at $73,000 for registered couples — an increase of $5,000 over last year. Taxpayers earning less than $21,750 as an individual and $43,500 as a partner can claim a maximum tax equal to 50% of the pension contribution.