23 Questions About 2023 Taxes

Presented by Marc Aarons

 

With the new year in full swing, we find ourselves in another tax filing season. In light of this, I’ve pulled together a tax guide for your convenience to make your tax journey smooth and easy this April.

This year’s tax changes include an increased standard deduction, adjusted tax brackets, and another delay for taxpayers using third-party payment platforms like Venmo and PayPal. With that in mind, here are 23 questions (and answers) about the 2023 tax year.

 

General Tax Questions

 

1. When is the deadline for filing taxes this year?

 

The deadline for filing taxes is Monday, April 15, 2024.

 

2. What are the rates and brackets for tax year 2023?

 

2023 Marginal Tax Rates	Single Filer	Married Filing Jointly	Head of Household	Married Filing Separately
10%	$0–11,000	$0–22,000	$0-15,700	$0-11,000
12%	$11,001-44,725	$22,001–89,450	$15,701-59,850	$11,001-44,725
22%	$44,726-95,375	$89,451-190,750	$59,851-95,350	$44,726-95,375
24%	$95,376-182,100	$190,751-364,200	$95,351-182,100	$95,376-182,100
32%	$182,101-231,250	$364,201-462,500	$182,101-231,250	$182,101-231,250
35%	$231,251-578,125	$462,501-693,750	$231,251-578,100	$231,251-346,875
37%	Over $578,125	Over $693,750	Over $578,100	Over $346,875

 

3. How do tax brackets work?

 

The IRS sets new, inflation-adjusted tax brackets each year. Your marginal tax rate is determined by looking at which bracket your total taxable income falls into. However, your tax liability isn’t simply your income multiplied by your marginal rate.

The rate you actually pay is your effective tax rate. It factors in all of your progressive tax brackets and any tax credits you claim, making your effective tax rate lower than your marginal tax rate.

Here’s a real-life example with 2023 tax year figures that shows how it works: Mark is a single filer with $50,000 in taxable income.

• From $0 to $11,000, Mark is taxed at 10%.
• From $11,001 to $44,725, he is taxed at 12%.
• From $44,726 to $50,000, Mark is taxed at 22%.

Mark’s marginal tax rate is 22%. But once he runs the calculations, Mark will pay around 12.6% of his income. This is his effective tax rate, equal to about $6,300.

 

4. What is the standard deduction for 2023?

 

For 2023, the standard deduction has increased to adjust for inflation.

 

Filing Status	2022	2023
Single	$12,950	$13,850
Married Filing Jointly	$25,900	$27,700
Married Filing Separately	$12,950	$13,850
Head of Household	$19,400	$20,800

 

*Note that if you are 65 or older or blind, your standard deduction is higher. If you fall into one of these categories, your standard deduction is increased by $1,850 if you’re single or $1,500 per qualifying individual if you’re married.

 

5. Should I itemize or take the standard deduction?

 

Nearly 87% of taxpayers take advantage of the standard deduction since it nearly doubled with the Tax Cuts and Jobs Act of 2017. However, the option you choose depends on the one that will maximize your tax benefits.

The standard deduction allows you to deduct the set amount from your taxes, no questions asked. If you plan to itemize, you need documentation to verify your qualifying expenses from a list approved by the IRS.

Note that you can decide whether to take the standard deduction or itemize each year.

 

6. What is a tax credit, and which ones should I take?

 

A tax credit is the amount of money you’re permitted to subtract, dollar for dollar, from any income taxes you owe. Here are eight of the most common ones:

• Child Tax Credit: For 2023, the Child Tax Credit is worth up to $2,000 per qualifying child under 17. Note that this credit starts phasing out for higher-income taxpayers.
• Earned Income Tax Credit (EITC): The EITC helps low- to moderate-income workers and families get a tax break. You may qualify for the credit or a refund check if you were married, filed jointly, and earned less than $63,398 in 2023. Find out if you’re eligible with the 2023 EITC tables.
• Child and Dependent Care Credit: For 2023, the Child and Dependent Care Credit is non-refundable. The credit allows up to $3,000 in expenses for one child or disabled person and $6,000 for more than one child or disabled person.
• Adoption Tax Credit: Families that grew through adoption might qualify for the Federal Adoption Tax Credit. Adoptive parents must earn $239,230 or less to be eligible for the full credit, which provides up to $15,950 per eligible child — any person under 18 who is mentally or physically unable to care for themselves.
• American Opportunity Credit: The American Opportunity Credit allows parents to claim up to $2,500 per student for tuition, activity fees, books, supplies, and equipment during the first four years of college. To qualify, students must be enrolled in an undergraduate, degree-seeking program at least half-time. Income limitations apply to this credit and it’s fully phased out for single filers with incomes over $80,000 or married filers with incomes over $160,000.
• Lifetime Learning Credit: The 2023 Lifetime Learning Credit is worth up to $2,000 to offset higher education expenses. Taxpayers can use the credit for tuition and related expenses for undergraduate, graduate, and professional degree courses for themselves, spouses, or dependents. The credit is phased out for single taxpayers with incomes over $90,000 or married filers with incomes over $180,000.
• Saver’s Credit: This tax credit is worth up to $1,000 ($2,000 if married and filing jointly) for mid- and low-income taxpayers who contribute to a retirement account.

7. Are there any deductions for student loan interest?

 

Following a pandemic-induced repayment pause, student loan payments resumed in October 2023. If you fall into this category, you may be eligible for a deduction on your student loan interest payments of up to $2,500. Keep in mind the credit is reduced if your modified AGI reaches a certain threshold.

 

8. What are the standard mileage rates for 2023?

 

The 2023 standard mileage rate for business driving for 2023 is 65.5¢, up three cents from the second half of 2022.

 

9. What are the medical travel and military mileage rates for 2023?

 

The mileage rate for medical travel and military moves is 22¢ for 2023.

 

Retirement Tax Questions

 

10. What are the retirement plan contribution limits for 2023?

 

2023 Retirement Plan Contribution Limits and Catch-Up Contributions:

• 401(k), 403(b), and 457 plans: Contributions for these plans are capped at $22,500 for 2023. Taxpayers 50 and older can once again put in $7,500 more as a “catch-up” contribution.
• Simple IRAs: The 2023 cap on contributions to SIMPLE IRAs is $15,500, plus an extra $3,500 for people age 50 and up.
• Traditional and Roth IRAs: Limits for IRAS are $6,500, plus $1,000 as an additional catch-up contribution for those aged 50 and up.

11. What about required minimum distributions (RMDs) for 2023?

 

Your birth year determines when you must start taking required minimum distributions.

• For people born in 1950 or earlier, taking required minimum distributions is necessary this year (2023).
• However, if you were born on or after January 1, 1951, you’re not required to take RMDs in 2023.

If you missed your yearly RMD or didn’t withdraw enough, there’s a 25% penalty. However, it’s possible to reduce the penalty to 10% if you correct the RMD within two years.

Let me know if you have questions about RMDs. Recent changes have made it quite confusing, so know I’m here to help. In the meantime, here’s more on RMDs from the IRS.

 

12. My property was affected by a natural disaster. What should I know?

 

If you live in a qualified federally declared disaster area, you can withdraw up to $22,000 from specific retirement plans without incurring the usual 10% early distribution penalty in 2023. Plus, you can spread the taxable portion of the distribution over three years.

Identify qualified disaster areas by heading to the FEMA Declared Disasters webpage.

 

13. Are there any tax breaks for senior adults and retirees?

 

Yes! Here are a few to look for:

• Extra Standard Deduction: Seniors aged 65 or older get an additional standard deduction by December 31 of the tax year for which they’re filing. For tax year 2023, married seniors filing jointly receive an extra $1,500 per qualifying spouse, whereas single seniors or heads of household receive an additional $1,850. These amounts increase to $1,550 and $1,950 for tax year 2024.
• Credit for the Elderly or Disabled: This credit applies to seniors aged 65 or older (or those retired on permanent disability) with an adjusted gross income below $25,000. The credit varies depending on filing status and the spouse’s age if filing jointly.
• IRA Contribution from a Spouse: If a spouse is still working, they can contribute to their spouse’s IRA after retirement. The contribution limits for both spouses cannot exceed $13,000 (for 2023) when one is 50 or $15,000 when both are over 50.
• Medicare Premiums Tax Deduction: Self-employed retirees can deduct Medicare Part B and D premiums, supplemental Medicare policies, or Medicare Advantage plan costs as self-employed health insurance.
• Charitable Contributions: Seniors who itemize their federal tax deductions can typically deduct up to 60% of their adjusted gross income in cash charitable contributions.
• Property Taxes: Many local and state governments provide property tax breaks for senior citizens. Conditions include an age requirement (65 or older in most jurisdictions), owning the home for a specific time, living in the home as a primary residence, and meeting low-income limits. You can also deduct property taxes in state and local tax (SALT) deductions, capped at $10,000 per year if you itemize your federal tax deductions.
• Timing Tax Payments: Arranging tax payments through deductions from retirement income helps avoid tax penalties and interest.
• Avoid the Pension Payout Trap: To prevent tax withholding on lump-sum payments or rollover distributions from a company plan, ask that the amount be sent directly to a rollover IRA.
• The RMD Workaround: Retirees taking Required Minimum Distributions (RMDs) from traditional IRAs can withhold a large amount for the IRS to cover their expected tax for the year.
• Gifting Money to Family: Gifting to family may help reduce your taxable estate. For 2023, the tax-free gift limit was $17,000. Just make sure gifts were deposited by December 31, 2023. See below.

Miscellaneous Tax Deductions

 

14. What are the lifetime estate and gift tax exemptions for 2023?

 

The lifetime estate exemption for 2023 jumped from $12.06 million to $12.92 million in 2023.

The gift tax exclusion rose to $17,000 per recipient. This means you can give up to $17,000 to each child, grandchild, or any other person in 2023 ($18,000 in 2024). So long as you stay below the limit, neither you nor your recipient will be required to file a gift tax return or tap the lifetime estate and gift tax exemption. If you are married, you and your spouse can each give a $17,000 gift to a recipient before you need to file a gift tax return.

 

15. What are the capital gain rates for 2023?

 

If you sold stocks, mutual funds, or other capital assets you held for at least one year, the IRS taxes any gain at a 0%, 15%, or 20% rate.

The 0% rate applies to those with taxable income:

• Up to $44,675 for individual taxpayers
• Up to $59,750 for head of household filers
• Up to $89,250 for married filing jointly
• Up to $44,625 for married filing separately

The 15% rate applies to those with taxable income:

• $44,626 to $492,300 for individual taxpayers
• $59,751 to $523,050 for head of household filers
• $89,251 to $553,850 for married filing jointly
• $44,626 to $276,900 for married filing separately

The 20% rate applies to those with taxable income:

• Over $492,300 for individual taxpayers or married filing separately
• Over $523,050 for head of household filers
• Over $553,850 for married filing jointly
• Over $276,900 for married filing separately

16. What tax incentives are available for making energy-efficient upgrades to my home?

 

The previously expired tax credits for energy-efficient upgrades have been reinstated due to new legislation.

Further, the Residential Clean Energy Tax Credit may help cover up to 30% of your solar energy system purchase. At the same time, the Energy Efficient Home Improvement Credit may offer credits for replacing exterior doors and windows, HVAC systems, and water heaters with energy-efficient models.

 

17. Are HSA contributions tax-deductible? What else has changed with HSAs?

 

Yes. The contributions to an HSA are tax-deductible, and the earnings (if invested) are tax-free, as are withdrawals for eligible medical expenses.

For 2023, you can contribute up to $3,850 for individual coverage and $7,750 for family coverage to your HSA. You report your contributions on Form 8889 with the total contributions transferred to and reported on your Form 1040. Remember, you have until April 15, 2024, to contribute to your HSA for the 2023 tax year.

 

18. What should I know if I bought health insurance from the ACA marketplace?

 

The Premium Tax Credit helps taxpayers afford health insurance premiums from the Marketplace. For 2023, income qualifications range from $13,590 for individuals to $27,750 for a family of four. If you had Marketplace coverage and received advance credit payments, you must file Form 8962 with your taxes and promptly report income changes to the Marketplace.

 

19. Are charitable contributions eligible for a tax deduction in 2023?

 

Contributions—of cash or non-cash assets—received by December 31, 2023, are eligible for tax deductions. Generally, you may deduct up to 60% of your AGI for cash donations. Keep in mind that charitable contributions are only deductible if you are itemizing.

If you make non-cash donations of greater than $5,000, you will need an appraisal to claim the deduction for the donations.

 

20. Are there any tax deductions for teachers in 2023?

 

Yes! Teachers and other educators who pay out of pocket for books, supplies, and other materials used in the classroom can deduct up to $300 for these expenses.

 

21. What’s changing this year with platforms like PayPal and Venmo?

In short, nothing. In light of taxpayers’ and tax professionals’ feedback, the IRS has decided to delay the implementation of the law set in 2021. This law initially required payment platforms like PayPal and Venmo to issue Form 1099-K to anyone who received more than $600 in a tax year, with an effective date of 2023. Now, the law won’t take effect until the 2024 tax season.
Beginning with the 2024 tax year, the IRS will introduce a higher reporting threshold. If your payments through these platforms surpass $5,000 in 2024, you can anticipate receiving the 1099-K tax form in early 2025. Subsequently, for the 2025 tax year, the threshold will revert to $600.

 

22. I purchased a new or used electric vehicle in 2023. Isn’t there a tax credit for me?

 

Yes. If you opted for a used one, you could receive a credit of up to $4,000 (equivalent to 30% of the purchase price). If you went for a brand-new electric car, the credit has been increased to a maximum of $7,500. To be eligible for these tax credits, you must have purchased qualifying vehicles, and your income can’t exceed a specified threshold.

 

23. My buddy/neighbor/co-worker uses an online platform to file his taxes. He says it’s quick and easy. What should I know?

 

While online tax platforms are convenient, they are not right for everyone. Individuals with complex financial situations may benefit from the services of a local tax professional. The following individuals and scenarios are included:

• Those with multiple income sources
• Self-employed, contract workers, clergy, or small business owners
• Those recently divorced or separated
• Those who grew their families through adoption in 2023
• Those who are considered high-net-worth individuals
• Ex-pats
• Those with complex stocks holdings
• Individuals dealing with tax debt, liens, or levies

Unlike online tax return platforms, you can receive personalized guidance and insights. Moreover, the security of your financial data is a vital concern when entering sensitive data online.

 

Beyond that, partnering with a local tax professional means you have a trusted expert who’s readily available for face-to-face meetings whenever you need assistance, whether during tax season or any other time of the year.

 

So, while online options offer convenience, the long-term financial well-being and peace of mind that come with professional guidance and face-to-face support are well worth it.

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I hope this Q&A was helpful as you begin to gather documents for your 2023 tax return. If you have friends or family you feel may benefit, please forward this guide along.

 

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

 

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.