Tax Updates 2023
Get Your Taxes Done for Only $99 and Ensure Your Maximum Refund!
Book Appointment & Get Free Consultation
The Expanded Child Tax Credit Program
- Voting is underway for the Child Tax Credit expansion package; approval means only small adjustments are necessary.
- The IRS will update its systems accordingly, automating the process without the need for taxpayers to file amendments.
- The Tax Relief for American Families and Workers Act of 2024 aims to:
- Enhance and adjust child tax credit terms.
- Increase depreciation allowances for economic innovation and growth.
- Implement special tax rules for Taiwan residents earning from U.S. sources.
- Boost tax relief for losses from natural disasters and wildfires.
- Augment the low-income housing tax credit.
- The bill will increase the refundable part of child tax credits, aiding low-income and large families.
- Income requirement set at a minimum of $2,500 annually.
- Credit calculation: 15% of income multiplied by the number of children.
- Choice to calculate CTC based on current or previous year’s income.
- Refundable credit per child to increase to $1,800 (2023), $1,900 (2024), and $2,000 (2025).
- Full credit eligibility: single filers earning below $200,000 and joint filers below $400,000, with gradual reduction beyond these thresholds.
Eligibility Criteria for Dependent Children
- Eligible children for the tax credit include:
- Biological children, stepchildren, foster children, siblings, half-siblings, step-siblings, or any of their descendants.
- Adopted children are considered your own, including those legally placed for adoption.
- Qualifying age and conditions for the child:
- Must be under 19 at year-end and younger than you (or your spouse if filing jointly).
- If a full-time student, under 24 at year-end and younger than you (or your spouse).
- Can be any age if permanently and totally disabled.
- Residency and support requirements:
- The child must have lived with the taxpayer for more than half of the year.
- The taxpayer must have provided over half of the child’s support during the year.
Eligibility for Claiming a Qualifying Relative
- Qualified relative gross income limit is below the filing threshold ($4,300), except:
- Full-time students under 24 may have higher income.
- To claim a qualified relative, they must:
- Live with you or be related to you.
- Be supported by you (generally over 50%).
- Not qualify as anyone else’s qualifying child.
- Parents or guardians can claim adult dependent children for:
- Educational credits, covering expenses like tuition, textbooks, supplies, and necessary technology for a Bachelor’s degree.
- Only tuition can be claimed for post-baccalaureate programs.
- Dependency status:
- Dependents may still need to file taxes; consult a Tax Professional for guidance.
- U.S. citizens or resident aliens abroad:
- Must file income, estate, and gift tax returns and pay estimated tax as if residing in the U.S.
- This includes full-time students under 24, who may have a higher income threshold.
- Qualified relative gross income limit is below the filing threshold ($4,300), except:
Credit for Child and Dependent Care Expenses
- For 2023, the child and dependent care credit is nonrefundable.
- Dollar limits for work-related expense deductions:
- $3,000 for one qualifying person.
- $6,000 for two or more qualifying persons.
- Maximum credit rate is 35% of work-related expenses.
- Credit rate decreases as income increases, with a minimum rate of 20% for adjusted gross incomes over $43,000.
- On Form 2441 for 2023, only amounts from 2022 used during the grace period can be entered on line 13, as per the instructions for that line.
Earned Income Tax Credit Adjustments
- For the tax year 2023, the maximum Earned Income Tax Credit (EITC) is $7,430 for taxpayers with three or more qualifying children, an increase from $6,935 in 2022.
- The revenue procedure includes a table detailing the maximum EITC amounts for various categories, along with income thresholds and phase-out details.
Credits of Education
- Lifetime Learning Credit:
- Not refundable.
- Up to $2,000 credit per return.
- Available for an unlimited number of years.
- Covers all post-secondary education levels and courses to acquire or improve job skills.
- No requirement for the student to pursue a degree or other recognized credential.
- Part-time enrollment is acceptable.
- Only tuition and fees required for enrollment or attendance are claimable.
- American Opportunity Credit:
- 40% of the credit is refundable.
- Up to $2,500 credit per eligible student.
- Limited to 4 tax years per eligible student, including years the Hope credit was claimed.
- Student must be pursuing a degree or recognized credential.
- Requires at least half-time enrollment for one academic period in the tax year.
- No eligibility for students with felony drug convictions by the end of the tax year.
- Expenses related to tuition, required enrollment fees, and course materials are claimable.
- Income Limits for Maximum Education Credits:
- Modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly) for maximum credit.
- Credit amount reduces if MAGI is between $80,000 and $90,000 (between $160,000 and $180,000 for married filing jointly).
- No credit if MAGI exceeds $90,000 ($180,000 for joint filers).
- Ineligibility for credit if claimed as a dependent on someone else’s return or if married filing separately.
- Lifetime Learning Credit:
Credits of Adoption
For the tax year 2023, the maximum credit for adoption expenses is capped at $15,950.
Educators
The maximum deduction for educator expenses has increased to $300.
Annual Gift Tax Exclusion Increase
- The annual exclusion for gifts is raised to $17,000 for the calendar year 2023.
- Starting in tax years beginning in 2022, Section 6039F empowers the Treasury Department and the Internal Revenue Service to mandate reporting of gifts from certain foreign persons by recipients if the total value of such gifts received in the tax year surpasses $17,339.
Overseas Income Exclusion
The foreign earned income exclusion amount is $120,000.
State-Specific Health Insurance Mandate Penalties
- There is no federal penalty for lacking healthcare coverage.
- However, certain states have their own mandates and penalties. For instance:
- In California, for the year 2023, the penalty for not having health insurance is either a flat rate of $900 per adult and $425 per dependent child under 18, or 2.5% of the gross income amount that surpasses the filing threshold, whichever is higher. The specific threshold depends on the taxpayer’s filing status and number of dependents.
Alternative Minimum Tax Adjustments
- For the tax year 2023, the Alternative Minimum Tax (AMT) exemption amount is set at $81,300, with phase-out starting at $578,150.
- For married couples filing jointly, the exemption amount is $126,500, with phase-out beginning at $1,156,300.
- For individuals married but filing separately, the exemption amount is $63,250, with phase-out starting at $578,150.
- For certain individuals under the age of 24, the AMT exemption amount equals their earned income plus $8,800.
Earned Income Tax Credit Adjustments
- For the tax year 2023, the maximum Earned Income Tax Credit (EITC) has increased to $7,430 for qualifying taxpayers with three or more qualifying children, a rise from $6,935 in 2022.
- The revenue procedure includes a table that details the maximum EITC amounts for other categories, along with the income thresholds and phase-out points.
Adjustments to the Standard Deduction
- For 2023, the standard deduction amounts are as follows:
- Singles and Married Filing Separately: $13,850
- Married Filing Jointly: $27,700
- Head of Household: $20,800
- Just like in the years 2022, 2021, 2020, 2019, and 2018, there is no limit on itemized deductions. This change comes from the Tax Cuts and Jobs Act, which eliminated the limitation on itemized deductions.
For Residents of California
Federal law mandates that the Franchise Tax Board (FTB) send out specific forms to taxpayers who meet any of the following conditions:
- Those who itemize deductions and received a state income tax refund.
- Taxpayers who received an interest payment of $10 or more.
- Individuals who received a Middle-Class Tax Refund (MCTR) payment of $600 or more.
The forms issued include:
- Form 1099-G: This is for reporting the state income tax refund. It will detail the tax year from which the refund was issued.
- Form 1099-INT: This form is a statement of interest income. The FTB issues Form 1099-INTs for all interest payments made during the 2023 calendar year, regardless of the tax year to which the interest relates.
Requirements For Tax Filing
Most U.S. citizens or permanent residents working within the country need to file a tax return under certain conditions:
- Gross Income Thresholds: If your gross income exceeds the filing requirement for your status.
- Self-Employment Earnings: More than $400 in net earnings from self-employment.
- Other Filing Requirements: Various other situations may necessitate filing a tax return.
Filing Requirements by Status for Gross Income:
- Single: $13,850 (or $15,700 if 65 and older)
- Married Filing Jointly: $27,700 (increases if one or both spouses are 65 and older to $29,200 or $30,700)
- Married Filing Separately: $5
- Head of Household: $20,800 (or $22,650 if 65 and older)
- Qualifying Widower: $27,700 (or $29,200 if 65 and older)
Other Circumstances Requiring Filing:
- Owing any special taxes (e.g., AMT, household employment taxes, uncollected Social Security and Medicare taxes).
- Receiving distributions from health savings accounts (HSAs), Archer MSAs, or Medicare Advantage MSAs.
- Having net earnings from self-employment of at least $400.
- Earning $108.28 or more from certain exempt religious organizations.
- Receiving advance payments of the premium tax credit or health coverage tax credit.
- Requirements to report under sections 965 related to certain foreign income.
U.S. Citizens or Resident Aliens Abroad: These individuals are generally required to file U.S. income, estate, and gift tax returns and pay estimated tax similarly to residents in the United States.
Students under 24 years may file taxes independently or as dependents, depending on their specific circumstances.
Requirements of Dependent Tax Filing
Here’s a simplified breakdown of the filing requirements for different scenarios based on age, marital status, and types of income:
Single and Under 65
- Unearned Income: More than $1,250
- Earned Income: More than $13,850
- Gross Income Threshold: More than $1,250 or earned income up to $13,450 plus $400
Single, 65 and Older
- Unearned Income: More than $3,100 ($4,950 if 65 or older and blind)
- Earned Income: More than $15,700 ($17,550 if 65 or older and blind)
- Gross Income Threshold: More than $3,100 ($4,950 if 65 or older and blind) or earned income up to $13,450 plus $2,250 ($4,100 if 65 or older and blind)
Married and Under 65
- Filing Separately: Gross income of at least $5 if your spouse itemizes deductions
- Unearned Income: More than $1,250
- Earned Income: More than $13,850
- Gross Income Threshold: More than $1,250 or earned income up to $13,450 plus $400
Married, 65 and Older
- Filing Separately: Gross income of at least $5 if your spouse itemizes deductions
- Unearned Income: More than $2,750 ($4,250 if 65 or older and blind)
- Earned Income: More than $15,350 ($16,850 if 65 or older and blind)
- Gross Income Threshold: More than $2,750 ($4,250 if 65 or older and blind) or earned income up to $13,450 plus $1,900 ($3,400 if 65 or older and blind)
These guidelines help determine if you’re required to file a tax return based on your age, income type, and marital status.
Contributions to Health Savings Accounts
For tax year 2023, the Medical Savings Account (MSA) contribution and coverage limits are as follows:
Self-only Coverage:
- Annual Deductible: Must be at least $2,650 but not more than $3,950.
- Maximum Out-of-Pocket Expenses: Cannot exceed $5,300.
Family Coverage:
- Annual Deductible: Must be at least $5,300 but not more than $7,900.
- Maximum Out-of-Pocket Expenses: Cannot exceed $9,650.
These thresholds define the minimum and maximum deductible amounts for qualifying high-deductible health plans associated with MSAs, as well as the maximum out-of-pocket expense limits for participants.
Health Savings Accounts and Alternative Tax-Advantaged Health Plans
For the 2023 tax year, the contribution limits for various health-related savings and spending accounts are as follows:
- Health Flexible Spending Arrangements (FSA): The maximum employee salary reduction contribution to a health FSA is increased to $3,050.
- Carryover for FSAs: For cafeteria plans that allow the carryover of unused amounts, the maximum amount that can be carried over into the next year is $610.
- Health Savings Account (HSA) Contributions:
- Self-only High Deductible Health Plan (HDHP) Coverage: Individuals can contribute up to $3,850.
- Family HDHP Coverage: The contribution limit is $7,750.
These adjustments reflect the annual inflation adjustments and provide taxpayers with the opportunity to allocate funds for healthcare costs effectively.
Retirement Account Contributions
For the 2023 tax year, contribution limits for various retirement and savings plans are as follows:
- Health Savings Account (HSA) Contributions:
- Self-only coverage: $3,850
- Family coverage: $7,750
- HSA catch-up contributions (age 55 or older): Additional $1,000
- 457 Plans:
- Contribution limit: $22,500
- Age 50 catch-up limit: $7,500
- Pre-retirement catch-up limit: Double the standard limit up to $22,500
- 401(a) Plans:
- Contribution limit: $61,000
- 401(k) Plans:
- Contribution limit: $22,500
- Age 50 catch-up limit: $7,500
- 403(b) Plans:
- Contribution limit: $22,500
- Age 50 catch-up limit: $7,500
- Pre-retirement catch-up limit: $15,500 (lifetime cap)
- Individual Retirement Accounts (IRA):
- Contribution limit: $6,500
- Age 50 catch-up limit: $1,000
These contribution limits are designed to help individuals plan for retirement by allowing them to set aside money in tax-advantaged accounts. The catch-up contributions for those age 50 and older provide an opportunity for individuals nearing retirement to further boost their savings.
2023 Income Tax Brackets
Sign up in minutes, quick and easy.
Our professional team at Art of Tax are finance experts that serve our clients with having more than 25 years of experience.