What You Need to Know About Your 2023 Personal Income Taxes

The deadline for filing a personal tax return for tax year 2023 is April 15, 2024 for most people. As in previous years, there are some tax changes to keep track of, such as inflation adjustments. Here's a rundown of issues to consider as you prepare to file your 2023 return.

Tax Brackets and Marginal Rates

There are still seven marginal tax rates at the federal level: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. However, the income thresholds increased from 2022 to 2023. Here's a rundown of tax brackets for 2023, due in 2024:

Standard Deductions

The standard deduction is the portion of your income that's not subject to income tax. You can take the standard deduction unless you decide to itemize your deductions on Form 1040 Schedule A instead.

The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the standard deduction beginning in 2018. These changes expire after 2025 unless Congress takes steps to renew them. Here are the standard deduction amounts by filing status for the 2023 tax year:

Itemized Deductions

It's easier for most filers to take the standard deduction but it makes sense to itemize if the value of your itemized deductions is greater than the standard deduction for your filing status. Not much has changed for 2023, but here are a few reminders:

• State and local taxes (SALT): The combined deduction for state and local income taxes, property taxes, and real estate taxes is capped at $10,000.
• Mortgage interest deduction: You can deduct your mortgage interest on up to $750,000 of debt. The limit is $1 million if you bought the home before Dec. 16, 2017.
• Charitable donations: The cash donation limit of 60% of AGI remains in place for 2023. Note that this limit is not automatic; you must elect it on your Form 1040.
• Medical expenses: You can deduct medical expenses that exceed 7.5% of your AGI.
• Miscellaneous deductions: You can no longer deduct miscellaneous itemized deductions unless you claim a deduction that's related to certain unreimbursed employee expenses.

Capital Gains Tax Rates

The tax treatment of long-term capital gains changed with the TCJA. The capital gains tax brackets closely aligned with income tax brackets before 2018, but the TJCA created unique capital gains tax brackets:

Child Tax Credit

The Child Tax Credit is a tax benefit granted to American taxpayers for each qualifying dependent child. The credit amount is $2,000 per qualifying child and the maximum refundable portion of the credit is $1,600 in 2023.

Alternative Minimum Tax

The alternative minimum tax (AMT) limits certain tax breaks for higher-income taxpayers to ensure that they pay at least a minimum amount of income tax. According to the Tax Foundation, "The federal AMT was created in 1963 after Congress discovered that 155 high-income taxpayers were eligible to claim so many deductions that they ended up with no federal income tax liability at all."

High-income taxpayers have to calculate their tax bill twice, once using the standard income tax system and then again under the AMT. They must pay the higher of the two results. The AMT is levied at two rates: 26% and 28%.

Here are the AMT exemptions and phase-outs for 2023:

Charitable Contributions

There is a limit of 60% of AGI on cash contributions for those who itemize: You can deduct donations for up to 100% of your AGI. Donations to donor-advised funds and supporting organizations don't qualify.

401(k) Plan Contribution Limits

The contribution limit for employer retirement plans such as 401(k)s, 403(b)s, most 457 plans, and the federal government’s thrift savings plan (TSP) is $22,500 for 2023. The catch-up contribution limit for employees ages 50 or older is $7,500 for 2023.

The contribution limit for SIMPLE retirement accounts is $15,500 for 2023, and a $3,500 catch-up limit applies to participants age 50 and up for both years.

IRA Contribution Limits

The annual contribution limit for traditional IRAs and Roth IRAs increases to $6,500 for 2023. There's an additional catch-up contribution of $1,000 for those over 50.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. The deduction may be reduced or phased out if either the taxpayer or their spouse was covered by a retirement plan at work during the year. The phase-outs don't apply if neither the taxpayer nor their spouse is covered by an employer-sponsored retirement plan.

Traditional IRA phase-out ranges for 2023 are as follows:

• $73,000 to $83,000 for single taxpayers covered by a workplace plan
• $116,000 to $136,000 for married taxpayers filing jointly when the spouse making the IRA contribution is covered by a workplace retirement plan
• $218,000 to $228,000 for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered
• The phase-out range for a married individual filing a separate return who is covered by a workplace retirement plan is not subject to an annual cost-of-living adjustment and remains at $0 to $10,000 in 2023.

Roth IRA contributions are not tax-deductible. There are also income limitations on the amount you can contribute to a Roth IRA. The income phase-out range for taxpayers making contributions to a Roth IRA is $138,000 to $153,000 for singles and heads of household in 2023. The income phase-out range is $218,000 to $228,000 for married couples who file jointly.

The Saver's Credit

People with low to moderate incomes may qualify for the saver's credit, a dollar-for-dollar reduction of the taxes they owe. The credit is available to people who contribute to an IRA, 401(k), or any other qualified retirement account, provided their AGI falls within specific parameters.

The income limit for the saver’s credit (also referred to as the retirement savings contributions credit) is $73,000 for married couples filing jointly in 2023, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.

Required Minimum Distributions (RMDs)

Required minimum distributions (RMDs) are back for 2023 and beyond. You must start taking withdrawals from your IRA, SIMPLE IRA, SEP IRA, and retirement plan accounts at age 72. The withdrawal amount is based on a calculation dictated by factors like account value and longevity. The Secure 2.0 Act, signed into law in late 2022, raises the RMD starting age in two tranches: to 73 starting in 2023, and to 75 starting in 2033.

Earned Income Tax Credit

The earned income tax credit (EITC) is a refundable tax credit that helps lower-income taxpayers reduce the amount of tax owed on a dollar-for-dollar basis. It's a refundable tax credit so taxpayers may be eligible for a refund even if they have no tax liability for the year.

Here are the EITC AGI limits and maximum credit amounts for 2023:

HSA Contribution Limits

The dollar limit for employee salary reductions for contributions to a health flexible spending account (FSA) is $3,050 for 2023.

For tax year 2023, people who have self-only coverage in a medical savings account (MSA) must have an annual deductible that's between $2,650 and $3,950. The maximum out-of-pocket expense for self-only coverage is $5,300.

The annual deductible for participants with family coverage must be between $5,300 and $7,900 for 2023. For family coverage, the out-of-pocket expense limit is $9,650.

Estate Tax Exemption and Annual Gift Exclusion

Estates of people who die during the tax year have a basic estate tax exemption amount of $12.92 million in 2023. The annual exclusion for gifts is $17,000 for 2023.

The Bottom Line

IRS inflation adjustments intend to keep federal taxes in line with inflation. Given that inflation started climbing in 2021 and continued climbing further in 2022 to historically high levels, particularly when compared to the last few decades, it's important to note the adjustments from previous years. It's also helpful to keep tabs on tax law changes that are unrelated to inflation.

This information can help you plan for the 2023 tax year and beyond. Just be sure to keep an eye on 2024 adjustments going forward so you can plan ahead for that tax return due in 2025.