2023 Tax Changes

Single $13,850 

Married filing separately $13,850

Head of household $20,800

Married filing jointly $27,700 

Tax credits, which reduce the tax you owe dollar for dollar, are normally better than deductions, which reduce how much of your income is subject to tax. In 2023, the Child Tax Credit is $2,000 per child age 17 or younger. The credit is also subject to a phase-out starting at $400,000 for joint filers and $200,000 for single filers. For other qualified dependents, you can claim a $500 credit.

This is another great credit parents and guardians should know about. The child and dependent care credit is a nonrefundable credit that allows taxpayers to offset some of the costs of paying for services like babysitters, day care and in-home caregivers for older dependents.

Here’s how it works: You can claim 20–35% of up to $3,000 ($6,000 for two or more dependents) for the cost of care. The percentage of the credit depends on your AGI. Families with an AGI of $15,000 or less can claim the full 35%. As you earn more income, the credit is reduced. But a family with an AGI of over $43,000 can still claim the minimum credit rate of 20%.

Let’s break it down. You pay $250 a week for Junior to go to day care. That’s about $13,000 a year (ouch). If you qualify to credit 20% of $3,000 in care costs, you get $600 knocked off your tax bill. Not too shabby!

Without the 2021 improvements in place, the minimum age for a childless worker to claim the EITC jumps back up to 25 for 2022 tax returns (it was 19 in 2021). The maximum age limit (65 years of old), which was eliminated for the 2021 tax year, is also back in play for 2022. The maximum credit available for childless workers also plummets from $1,502 to $560 for the 2022 tax year. Expanded eligibility rules for former foster youth and homeless youth that applied for 2021 are dropped as well. In addition, the rule allowing you to use your 2019 earned income to calculate your EITC if it boosted your credit amount no longer applies.

If you frequently sell goods or services online as a side hustle, you may have been warned about extra taxes coming your way when you file in 2024 thanks to new rules surrounding 1099-K forms. Well, we’ve got some good news: There’s no need to worry, at least for now.

That’s because the new 1099-K policies that the IRS planned to begin enforcing during 2024 tax season—ones that would’ve affected a lot of folks who earn some extra income through sites like Etsy, eBay and Fiverr—have officially been delayed, meaning they won’t take effect until at least tax season 2025.

For now, a 1099-K form will continue to only be required if you have more than 200 third-party business transactions a year and they added up to more than $20,000 of income.23 But the IRS is planning to make things a lot different in the 1099-K department down the road.

Here’s how it’ll break down when the new policy kicks in: You’ll receive a 1099-K form during tax season if you accept payments for goods or services over a third-party network (think Venmo, PayPal, Stripe, Square, Zelle and Cash App) that are more than $600, even if it’s just one transaction over $600!24

The "above-the-line" deduction for up to $300 of charitable cash contributions ($600 for married couple filing a joint return) expired at the end of 2021. As a result, it isn't available for the 2022 tax year (it was available for 2020 and 2021). Only people who claimed the standard deduction on their tax return (rather than claiming itemized deductions on Schedule A) were allowed to take this deduction.

The 2020 and 2021 suspension of the 60%-of-AGI limit on deductions for cash donations by people who itemize also expired, so the limit is back in place starting with the 2022 tax year 

Here's some good news for retirees: The beginning age for taking required minimum distributions (RMDs) rises to 73 from 72 for owners of traditional IRAs, 401(k)s and other workplace retirement plans. This applies to account owners who turn 72 after 2022. If your turn 73 this year, you must take your first RMD by April 1, 2024. People who work past 73 can generally delay taking RMDs from their current employer’s 401(k) until they retire.

There is a penalty for people who fail to take their RMD, but that penalty is lower than in past years. Starting in 2023, the excise tax for such failures is 25% of the missing RMD amount, which is down from 50%. Additionally, the penalty goes down to 10% for failures that are corrected in a timely manner.

For people who are still saving for retirement, many key dollar limits on retirement plans and IRAs are higher in 2023. For example, the maximum contribution limits for 401(k), 403(b), and 457 plans jump from $20,500 to $22,500 for 2023. People born before 1974 can put in $7,500 more as a “catch-up" contribution (up from $6,500 for 2022). That means a person who is age 50 or older in 2023 can stash up to $30,000 pretax in a 401(k), 403(b), or 457. The 2023 cap on contributions to SIMPLE IRAs is $15,500 ($14,000 for 2022), plus an extra $3,500 ($3,000 for 2022) for people age 50 and up.

The 2023 contribution limit for traditional IRAs and Roth IRAs increased from $6,000 to $6,500, plus $1,000 as an additional catch-up contribution for individuals aged 50 and up. The income ceilings on Roth IRA contributions went up. Contributions phase out in 2023 at adjusted gross incomes (AGIs) of $218,000 to $228,000 for couples and $138,000 to $153,000 for singles (up from $204,000 to $214,000 and $129,000 to $144,000, respectively, for 2022).

Deduction phaseouts for traditional IRAs also start at higher levels in 2023, from AGIs of $116,000 to $136,000 for couples and $73,000 to $83,000 for single filers (up from $109,000 to $129,000 and $68,000 to $78,000 for 2022). If only one spouse is covered by a plan, the phaseout zone for deducting a contribution for the uncovered spouse starts at $218,000 of AGI and ends at $228,000 (they were $204,000 and $214,000 for 2022).

More lower-income individuals may be able to claim the saver’s credit in 2023, too. This tax break can be worth up to $1,000 ($2,000 for joint filers), but you must contribute to a retirement account and your AGI must be at or below a certain threshold to qualify. For 2023, the AGI thresholds are $36,500 for single filers and married people filing a separate return ($34,000 for 2022), $73,000 for married couples filing jointly ($68,000 for 2022), and $54,750 for head-of-household filers ($51,000 for 2022).

For the 2022 tax year, teachers and other educators who dig into their own pockets to buy books, supplies, COVID-19 protective items, and other materials used in the classroom can deduct up to $300 of these out-of-pocket expenses ($250 for 2021). The maximum deduction for 2022 jumps to $600 for a married couple filing a joint return if both spouses are eligible educators – but not more than $300 each.

An "eligible educator" is anyone who is a kindergarten through 12th grade teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year. Homeschooling parents can't take the deduction.

Bettering yourself or your children through education is a good thing, and it’s even better when you get a tax break.

The American opportunity tax credit (AOTC) is a partially refundable credit that pays for education expenses for students in the first four years of college. You can claim up to $2,500 per student—and if the credit brings your tax bill to zero, 40% (up to $1,000) will be refunded to you.

Another education credit is the lifetime learning credit (LLC). This one isn’t refundable, but it covers up to $2,000 in qualified educational expenses per return. While you can only take advantage of the AOTC for undergrad expenses, you can reap the benefits of the LLC for expenses related to all kinds of educational opportunities—from degree programs to technical classes to improving job skills.

But beware: You can claim both the AOTC and the LLC on your tax return—but not for the same student or the same expenses.

The Inflation Reduction Act, which was signed into law on August 16, 2022, renamed the former Residential Energy Efficient Property Credit so that it's now called the Residential Clean Energy Credit. But, more importantly, the credit amount was increased starting with the 2022 tax year.

Before the Inflation Reduction Act, the credit was generally worth 26% of the cost to install qualifying electric, water heating, or temperature control systems for your home that use solar, wind, geothermal, biomass or fuel cell power. The credit percentage was also scheduled to drop to 23% in 2023 and then expire in 2024.

Now, the credit is increased to 30% starting in 2022. It eventually drops to 26% for 2033 and 22% for 2034, before the credit expires in 2035. In addition, it doesn't apply to biomass furnaces and water heaters anymore. However, starting in 2023, it will apply to battery storage technology with a capacity of at least three kilowatt hours 

The Social Security annual wage base is $160,200 for 2023 (that's a $13,200 hike from 2022). The Social Security tax rate on employers and employees stays at 6.2%. Both workers and employers continue to pay the 1.45% Medicare tax on all compensation in 2023, with no cap. Workers also pay the 0.9% Medicare surtax on 2023 wages and self-employment income over $200,000 for singles and $250,000 for couples. The surtax doesn't hit employers, though.

The nanny tax threshold went up to $2,600 for 2023, a $200 increase from 2022.

The 2023 standard mileage rate for business driving rose to 65.5¢ a mile. The mileage allowance for medical travel and military moves also increased to 22¢ a mile in 2023. However, the charitable driving rate stayed put at 14¢ a mile — it's fixed by law   

The limits on deducting long-term care insurance premiums are higher in 2022 for one age group. Taxpayers who are age 61 to 70 can deduct up to $4,510 for 2022, which is a $10 decrease from the 2021 amount.

The 2022 deduction limits for all age groups are the same as the 2021 amounts. Here's the complete list of limits by age:

· 40 years old or less = $450

· 41 to 50 years old = $850

· 51 to 60 years old = $1,690

· 61 to 70 years old = $4,510

· 71 years of age or older = $5,640

For most people, long-term care premiums are medical expenses deductible only by itemizers on Schedule A. However, self-employed people can deduct them on Schedule 1 of the 1040.

The annual cap on deductible contributions to health savings accounts (HSAs) rose in 2023 from $3,650 to $3,850 for self-only coverage and from $7,300 to $7,750 for family coverage. People born before 1969 can put in $1,000 more (same as for 2022).

Qualifying insurance policies must limit out-of-pocket costs in 2023 to $15,000 for family health plans ($14,100 in 2022) and $7,500 for people with individual coverage ($7,050 in 2022). Minimum policy deductibles increase for 2023 to $3,000 for families and $1,500 for individual coverage ($2,800 and $1,400, respectively in 2022).

For 2023, the limit on employee contributions to a healthcare flexible spending account (FSA) is $3,050, which is $200 more than the 2022 limit. If the employer's plan allows the carryover of unused amounts, the maximum carryover amount for 2023 is $610 ($570 for 2022).