Tax Bracket Changes in 2023 | Remote Quality Bookkeeping

Due to record-high inflation rates, Americans have watched prices soar over the past two years. Unfortunately, these same increases haven’t come in the form of raises or other income increases, which has left many people in severe financial hardship.

Although many of the tax breaks that the government established at the beginning of the COVID-19 pandemic have expired by now, the IRS has been looking for ways they can help relieve some of the financial stress Americans face. Are you aware of these recent IRS changes and how they may affect the amount of taxes you pay in 2023?

IRS Announced Tax Bracket Changes

In October, the IRS announced Revenue Procedure 2022-38, which adjusted inflation to over 60 tax provisions [1]. The most notable changes involve the income thresholds for individual and married couple tax brackets as well as some changes to corporate tax payments.

Individual Tax Bracket Shifts

The tax percentage rates didn’t change for individuals and married couples—just the income thresholds for each. However, this change could help many individuals and families pay less in taxes for 2023.

The new thresholds are as follows:

10%: Individuals with incomes of $11,000 or less; $22,000 for married couples filing jointly
12%: Individuals with incomes over $11,000; $22,000 for married couples filing jointly
22%: Individuals with incomes over $44,725; $89,450 for married couples filing jointly
24%: Individuals with incomes over $95,375; $190,750 for married couples filing jointly
32%: Individuals with incomes over $182,100; $364,200 for married couples filing jointly
35%: Individuals with incomes over $231,250; $462,500 for married couples filing jointly
37%: Individuals with incomes over $578,125; $693,750 for married couples filing jointly

Business Tax Changes

Because many small businesses are considered pass-through entities [2], these same threshold changes may also benefit small business owners in 2023 since the higher thresholds may allow some small businesses to fall into lower tax brackets. Furthermore, pass-through business owners whose taxable income falls at or below $170,050 can receive the qualified business income (QBI) deduction, which allows a 20% deduction [3].

Although corporate taxes work differently than small businesses, the IRS didn’t leave corporations out of the equation for the 2023 tax year, either. Starting this year, corporations whose average adjusted income is over $1 billion (based on financial statements) can take advantage of the corporate alternative minimum tax (AMT), which is 15%. This is lower than the previously imposed corporate tax rate of 21%.

Other Changes for the 2023 Tax Year

In addition to these changes in tax percentages and income thresholds, the IRS announced several other changes that can help individuals, families, and small business owners save money and pay fewer taxes in 2023. Many of these “tax breaks” come in the form of deduction increases, meaning they mostly apply to individuals and families. However, it’s still helpful information to have nonetheless.

Standard Deductions

The IRS allows a standard deduction to help all Americans reduce their overall tax obligations. You can either itemize expenses throughout the year or take the standard deduction. Most of the time, people don’t have enough to itemize more expenses than the standard deduction, so they just take the standard deduction instead.

Here’s how the standard deduction is changing for 2023:

Individuals = $13,850 (up from $12,950)
Married Couples = $27,700 (up from $25,900)
Head of Household = $20,800 (from $19,400

Alternative Minimum Tax

High-income earners must pay an Alternative Minimum Tax to ensure they are “paying their fair share” of taxes yearly. However, these individuals also qualify for an AMT exemption to help offset these taxes. For 2023, the Alternative Minimum Tax exemption is $81,300 ($126,500 for couples), up from $75,900 ($118,100 for married couples) in 2022. This exemption also begins to phase out at $578,150 for individuals and $1,156,300 for married couples, up from last year’s $539,900 and $1,079,800.

Earned Income Tax Credit

Every taxpayer with children typically qualifies for the earned income tax credit based on their income, marital status, and family size. To account for inflation, the IRS has raised the maximum EITC amount to $7,430 for families with three or more children, an increase of $495 from 2022.

Other Exclusions

For certain individuals and small business owners, each of the following exclusions could help reduce the tax burden for 2023:

Foreign Earned Income Exclusion = $120,000 (up from $112,000)
Basic Estate Exclusions = $12,920,000 (up from a total of $12,060,000)
Annual Exclusion of Glfts = $17,000 (up from $16,000)

Actions You Can Take to Lower Your 2023 Tax Liability

Many of these changes can help individuals, families, and business owners lower the amount of taxes they pay to the IRS in 2023. However, these changes are minimal in the grand scheme of things. Luckily, there are other actions you can take to further reduce your tax burden for the 2023 year.

For example, you can place yourself into a lower tax bracket by reducing your taxable income. The easiest way to do this is by placing additional money into retirement accounts like a 401(k) or IRA. Typically, all retirement investments are made “pre-tax,” meaning they aren’t factored into your taxable income. Even if you’re self-employed, you can set up and contribute up to 25% of your net earnings to a Simplified Employee Pension (SEP).

If you’re already taking full advantage of your retirement accounts, you can contribute money towards a Health Savings Account (HSA). These accounts let you set aside tax-deductible contributions that you can use towards your deductible or other related medical expenses. Although there are limits to how much you can tuck away in an HSA, it still helps reduce your taxable income.

Finally, if you enjoy giving back to the community, you can use a Qualified Charitable Distribution (QCD) to reduce your income. This tax benefit lets you transfer funds from your IRA directly to any qualifying charity of your choice. Because these donations are excluded from your income, they can reduce your tax liability. For 2023, you can offset up to $100,000 this way, and the IRS will continue to update the maximum amount for QCDs annually to account for inflation.

Don’t Wait Until 2024 — Get Your Books In Order Now

Most people don’t consider their taxes until it’s time to file. However, when January 2024 rolls around, it will be too late to reduce your taxable income for 2023 or find other ways to save money when you file your 2023 returns. Therefore, you need a game plan now to maximize your deductions and reduce your tax liability for the year.

At Remote Quality Bookkeeping, our team of accounting experts can help your business maintain accurate books, track your expenses, and find ways to lower your tax burden. What’s more, you’ll have bookkeeping and accounting support all year long, so you never have to worry about whether or not your records are up to date.

If you’re ready to stop stressing over business finances and start getting back to doing what you love, give us a call or visit our website to sign up for a free trial. Small business accounting doesn’t stress you out if you’re willing to let us help you.

Resources

[1] https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023

[2] https://www.investopedia.com/terms/f/flow-through.asp

[3] https://www.lendingtree.com/business/small-business-tax-rate/

Will Your Tax Bracket Change in 2023?