Taxpayers preparing their federal returns for 2023 will be able to reduce what they owe by taking advantage of some significant credits, deductions and other tax breaks. Here are some of the most popular tax breaks you can potentially use on your 2023 return. A financial advisor can help you optimize a tax strategy for your investment needs and goals.
Popular Deductions
The most popular tax deduction is the standard deduction. It’s available for filers who don’t itemize deductions and, for most filers, taking the standard deduction reduces taxable income more than itemizing would.
Each year, the IRS adjusts the size of the standard deduction for inflation. The exact amount is determined by filing status. For tax year 2023, the standard deduction for single filers and married people filing separately is $13,850 ($12,950 in 2022). Married taxpayers filing jointly can deduct $27,700 ($25,900 in 2022). Heads of household get a $20,800 standard deduction ($19,400 in 2022).
Another popular deduction for filers who don’t itemize lets them trim up to $300 off taxable income for charitable donations made in cash. Note that for tax year 2021, this cash charitable deduction had been increased to $600 for couples filing jointly. However, it reverted back to $300 since 2022.
Deductions for Filers Who Itemize
For most taxpayers, taking the standard deduction saves more than itemizing. However, a significant number of taxpayers still itemize. For those filers, mortgage interest, medical expenses and state and local taxes provide some of the best breaks.
If you took out a home loan after Dec. 15, 2017, you can deduct mortgage interest paid during 2023 on up to $750,000 of the loan. A married person filing separately can only deduct interest on the first $375,000 of the loan. If your mortgage dates to before Dec. 15, 2017, the limit is $1 million, or $500,000 for married filing separately.
You may also be able to deduct outlays for medical care, including money spent on doctor visits, prescriptions, x-rays, eyeglasses and other health needs. You can only deduct amounts in excess of 7.5% of your adjusted gross income, however.
State and local tax deductions can be a boon for residents of high-tax states. Filers can deduct up to $10,000 for payments made for property and either income or sales taxes.
Other Tax Breaks for Your 2023 Return
Each year the IRS adjusts tax brackets to account for inflation. The marginal rates charged for the seven brackets, ranging from 10% to 37%, are unchanged. But the income levels required to move into a higher bracket increase. This amounts to a break for people whose income would otherwise move them into a higher tax bracket.
For 2023, the lowest 10% rate applies to people earning up to $11,000 ($10,275 in 2022). Income over that up to $44,725 pays 12% ($41,775 in 2022). The next bracket, 22%, applies to income over that up to $95,375 ($89,075 in 2022). Income over that up to $182,100 pays 24% ($170,050 in 2022). After that, a 32% rate is applied to income up to $231,250 ($215,950 in 2022). From there, income up to $587,125 is taxed at 35% ($539,900 in 2022). The highest 37% tax rate applies to income over $578,125 ($539,900 in 2022).
Taxpayers with children or other dependents under age 17 can likely get the child tax credit. This credit was temporarily expanded up to $3,600 in 2021, but it has no reverted back to $2,000 since 2022. The credit reduces your tax bill directly by up to $1,400 per dependent, based on your income.
Other tax breaks include the earned income tax credit, which can be worth up to $7,430 (up from $6,935 in 2022) depending on filing status, number of children and earned income.
Other tax breaks that were increased during the year to account for inflation include higher income levels for phasing out IRA contributions and higher thresholds for capital gains taxes. The size of an estate that is exempt from federal estate and gift taxes rose from $12.06 million in 2022 to $12.92.
Bottom Line
The tax year offers an especially rich array of tax breaks mostly thanks to the federal government’s efforts to alleviate the financial burden of a second year of the coronavirus pandemic. From tax-free student loan forgiveness to higher amounts for popular tax breaks like the standard deduction, taxpayers can choose from a wide assortment of ways to reduce the income taxes they owe.
Tax Planning Tips for Beginners
- To make sure you don’t pay more taxes than necessary, consider hiring a financial advisor who specializes in taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Taxpayers who don’t itemize may still be able to take some deductions using the Schedule 1 form. These include self-employment taxes, contributions to IRAs and health savings accounts, interest on student loans, expenses incurred by teachers and alimony.
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