What to Expect in Tax Year 2023

There is one constant in life: change. And that includes tax laws. U.S. taxpayers can expect annual federal tax code adjustments just about every year. For tax year 2023, there are at least 60 tax provisions to be aware of as you prepare your finances for the new year.

Here are a few changes that will likely affect most taxpayers filing their federal income tax return in 2024.

Higher standard deductions

Taxpayers often decide between taking a standard deduction and itemizing deductions based on which option provides the greatest reduction in taxable income for the filing year. As in recent tax seasons, the standard deduction continues to rise, making it attractive to both single and married filers.

    Standard deductions for tax year 2023:

• Married couples filing jointly: $27,700 (up $1,800 from tax year 2022).
• Single taxpayers and married individuals filing separately: $13,850 (up $900 from tax year 2022).
• Heads of households: $20,800 (up $1,400 from tax year 2022). 

Note: Since the 2017 Tax Cuts and Jobs Act, taxpayers have been able to take unlimited itemized deductions. This will continue in tax year 2023.

Stable tax rates, but adjusted tax brackets

U.S. taxpayers are assigned a 10%, 12%, 22%, 24%, 32%, 35%, or 37% tax rate. This hasn't changed. However, since inflation affects the value of money, you'll notice that the tax brackets differ from year to year. For example, a single filer in tax year 2022 with a taxable income of $90,000 would have a tax rate of 24%. However, the same filer with the same taxable income in tax year 2023 would have a tax rate of 22%.

Increased Earned Income Tax Credit

Eligible taxpayers with three or more qualifying children can receive a credit of $7,430, up $495 from tax year 2022. Filers must meet income thresholds. Refer to the IRS's Earned Income Tax Credit tables for details.

Increased health flexible spending account and cafeteria plan limits

If you participate in these plans, you can now contribute more to them and benefit from an increased carryover amount. Health flexible spending accounts will permit contributions up to $3,050. In addition, cafeteria plans that permit the carryover of unused amounts can increase the carryover amount by $40. This gives eligible participants a maximum carryover amount of $610 for tax year 2023.

Other changes:

• If you earned money outside the U.S., you might be able to exclude more of it from your federal income tax return. The Foreign Earned Income Exclusion is $120,000 (up $8,000 from tax year 2022).

• If you want to gift more money in tax year 2023, you can give $1,000 more without paying taxes on the gifted amount. The federal gift tax exclusion will increase from $16,000 to $17,000.

• If you plan on adopting a child, you can receive a higher tax credit in tax year 2023. The tax credit for qualified adoption expenses will increase to $15,950 (up $1,060 from tax year 2022).

While some tax changes won't affect you, others could influence how and when you file. Visit irs.gov or speak with a qualified tax professional for guidance on what updated tax provisions mean for you.