On January 30th, 2024, the House of Representatives passed the Tax Relief for American Families and Workers Act of 2024. If the Senate passes the bill and signs it into law, the new law will expand the Child Tax Credit for this year’s tax returns which are due on April 15th, 2024.
Your clients don’t have to wait on this legislation to file. If the bill passes, the IRS says they will handle any adjustments and additional refunds for your eligible clients who have already filed this season. Encourage your clients to send you their documents so you can prepare and file their taxes today.
Following the 2022 Inflation Reduction Act, tax preparers will continue to see inflation-related adjustments in the tax code this year. This article sheds light on significant tax changes for 2023, including expanded tax brackets, increased standard deductions, and updates to energy credits and 1099-K reporting requirements.
Changes to income tax brackets for 2023
In October 2022, the IRS announced tax inflation adjustments for 2023 tax returns, impacting over 60 tax provisions. Governed by the Tax Cuts and Jobs Act (TCJA), tax brackets are adjusted annually based on the Chained Consumer Price Index (C-CPI) measurement of inflation. With inflation at 7.1%, 2023 witnessed the most substantial adjustment to tax brackets in decades.
Generally, wider tax bracket thresholds will reduce tax liability for most taxpayers. However, the most pronounced impact will be felt by those in the higher 22% through 37% brackets. It’s essential to note that these adjustments may not necessarily lead to an increased refund for clients, as their withholding rate would have been reduced in tandem with their reduced tax liability.
2023 Tax Brackets (tax returns due April 15, 2024):
| Tax Rate | Single | Married Filing Joint | Married filing Separate | Head of Household |
| 10% | Up to $11,000 | Up to $22,000 | Up to $11,000 | Up to $15,700 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 | $11,000 to $44,725 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 | $44,725 to $95,375 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 | $95,375 to $182,100 | $95,350 to $182,100 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 | $182,100 to $231,250 | $182,100 to $231,500 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 | $231,250 to $346,875 | $231,250 to $578,100 |
| 37% | $578,125 or more | $693,750 or more | $346,875 or more | $578,100 or more |
Looking ahead, the IRS has already released adjustments for the 2024 tax year, factoring in an estimated inflation rate of 5.4%. Review these changes now to offer informed advice to clients on how the adjustment may impact their earnings in the upcoming year.
New standard deduction for 2023
The IRS annual adjustment increased the standard deduction in response to inflation, recognizing the need to safeguard taxpayers against the growing cost of living. For clients, the increased standard deduction can significantly impact their tax returns by potentially lowering their taxable income. This change may reduce their overall tax liability, offering taxpayers an opportunity for increased savings and financial well-being. Below are the 2023 standard deduction rates:
| Filing Status | 2022 Standard Deduction | 2023 Standard Deduction |
| Single | $12,950 | $13,850 |
| Head of household | $19,400 | $20,800 |
| Married filing jointly | $25,900 | $27,700 |
| Married filing separately | $12,950 | $13,850 |
The IRS has published the 2024 standard deduction adjustments (for returns filed in 2025) here.
New 1099-K requirements for 2023
The IRS recently announced that changes to Form 1099-K requirements will be phased into the tax code, starting with the 2024 tax returns. The tax industry anticipates the updated reporting requirements to impact a large volume of individual taxpayers and small business owners. The 1099-K implementation phase will allow the agencies to evaluate and enhance operational processes, addressing the concerns of taxpayers and stakeholders more effectively.
The significant modifications to 1099-K reporting requirements refer to the de minimis threshold for third-party payment networks. For tax years 2023 and prior, these networks must issue a Form 1099-K if an individual or business received over $20,000 in gross payments and had more than 200 transactions. Starting in 2024, the threshold decreases, requiring 1099-Ks for those with more than $5,000 in gross payments and any number of transactions.
The reporting of Form 1099-K will vary depending on the nature of the income source. For example, clients who report Form 1099-K income on Schedule C can deduct business expenses. However, taxpayers receiving a 1099-K for hobby income cannot access business expense deductions. Therefore, it is essential to obtain detailed information from clients regarding why they received the 1099-K. Proactively gather information on the tax form’s source and issuer to guide your clients on their tax circumstances and compliance.
Changes to tax credits and deductions for 2023
In addition to inflation adjustments this year, your clients can expect to see expansions to existing tax credits and new tax credit provisions regarding taxpayer energy efforts.
- Child Tax Credit: The refundable portion increased to $1600.
- Premium Tax Credit: The Inflation Reduction Act is extended through 2025.
- Business Meals Deduction: Only 50% of the cost of business meals can be deducted.
- Earned Income Tax Credit: Investment income limitation increased to $11,000.
The Inflation Reduction Act ushered in significant changes and additions to energy tax credits for 2023. A quick overview of residential energy credit changes includes:
- Energy-Efficient Home Improvement Credit has dramatically increased, allowing homeowners to claim 30% (up from 10%) of qualifying improvement expenses, up to $1,200 annually (up from the $500 limit). The Residential Clean Energy Credit further expanded the scope of qualifying expenses like home energy audits, exterior doors, solar power, battery storage, water heaters, and biomass stoves.
- Clean Vehicle Credit of up to $7,500 is available with updated distinctions based on vehicle retail price, income thresholds, and vehicle assembly. This credit now includes a provision for Used Electric Vehicles of up to $4,000.
- Commercial Clean Vehicles purchased in 2023 can claim a maximum credit of $7,500 for qualified vehicles with gross vehicle weight ratings (GVWRs) of under 14,000 pounds or $40,000 for all other vehicles.
Adjustments for retirement accounts for 2023
If you have clients with early distributions from retirement accounts, review new exceptions to the 10% penalty. While the IRS typically imposes a standard 10% penalty to early distributions, exceptions will now include taxpayers who are:
- Private sector firefighters
- Public safety officers
- State and local government correction officers
- Terminally ill individuals
- Corrective distributions of excess contributions
Additionally, with the passage of the Secure 2.0 Act, the age for initiating required minimum distributions (RMDs) has increased to 73 starting in 2023. It will rise to 75 for those born in 1960 or later.
The Secure 2.0 Act has also lowered the excise tax rate for failing to take RMDs from 50% to 25% and allows for a reduction to 10% if the RMD is fulfilled within two years. Furthermore, the IRS may waive the entire penalty if the account owner demonstrates that the distribution shortfall resulted from a reasonable error, with steps being taken to rectify it.
Learn more: What is the Secure Act 2.0?
FAQs
Do you still have questions on tax law changes? Check out these frequently asked questions for the highlights.
What are the major tax changes for 2023?
This overview provides a glimpse into the significant tax law changes for 2023, shaping the current fiscal tax year.
- Tax bracket thresholds widened
- Standard deduction increased
- Refundable Child Tax Credit increased to $1,600
- Premium Tax Credit extended through 2025
- New exceptions to 10% early distribution penalty
- 1099-K reporting threshold reduced to $5,000
- The EITC investment income limit increased to $11,000
- Updated Energy Efficient Home Improvement Credit
- New credit for previously owned clean vehicles
- Business meals deduction reduced to 50%
Could clients expect refunds to be bigger for tax year 2023?
As a tax preparer, you know that various factors determine whether a taxpayer will receive a refund. Recent provisions in the tax code, designed to mitigate the effects of inflation and expand new credits and deductions, offer taxpayers additional opportunities for tax breaks, potentially leading to increased refunds this year. While some clients may benefit from these changes, it’s important to note that others with unchanged tax circumstances may see refunds similar to the previous year.
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