Facts About 2023 Tax Law You Need to Know

Marginalized Tax Rates

The rate you pay on your taxable income is not uniform for the entire amount of taxable income you have. It’s actually marginalized, meaning each segment of your income is taxed at increasingly higher rates.

For example, on your federal tax return the first portion of your taxable income up to $11,000 is taxed at 10% for single taxpayers, up to $22,000 for married couples and up to $15,700 for heads of households. The next portion of your taxable income from $11,000 up to $44,725 is taxed at 12% for single taxpayers, from $22,000 up to $88,450 for married couples and from $15,700 up to $59,850 for heads of households. These tax brackets grow incrementally up to a top tax rate of 37% for single taxpayers with taxable incomes from $578,125 and up, for married couples with taxable incomes from $693,750 and up and for heads of households with taxable incomes of $578,100 and up. The marginal rates operate in a similar manner for most states as well.

The Standard Deduction

For tax year 2023 the standard deduction, which is indexed for inflation each year, has been increased to $27,700 for married couples filing jointly, up from $25,900 in 2022. For single taxpayers and married couples filing separately, it’s been increased to $13,850, an increase from $12,950 in 2022. For head of household filers the standard deduction has been increased to $20,800, up from $19,400 in 2022. For those taxpayers who can still accumulate deductions in excess of these amounts, itemizing their deductions will result in lower taxable income than taking the standard deduction.

Self-Employed Home Office Deductions

The trend towards operating a business from home has become increasingly popular in recent years. There are valuable deductions available to those who set up shop from home. These expenses must be allocated to the business based on the square footage of the space used exclusively for business divided by the total square footage of the home. The total square footage may exclude bathrooms, hallways and closets, thereby increasing the deductible percentage of business use. For homeowners, the deductions include mortgage interest, real estate taxes, homeowner’s insurance, utilities, home repairs for which the office benefits and even depreciation of the office space. For renters, the deductions include rent, utilities and renter’s insurance, if applicable.

Some Federal Tax Credits That May Be Available to You

Earned Income Tax Credit

Married couples filing jointly and single taxpayers with lower incomes can qualify for the earned income credit, which is a refundable credit. Refundable means one can qualify for the credit even without having tax liability if they receive wages or operate a business with some profit. The EITC is NOT available to married couples filing separately. You must be a U.S. citizen or a resident alien with earned income, a valid social security number an investment income of no more than $3,650 in 2023.

The adjusted gross income limit for claiming the EITC is $15,820 for single taxpayers with no qualifying children and $21,710 for married couples filing jointly. With up to three qualifying children the income limit is $50,594 for single taxpayers and $56,844 for married couples. The credits can range from $600 with no qualifying children, $3,995 for one child, $6,604 for two children and $7,430 for three or more qualifying children.

Child Tax Credit

The child tax credit is a non-refundable credit, meaning that it is only available to households with taxable income. It provides up to a $2,000 tax credit per qualifying child. Qualifying for this credit depends on the age of dependent children, how much support they receive, citizenship, how much time the dependent children spend at home and family income.

The phasing out of the credit begins at a modified adjusted gross income of $200,000 for single taxpayers and $400,000 for married couples filing jointly.

Non-Child Tax Credit

Another non-refundable credit is the non-child tax credit of $500 and is available for married couples with dependents who don’t qualify for the child tax credit. This credit applies to households with children aged 17 or older or elderly parents that receive support. The phasing out of the credit also begins at a modified adjusted gross income of $200,000 for single taxpayers and $400,000 for married couples filing jointly.

American Opportunity and Lifetime Learning Credits

The American Opportunity and Lifetime Learning tax credits are available to help families offset the cost of higher education at an eligible educational institution for the purpose of getting a degree or skills needed to qualify for a job. It includes tuition, fees, supplies, equipment and course materials for up to four years. Students must be enrolled in at least one academic period in the tax year. A school’s name, address and federal employer ID number must be listed on form 8863. In most cases students must receive a form 1098-T to qualify for the AOTC, which is up to $2,500 and the LLC which is up to $2,000.

Employee Retention Credit

The Employee Retention Credit is a refundable tax credit for businesses and tax-exempt organizations that had employees during and were impacted by the COVID-19 pandemic. This credit is not available for individuals and differs depending upon the time period for which the credit is applied for. The qualifying period for claiming the credit is for wages paid from March 13, 2020 through December 31, 2021 and the application period expires three years after the due date of the original payroll tax return. The credit is equal to 50% of up to $10,000 in qualified wages, which includes qualified health care expenses.

Saver’s Tax Credit

The Saver’s Tax Credit is available to taxpayers who contribute to retirement plans such as 401(k), traditional IRA and Roth IRA plans. The credit amounts to 10%, 20% or 50% of the contribution depending on the taxpayers adjusted gross income. For married couples filing jointly with incomes of no more than $43,500 the credit is 50% of your contribution. The credit falls to 20% of contributions for incomes between $43,501 and $47,500 and 10% for incomes between $47,501 and $73,000. For heads of household the 50% credit is for incomes up to $32,625, 20% for incomes between $32,626 and $35,625 and 10% for incomes between $35,626 and $54,750. For single taxpayers, married couples filing separately and qualifying widow(ers) the 50% credit is for incomes up to $21,750, 20% for incomes between $21,751 and $23,150 and 10% for incomes between $23,151 and $36,500.

Solar Tax Credit

The solar tax credit is available to homeowners who install a solar-powered system on their home to reduce energy costs. The credit for 2023 has been increased to 30% of the cost of a qualified system and will remain at 30% until 2032. Be careful when making your decision regarding a solar system because there are offers on the market that retain ownership to the installing company, thereby preserving the tax benefits for the installer rather than the homeowner.

Electric Vehicle Tax Credit 

A non-refundable credit can be claimed for taxpayers who purchase an electric vehicle in 2023. The non-refundable nature of the credit means that taxpayers must already have tax liability which can be reduced by the credit. Used vehicles are eligible for the credit of up to $4,000, but limited to 30% of the purchase price, while new vehicles may be eligible for up to a $7,500 credit. There are a number of conditions that used vehicles must meet in order to receive the credit. 

  • Used cars must be a plug-in electric or fuel cell with at least 7 kilowatt hours of battery capacity.
  • The purchase price must be $25,000 or less.
  • A used car can only be transferred one time to earn the credit.
  • The vehicle must be at least two years old.
  • The vehicle must weigh less than 14,000 pounds.
  • For new vehicles, there are a number of limitations.
  • For passenger vehicles, the purchase price may not exceed $55,000.
  • For SUV’s and pick-up trucks, the purchase price may not exceed $80,000.
  •  For 2023, 40% of the battery parts and critical minerals value must be extracted, processed or recycled in the U. S. or a country in which the U. S. has a free trade agreement.

If your electric vehicle doesn’t meet the criteria listed above, you may want to check out other possible state-wide or private industry programs offering rebates.

Energy Efficient Home improvement Credit

There are a number of energy improvements made to your home that qualify for a tax credit. The home must be located in the U. S., be a primary residence and an existing home that is improved or added on to.

If the qualifying home is used no more than 20% for business it qualifies for a full credit, but if the business use is greater than 20%, the qualifying expenses must be allocated based on the non-business use of the home. Here is a list of some improvements that qualify for the credit:

  • Exterior doors, exterior windows and skylights that meet the Energy Star requirements; $250 per door and $500 total, $600 for skylights
  • Insulation and air sealing materials and systems that meet certain International Energy Conservation Code standards
  • A home energy audit that includes a written report and inspection that identifies the most significant and cost-effective energy efficiency improvements with respect to the home, including an estimate of the energy and cost savings with respect to such improvement and must be conducted by a home energy
    auditor
  • Central air conditioners, natural gas, propane or oil water heaters
  • Natural gas, propane, or oil furnaces and hot water boilers
  • Electric or natural gas heat pumps, electric or natural gas heat pumps water heaters, biomass stoves and boilers