To minimize your income taxes for 2023, you need a strategy and that requires keeping up with tax laws changes. From standard deductions to health savings accounts to tax rate schedules, here”™s a checklist of tax changes to help you plan the year ahead.
The tax rate structure, which ranges from 10% to 37%, remains similar to 2022; however, the tax-bracket thresholds increase for each filing status. Standard deductions also rise, and personal exemptions have been eliminated through tax year 2025.
Standard deduction: In 2023, the standard deduction increases to $13,850 for individuals (up from $12,950 in 2022) and to $27,700 for married couples (up from $25,900 in 2022).
Alternative Minimum Tax (AMT): In 2023, AMT exemption amounts increase to $81,300 for individuals (up from $75,900 in 2022) and $126,500 for married couples filing jointly (up from $118,100 in 2022). Also, the phaseout threshold increases to $578,150 ($1,156,300 for married filing jointly). Both the exemption and threshold amounts are indexed annually for inflation.
“Kiddie Tax”: For taxable years beginning in 2023, the amount that can be used to reduce the net unearned income reported on the child”™s return that is subject to the “kiddie tax” is $1,250. The same $1,250 amount is used to determine whether a parent may elect to include a child”™s gross income in the parent”™s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child”™s gross income for 2023 must be more than $1,250 but less than $12,500.
Health Savings Accounts (HSAs): Contributions to an HSA are used to pay the account owner”™s current or future medical expenses, their spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2023, a qualifying HDHP must have a deductible of at least $1,500 for self-only coverage or $3,000 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $7,500 for self-only coverage and $15,000 for family coverage.
Medical Savings Accounts (MSAs): There are two types of Medical MSAs: The Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
Self-only coverage: For taxable years beginning in 2023, the term “high deductible health plan” for self-only coverage means a health plan that has an annual deductible that is not less than $2,650 and not more than $3,950, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $5,300.
Family coverage: For taxable years beginning in 2023, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $5,300 and not more than $7,900, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $9,650.
AGI limit for deductible medical expenses: In 2023, the deduction threshold for deductible medical expenses is 7.5% of adjusted gross income (AGI), made permanent by the Consolidated Appropriations Act of 2022.
Eligible long-term care premiums: Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2023, the limitation is $480. Persons more than 40 but not more than 50 can deduct $890.
Those more than 50 but not more than 60 can deduct $1,790, while individuals more than 60 but not more than 70 can deduct $4,770. The maximum deduction is $5,960 and applies to anyone more than 70 years of age.
Medicare taxes: The additional 0.9% Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly) remains in effect for 2023, as does the Medicare tax of 3.8% on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the tax.
Foreign earned income exclusion: For 2023, the foreign earned income exclusion amount is $120,000 up from $112,000 in 2022.
Long-term capital gains and dividends: In 2023, tax rates on capital gains and dividends remain the same as 2022 rates (0%, 15%, and a top rate of 20%); however, threshold amounts have increased: the maximum 0% rate amounts are $44,625 for individuals and $89,250 for married filing jointly. For an individual taxpayer whose income is at or above $492,300 ($553,850 married filing jointly), the rate for both capital gains and dividends is capped at 20%. All other taxpayers fall into the 15% rate amount (i.e., above $44,625 and below $492,300 for single filers).
Editor”™s note: The second half of this column appear next week and will cover more tax changes that require your attention. This column is for information only and should not be considered individual advice. Taxes are complicated and mistakes can be costly, so consider seeking professional planning and preparation assistance.
Norman G. Grill is managing partner of Grill & Partners LLC, certified public accountants and consultants to closely held companies and high net worth individuals, with offices in Fairfield and Darien.
