What Is Eligible As A Tax Deduction For 2023?

Ever-evolving tax laws mean changes are in store every year, and 2023 is no exception. Tax deductions have changed in light of COVID-19 and inflationary pressures. Most Americans claim the standard deduction when filing federal returns, but itemizing deductions may be advantageous. Regardless of how you itemize, changes to tax brackets and deductions will affect your returns. Our Pasquesi Sheppard team invites you to explore how tax deductions have changed and how you can use them to maximize your tax refund.

How Do 2023 Changes Affect My Taxes?

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Tax brackets have widened, while exemptions and credits have increased over the last year, resulting in a lower tax bill for many filers. Increases in exemptions and credits are tied to inflation and follow current statutes. The 2023 rates apply, beginning January 1, 2023, for taxes payable in 2024. Some rates are projections subject to finalization. The Inflation Reduction Act extended some energy-related tax breaks for commercial buildings, increasing them to account for inflation.

What Is the Standard Deduction?

The standard deduction varies depending on several factors and changes yearly to account for inflation. Inflation increases the value of federal deductions and tax credits. Monitoring which deductions are adjusted for inflation is key to planning your taxes and finding the best way to maximize your deductions or minimize your tax bill. Standard deductions may increase in cases of a “net qualified disaster loss.” Married people filing separately can’t take the standard deduction if the spouse’s tax return includes itemized deductions. The standard deduction isn’t available for dual-status aliens, either.

For 2023, the standard deduction is $13,850 for single or married filing separately. It’s $27,700 for married filing jointly or for a surviving spouse. It’s set at $20,800 for the head of household. Those aged 65 or older or blind can claim an additional standard deduction of $1,500 or $1,850 for single or head of household. The additional amount doubles for those both aged 65 or over and blind. For 2022, the rates are $12,950, $25,900, and $19,400. Deductions are $1,400 or $1,750 for those aged 65 or older or blind.

What Are the Federal Income Tax Rates in 2023?

Federal income tax rates are set at seven levels that have stayed the same over the years: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The income brackets connected to the seven rates are subject to change annually.

For 2023, the brackets published by the IRS are:

  • 37% for incomes over $578,125 ($693,750 for married couples filing jointly)
  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly)
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly)
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly)
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly)
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly)
  • 10% for incomes of $11,000 or less ($22,000 for married couples filing jointly)

Note that the Tax Cuts and Jobs Act of 2017 changed the federal income tax rates. Starting in 2026, they’re slated to revert to the prior rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

How Much is the Child Tax Credit?

The enhanced child tax credit expired for 2022, returning to the original amount of $2,000 per qualifying child. In 2023, the credit will stay at $2,000, but the maximum refundable part of the credit is anticipated to be $1,600 in 2023. The refundable portion is adjusted based on inflation.

Are Federal Estate and Gift Taxes Changing?

Federal estate and gift taxes are being bumped up in 2023. For calculating the personal exemption, the unified credit amount increases to $12,920,000, or $25,840,000 for those filing as married. Gifts are excluded up to the value of $17,000—an increase of $1,000 from 2022. Exemptions in 2022 are slightly lower at $12,060,000 for individuals and $24,120,000 for married couples.

What Are Other Notable Tax Changes for 2023?

Other notable tax changes for 2023 include:

  • The Alternative Minimum Tax exemption moves to $81,300 and starts to phase out at $578,150 or $126,500, with a phase-out at $1,079,800. This is about a 7% increase over 2022 numbers.
  • The maximum Earned Income Tax Credit is $7,430 for those with three or more qualifying children, up from $6,935 in 2022.
  • Employee salary reductions for health flexible spending is $3,050, with a maximum carryover of $610 for plans that allow it. The IRS has also adjusted the requirements for eligibility for medical savings accounts.
  • The maximum credit allowed for adoptions is $15,950, up from $14,890 in 2022. The foreign earned income tax exclusion is $120,000, up from $112,000 in 2022.

What Are Illinois Tax Rates?

Illinois has a flat 4.95% individual income tax rate and a 9.50% corporate tax rate.

What Are Capital Gains Rates for Illinois Residents?

Illinois residents declare capital gains on both state and federal tax returns. Capital gains are taxed at state, federal, and sometimes local levels. Illinois’s top average combined rate is 27.2% when state, federal, and local taxes are added together.

State

Long-term capital gains tax rates in Illinois are simple to calculate because they are paid at a flat rate of 4.95%. Short-term capital gains also are taxed at 4.95% since the regular individual income tax rate matches the capital gains tax. Illinois taxpayers with an adjusted gross income of more than $250,000 for single filers or $500,000 for joint filers cannot claim a personal exemption.

Federal

Federal rates for short-term capital gains match regular income tax rates, ranging from 10% to 37% based on income brackets. Federal long-term capital gains tax rates have three brackets, ranging from 0% to 15% and 20% based on income levels for single filers, married filing jointly, married filing separately, or head of household. Most filers will pay 15%, which applies to incomes varying from about $44,000 to roughly $500,000, depending on filing status for 2023.

In addition to state and federal capital gains taxes, those with modified adjusted gross income over $200,000, or $250,000 for married filing jointly, are subject to a 3.8% Net Investment Income Tax.

Our financial planning and consulting experts at Pasquesi Sheppard are ready to help you minimize your tax burden by helping you make long-term financial decisions. We’ll help you with various critical services, including tax planning, tax preparation, estate planning, and accounting. If you have questions about 2023 tax changes, contact us via our secure online form or at 847-234-5000. We’ll help ensure you take the proper steps to achieve your financial goals.