Like most people, you probably consider taxes when you make financial decisions. Therefore, it is wise to pay attention to major tax law changes to understand how they will affect how you spend and invest your money.
There have been several federal tax law changes since the Biden Administration began, which are detailed below. In particular, the administration passed the Inflation Reduction Act in 2022 and other laws that contain essential tax law changes.
If you have legal questions, our Chicago IRS lawyers at North Suburban Legal Services can help.
MSNBC reported a 7% change in federal income tax brackets between 2022 and 2023. This change was larger than usual because inflation has been high after the pandemic for various reasons. The following are the marginal tax brackets for 2023 for people who are married and filing jointly:
The standard deduction was increased by 7% for 2023 to $27,700 for married couples filing jointly, an increase from $25,900 last year. In addition, a single filer can claim $13,850, up from $12,950 last year. 90% of taxpayers currently claim the standard deduction, so this change could significantly impact tax savings for many people.
The Inflation Reduction Act contains $80 billion in funding over a decade to allow the IRS to engage in additional tax enforcement. The idea behind the increased funding is to increase the collection of taxes with more audits and related enforcement actions.
A vital provision of the Inflation Reduction Act is putting a 15% corporate minimum tax on companies earning more than $1 billion annually. Under the old law, these companies were subject to a 21% corporate tax but many paid less or no tax. Under the new law, the 15% minimum tax applies to yearly income posted in the company’s financial statement instead of the firm’s taxable income. This change took place on Jan. 1, 2023.
Fortunately, companies can still claim tax credits to lower their taxes. Note that a provision of the tax law states that private equity firm subsidiaries that make more than $1 billion annually are exempt from the new tax.
The AMT exemption amount for 2023 is $81,300 and starts to phase out at $578,150 or $126,500 for a married couple filing jointly, for whom the AMT exemption starts to phase out at $1,156,300.
The maximum Earned Income Tax Credit for 2023 is $7,430 for taxpayers who qualify and have three or more qualifying children. This is an increase from $6,935 in 2022.
Large companies often repurchase their stock to increase the share value. However, the Inflation Reduction Act put a 1% tax on companies’ stock buybacks. This change also occurred on Jan. 1, 2023.
People who are 50 and older can make catch-up contributions to retirement plans, which is more than the normal maximum contribution. This amount was $6,500 last year, but it has been increased to $7,500 in 2023. Also, a provision will take effect in 2025 that lets workers who are 60 to 63 make larger catch-up contributions as high as $11,250 per year. These contributions are pre-tax, so the contributions lower one’s current tax liability.
There are provisions in the law that allow some people to make early withdrawals before age 59-1/2. These are for people who are terminally ill, domestic abuse victims, and to pay for the cost of long-term care. Also, those affected by a federally-declared disaster can withdraw up to $22,000 without penalties. They also can stretch the payments on income taxes that are required for the distribution for up to three years.
Individuals through 2022 had to start taking RMDs from their job retirement plans and regular IRA by April 1 of the year when they turned 72. However, starting Jan. 1, 2023, the age to start RMDs changed to 73, and it will increase to 75 in 2033. Although this delays required distributions and also delays the tax liability that happens from distributions, it will lead to bigger payouts over a shorter time. This could cause negative tax consequences for certain taxpayers.
As of Jan. 1, 2023, people who are 70-1/2 or older may make a one-time give of $50,000 from their IRA to a charitable remainder annuity trust, charitable gift annuity, or charitable remainder trust. The amount placed into the annuity or trust goes toward the $100,000 yearly QCD total gift allowed before for certain 501(c)(3) charitable organizations. Tax experts say this may be an effective way to reduce additional tax liability and also reduce RMDs.
People with unused balances in their 529 education savings plans can move that money up to $35,000 to a Roth IRA. However, this only applies to a 529 plan that has been in effect for at least 15 years. You can make transfers to Roth IRAs if they do not exceed contribution limits for a year, which is $6,500 for most people and $7,500 for those 50 and older. These transfers avoid income taxes and penalties of 10% that would have applied to money in the 529 plan if it had been taken out as a non-qualified distribution.
Federal tax laws have changed considerably under the Biden Administration, so talk to your CPA to determine how the changes affect you. If you have tax issues, you do not want to take on the IRS alone. Work with our Chicago IRS lawyers at North Suburban Legal Services for the best case result by calling (312) 909-6089.