The tax landscape in the United States has undergone notable changes for both individuals and businesses in 2023, influenced by inflation and legislative updates. Understanding these changes is vital for effective financial planning and compliance.
For Individuals:
- Inflation Adjustments: The IRS announced inflation adjustments for the 2023 tax year, which sees many key tax provisions, including federal tax brackets, increasing by approximately 7%. This adjustment aims to counteract “bracket creep” caused by inflation. For example, the income threshold for married couples filing jointly in the 12% bracket increased from $83,550 in 2022 to $89,450 in 2023.
- Standard Deduction Increase: The standard deduction rose for all filers. Single filers and those married filing separately see an increase of $900, while married couples have an increase of $1,800. For heads of households, the increase is $1,400. Additionally, deductions for individuals over 65 or blind have also increased.
- Capital Gains Tax: The income thresholds for long-term capital gains, which are taxed at either 0%, 15%, or 20%, have been adjusted. This impacts individuals with investments in stocks, real estate, or cryptocurrencies.
- Earned Income Tax Credit and Other Provisions: The Earned Income Tax Credit has been increased, with the maximum credit for taxpayers with three or more children rising to $7,430. Changes also include an increase in the annual exclusion for gifts and the lifetime estate tax exclusion.
For Businesses:
- Restaurant Deduction Change: Businesses can only deduct 50% of their spending at restaurants in 2023, a decrease from the 100% deduction available in 2022.
- Phasing Out of Bonus Depreciation: The ability to claim 100% bonus depreciation on certain assets is phasing out. In 2023, this falls to 80% and will decrease by 20% annually thereafter.
- Retirement Plan Incentives: Small businesses with up to 50 employees can claim a tax credit for 100% of the costs of starting a retirement plan, up to $5,000. Additionally, a credit for up to $1,000 in employer contributions to each employee’s plan is available.
- Incentives for Green Initiatives: The Inflation Reduction Act introduced tax credits and deductions for businesses adopting energy-efficient practices. This includes larger deductions for energy-efficient commercial building renovations and credits for purchasing electric vehicles.
- Corporate Alternative Minimum Tax (AMT): The Inflation Reduction Act introduced a 15% minimum tax on adjusted financial statement income for corporations with annual income over $1 billion.
State-Level Corporate Tax Changes:
- Corporate Income Tax Rate Reductions: Some states like Arkansas, Nebraska, New Hampshire, and Pennsylvania have reduced their corporate income tax rates. For example, Pennsylvania reduced its rate from 9.99% to 8.99%, with plans to further reduce it to 4.99%.
- Capital Expensing Provisions: While federal capital expensing provisions are phasing out, some states like Arkansas are ensuring full business capital expensing for state tax purposes.
Overall, these changes reflect a dynamic tax environment in the U.S., with adjustments aimed at accommodating inflation, encouraging certain business practices, and addressing large corporate earnings. Both individuals and businesses should stay informed about these changes to optimize their tax strategies and ensure compliance.
