Do you hate it when stores and your neighbors put out Christmas decorations before Thanksgiving?
If that is you, you are really going to hate this article. That is because we are going to bypass Christmas, Hanukkah, Kwanzaa, and all other celebrations. Yes, friends, we are going to focus on the most festive time of the year — tax season. In 2023, we have to file by April 18.
Did I hear a bah humbug? Not so fast. When you sit down to do your taxes next year you will find a little extra under the deduction tree.
Inflation Boost
All year, inflation has been eating away at purchases ranging from gasoline to, well, eating. However, at tax time, inflation will be giving back.
The Internal Revenue Service (IRS) announced last month that it has adjusted over 60 tax provisions to account for inflation. As a result, the value of some federal tax credits and deductions increases. At the same time, temporarily enhanced provisions will expire reducing some tax credits.
Bracket Shift
About 90 percent of filers take the standard deduction instead of itemizing. As a result, changes in the standard deduction probably affect you.
The IRS adjusts tax provisions every year. However, the seven tax rates always remain the same. Those rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
Income brackets change. Those brackets are ranges of income to which tax rates apply. Confused? Here is an example.
A single person with a $50,000 annual income would be in the 22 percent tax bracket. That is because the 22 percent bracket for the tax year 2022 is between $41,775 and $89,075.
Here are the rates and brackets for the tax year 2022:
- 37% for incomes over $539,900 ($647,850 for married couples filing jointly);
- 35% for incomes over $215,950 ($431,900 for married couples filing jointly);
- 32% for incomes over $170,050 ($340,100 for married couples filing jointly);
- 24% for incomes over $89,075 ($178,150 for married couples filing jointly);
- 22% for incomes over $41,775 ($83,550 for married couples filing jointly);
- 12% for incomes over $10,275 ($20,550 for married couples filing jointly).
- 10% for incomes of $10,275 or less ($20,550 for married couples filing jointly).
Tax brackets for 2022 are about $1,000 to $3,000 higher than those of 2021.
You Probably Fit In Multiple Brackets
From the previous example, you might have the idea that our $50,000-a-year single person will pay $11,000 in taxes ($50,000 x .22). However, that is not how it works. The 22 percent tax only applies to income in that bracket (anything over $41,775). Income between $10,275 and $41,775 falls in the 12 percent range and is taxed at that rate. Likewise, everything below $10,275 is taxed at 10 percent.
Standard Deduction
The standard deduction is higher on your 2022 tax return.
For singles and married people filing separately, the 2022 standard deduction is $12,950. That is a $400 increase from last year. Married people filing jointly and surviving spouse filers get a $25,900 deduction. That is $800 more than last year. In addition, a Head of Household filer gets a $19,400 standard deduction – up by $600.
The standard deduction is subtracted from your gross income before a tax rate is applied. So, our $50,000 single filer would drop out of the 22 percent bracket when the standard deduction is applied to his/her income ($50,000 – $12,950 = $37,050).
Under certain circumstances, you can add to the standard deduction. If you are 65 or older or blind you can claim an additional standard deduction of $1,400. If you file as Single or Head of Household, it is $1,750. For those 65 and blind, the amount is doubled.
Other Changes
Some tax provisions were altered last year to reflect the economic impact of the pandemic. This year’s taxes will see many of those provisions returning to their previous standards.
Child Tax Credit
The child tax credit will return to pre-2021 tax year levels. That means this year’s credit will be $2,000 for children up to the age of 16. Last year it was $3,000 for children six to 17 and $3,600 for those five and under. In addition, last year the credit was fully refundable. However, this year it is not.
President Biden tried and failed to get those 2021 provisions of the Child Tax Credit extended.
Child and Dependent Care Credit
Like the Child Tax Credit, this provision returns to pre-2021 levels.
This credit gives you a tax break for the care of certain dependents. It applies to expenses to care for children under 13, an incapacitated spouse or parent, or other dependents.
If your income is under $15,000 a year, you get a credit of 35 percent of the first $3,000 you spend on such expenses. For two or more dependents, the credit rises up to 35 percent of up to $6,000 in expenses. However, for incomes over $15,000, the credit declines.
Side Gigs
One new wrinkle this year is the reduced threshold for reporting income. This will impact many who have a side hustle.
This year, if you receive $600 or more from a third-party provider, such as PayPal or Venmo, you must report it. The payment vendors will supply you with Form 1099-K.
Last year, you had to make 200 or more transactions and receive $20,000 to trigger an IRS report.
Read More:
10 Steps To Avoid Overspending On Christmas Gifts
10 Signs You Should Rethink Buying A House
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Image and article originally from www.savingadvice.com. Read the original article here.