Mark your calendars for April 15, the day most 2023 federal tax returns are due in 2024. With changes spurred by the Inflation Reduction Act rolling out for this tax year, the spike of the Consumer Price Index (aka CPI, a measure of how much Americans pay for common household goods over time), and potential changes to your personal situation, your 2023 return could look different from last year's. Consult a tax advisor to get personalized help, but here are a few reasons you may owe taxes this year when you normally don't—or have a smaller or larger refund or tax bill.
Changes for everybody
Cost of living hikes (hey, inflation) and pandemic-era credit and deduction rollbacks spurred the IRS to shake things up for tax year 2022, and those changes continued into 2023.
1. Marginal tax rate brackets changed
Whether your income went north or south—or even stayed the same—the rate at which your income is taxed could have changed when income ranges for the 7 federal tax brackets were adjusted for tax year 2023. Across the board, the brackets increased by about 7% from 2022 because of inflation. For example, for single filers, the 22% tax bracket for the 2022 tax year started at $41,776 and ended at $89,075. It shifts up to between $44,726 and $95,375 for tax year 2023. What this means is that just because you were taxed at or above a marginal tax rate of 22% last year doesn't mean history will repeat itself, no matter what happened with your income.
2. The standard deduction changed
Taking the standard deduction means you lower your taxable income by the government's preset amount—no extra math or receipts required. For single filers and married individuals filing separately, that amount goes up $900 from 2022 to $13,850 in 2023. Married-filing-jointly filers can expect an increase of $1,800 for a deduction amount of $27,700.
3. Certain tax credits and deductions changed
First things first: Know the difference between a tax credit, which reduces the dollar amount of taxes you owe, and a tax deduction, which reduces your taxable income. For example, if you owe $1,000 in taxes but receive a $250 credit, you owe $750. If you claim a $250 deduction, you do not pay taxes on that $250.
Some tax credits and deductions were expanded in 2021 as part of the government's pandemic-relief efforts, but not all those breaks were extended for 2022 or 2023. Here are a few credits and deductions that changed, potentially lowering your refund or resulting in a tax bill:
- Child Tax Credit: In 2021, the max was $3,600 per child under age 6 and $3,000 for children ages 6 to 17, and the credit was fully refundable for eligible filers. That means if the credit was more than the taxes you owed, you got back the difference. If you owed $0 in taxes, you got the full amount as a refund. As of 2023, the max is $2,000 per child up to age 16 (despite a proposal by the Biden administration to return to the 2021 max), and the credit is technically nonrefundable, meaning if the credit is more than the taxes you owe, you don't get back any of the difference. The credit's value phases out based on modified adjusted gross income levels. However, you might be eligible to claim the Additional Child Tax Credit, which would allow you to reduce your tax bill—or receive a refund if you don't owe anything—by up to $1,500. Consider consulting with a tax professional to see if you qualify.
- Adoption Credit: The max amount new adoptive parents may claim on qualified expenses went up to $15,950 for 2023 from $14,890 in 2022. The size of your credit begins lowering for taxpayers with modified adjusted gross incomes (MAGIs) over $239,230 and is unavailable to filers with MAGIs of $279,230 or more.
- Earned Income Tax Credit: Available to low- to moderate-income filers who meet certain criteria, this credit maxed out at $560 for a taxpayer with no children in 2022. The credit is worth more for tax year 2023 with a limit of $600 for a single filer with no children, and goes up to $7,430 for taxpayers with 3 or more qualifying children.
- Student loan interest deduction: People with higher incomes than in 2022 may claim this deduction of up to $2,500. For 2023, joint filers with MAGI up to $155,000 can claim the whole deduction, and joint filers with MAGI up to $185,000 can deduct a portion. (This is up from $145,000 and $175,000, respectively, in 2022). The MAGI threshold for claiming this deduction lifted by $5,000 for single filers: from $70,000 in 2022 to $75,000 in 2023 to claim the entire deduction, with taxpayers with MAGIs up to $90,000 being able to claim a piece.
- Health savings account (HSA) and flexible spending account (FSA) deductible contributions: Contributing to these tax-advantaged accounts could lower your taxable income by even more for tax year 2023. If you maxed out your allowable contributions, you could lower your taxable income by $200 more than in 2022 for self-only HSA coverage and FSA coverage and, $450 more for family HSA coverage.
Changes you might have made
Life events happen, and when they do, they could affect your tax return—and potential refund.
4. You've gone green
The benefit of buying an electric vehicle used to come at tax time—tax-payers could get up to $7,500 with the Clean Vehicle Credit—but come 2024, that credit could be applied to the down payment right when you buy the car. If you don't want to apply the credit then, you can wait until tax-filing time to claim it. But remember, the electric vehicle credit is nonrefundable. That means if the tax credit is more than what you owe, you don't get the difference back. One more thing: There are more component requirements for new clean vehicles you received after April 18, 2023, to qualify for the credit than there had been previously.
If you made your home planet-friendlier, you may qualify for the Residential Clean Energy Credit, which offers a 30% credit for costs related to things such as solar electric or wind energy equipment. There's also the Energy Efficient Home Improvement Credit, which offers a 30% credit (up 10% from last year) for costs such as insulation and energy-saving windows. Check out the White House's site on clean energy.
5. You sold NFTs
The IRS changed the term "virtual currencies" to "digital assets," which include non-fungible tokens (NFTs), sales of which are subject to capital gains tax, just like stocks and bonds. If you hold one of these digital assets for more than a year, those long-term capital gains are taxed up to 20% at the federal level, but income thresholds for long-term capital gains tax rates shifted up from 2022 to 2023. If you hold digital assets for less than a year, your capital gains are considered short-term and taxed as ordinary income, which can be as high as 37% depending on your federal tax bracket. Your state, county, or even city of residence may tax your capital gains as well, potentially contributing to a higher tax bill. There's also an additional 3.8% surtax on net investment income called the Net Investment Income Tax for high-income filers.
6. You got hitched
Newlywed? Congrats. If you file jointly, your tax bracket may change, and your standard deduction will increase. (See point 1 above.) But you may be hit with the marriage tax penalty, meaning you and your spouse pay more taxes as a couple than if you were filing as singles (which you can't do after "I do" … sorry). The penalty only kicks in if your combined income is $693,750 or more, or if you live in one of 15 states with a penalty built into its income tax bracket structure.
7. Your household grew
New addition to your family, such as a baby or elderly parent who moved in with you? You may qualify for the Child Tax Credit, Adoption Tax Credit, Child and Dependent Care Credit, and/or Credit for Other Dependents, which may lower what you owe—or boost your refund.
8. You worked remotely
If you worked remotely, you may owe taxes and have to file in multiple states. Some employers might calculate withholding for you but check your paycheck to confirm. Check with local tax authorities in the places you worked for filing requirements. You can also check state reciprocity agreements that allow you to skip filing multiple returns. And if you moved to one of 7 states with no income tax this calendar year, you'll file a federal return and possibly a final state return in your old state, depending on when you moved and established residency.
9. You're a teacher who bought school supplies
Teachers often dig into their own pockets to supply their classrooms with markers and glue sticks. For tax year 2023, teachers can deduct up to $300 of those unreimbursed expenses, up from $250 when the deduction was enacted for tax year 2021.
10. You started a side hustle
Freelancers, independent contractors, and the like usually get a 1099-NEC (non-employee compensation) form, a record of how much a business paid you. The company you contract for is not required to withhold federal and state taxes for non-employees, so it's on you to pay up—every quarter instead of once a year—or you can adjust your W-2 with your full-time job. And you may face penalties if you wait. Paying quarterly estimated taxes could help you avoid a big bill or possible penalties.
11. You got government benefits
If you received unemployment benefits in 2023, that income is subject to federal tax and in many cases, state tax.1