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Popular tax deductions, credits, and exclusions get better in 2023 due to inflation hikes

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Very few of us share the same tax circumstances. However, there is one thing every taxpayer can agree on.

We all want to pay the least amount of federal tax as possible.

Deductions, like the standard amounts discussed in Part 2 of the ol' blogs annual tax inflation series, are a major way of reducing our annual tax bill. But wait. There's more.

There are the adjustments to income, listed on Form 1040 Schedule 1 and still known as above-the-line deductions. You can claim all of these 25 tax breaks regardless of whether you itemize or take the standard deduction.

Definitely don't overlook tax credits. They are the better tax break since they offer direct dollar-for-dollar reductions of our tax bill. Some can even give us a refund.

And in some cases, the tax code says that a portion of our income isn't taxed at all.

Even better, the Internal Revenue Service adjusts many of these tax-lowering options every year for inflation. Here's a look at the applicable 2023 cost-of-living revisions to these tax breaks in this, Part 4 of the tax inflation series.

Child tax credit: Let's start with one of the year-in-year-out most popular family-related tax breaks, the Child Tax Credit (CTC).

The CTC has been around in some form since 1997. It was increased to $2,000 per qualifying child as part of the Tax Cuts and Jobs Act (TCJA) of 2027. It was boosted even more in 2021 as part of the American Rescue Plan Act (ARPA), which was enacted help folks deal with the COVID-19 economic downturn.

The bad news is that the ARPA increases expired on Dec. 31, 2021. The good news is that the portion of the CTC in 2023 that is refundable, meaning you could get excess credit back as a refund, goes from 2022's $1,500 to $1,600.

There's still a slim chance that the CTC could be returned to the larger 2021 tax year levels, for both the 2022 and future years, when the lame-duck Congress gets back to Capitol Hill after the mid-term elections. But for now, the IRS and all us taxpayers must operate and plan based on the existing, not possible, tax law.

Adoption tax credit, employer assistance: It's no secret, even to those of us without children, that kiddos cost a lot. That's why Uncle Sam offers a variety of family-friendly breaks in addition to the CTC to help moms and dads cover all their youngster-related expenses.

One of them offers financial help in the form of a tax credit and tax-free employer assistance for folks who grow their families through adoption.

In 2023, a company can provide eligible adoptive parents up to $15,950 in tax-free help to cover the costs associated with adding to their families. This new income exclusion amount is a nice jump from the $14,890 allowed in 2022.

Even if adoptive parents don't get help from their employers in 2023, they can claim next year an adoption credit of up to that same maximum of $15,950. Again, this if for all adoptions, including of a child with special needs. And again, this is an increase from the 2022 amount of $14,890.

Both the adoption income exclusion and tax credit amounts will begin to phase out in 2023 when individuals have modified adjusted gross income (MAGI; shameless plug for the ol' blog's glossary, which explains MAGI as well as many other tax term definitions) greater than $239,230. That's an increase from 2022's $223,410 MAGI phase-out starting point.

The adoption credit or income exclusion is eliminated in 2023 once adoptive parents hit MAGI of $279,230 or more. This tax benefit ends in 2022 when adoptive parents' MAGI hits $263,410 or more.

Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.

Note, too, that the tax credit is not refundable. Any extra adoption credit left after you reduce your tax bill to zero won't come back to you as a refund.

Earned Income Tax Credit, or EITC: The Earned Income Tax Credit (EITC), which was created in the 1970s as an outgrowth of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers.

While it's a great benefit for families, one common misperception about the EITC is that you must have children to claim it. Not true. In fact, ARPA also upped 2021's EITC amounts for single filers. But as with the enhanced CTC, that boost ended at the end of last year.

Still, the coming inflation adjustments will help all eligible EITC taxpayers. For 2023, inflation adjustments mean the maximum EITC amounts, determined by your family size, will be:

  • $7,430 for taxpayers filing jointly who have three or more qualifying children, up from $6,935 in 2022;
  • $6,604 with two qualifying children, up from $6,164 this tax year;
  • $3,995 with one qualifying child, up from the current $3,733; and
  • $600 if you don't have any qualifying children, up from $560 in 2022.

All of these EITC amounts are refundable, meaning any credit that is more than your tax bill comes back to you as, per its name, an IRS refund.

Of course, the key to claiming the EITC is to fall within its earnings' guidelines. If you don't make enough money, you can't claim it. Make more, and the credit amount is reduced. And if you make what is deemed too much, you can't claim the EITC at all.

To claim any EITC amount in 2023, inflation adjustments mean that your earned and adjusted gross income (AGI) next year each must be less than the following amounts:

Filing Status

No
Children

1
Child

2
Children

3 or More Children

Single,
Head of Household
or Surviving Spouse

$17,640

$46,560

$52,918

$56,838

Married
Filing Jointly

$24,210

$53,120

$59,478

$63,398


In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2023, that earnings amount is $11,000.

For comparison, the 2022 tax year maximum EITC claim earnings limits are:

Filing Status

No
Children

1
Child

2
Children

3 or More Children

Single,
Head of Household
or Surviving Spouse

$16,480

$43,492

$49,399

$53,057

Married
Filing Jointly

$22,610

$49,622

$55,529

$59,187


For 2022, the excessive investment income amount is $10,300.

Student loan interest: Paying for higher education is a major expense, for students and their families. That's why so many students and/or their families take out loans to pay for college.

The Biden Administration is preparing to forgive up to $20,000 in student loan debt for millions. But if you don't qualify, or will still owe after some of your college debt is canceled, you might be able to claim a tax break for the interest on the remaining loan amount.

You can offset a portion of that educational debt by using the Schedule 1 write-off for student loan interest. This $2,500 tax break, which is found on Form 1040 Schedule 1, is set by law, so it doesn't change each year based on inflation.

However, the ability to claim this above-the-line deduction is based on your income and those earnings thresholds can be affected by inflation.

In 2023, you can claim the full $2,500 student loan interest deduction as long as you, as a single taxpayer, have MAGI of $75,000 or less. The income threshold goes to $155,000 next year for married filing jointly taxpayers with college debt.

In 2022, the full student loan interest deduction is available to single taxpayers with MAGI of $70,000 or less, and $145,000 for jointly filing married couples.

If you make more than these amounts for your filing status in either year, the loan deduction amount is reduced.

The loan interest deduction is totally eliminated in 2023 if you, as a single filer, make $90,000. The tax break ends next year for married joint filers with MAGI of $185,000 or more.

For 2022 filings, it's not available for single taxpayers with MAGI of $85,000 or more, or $175,000 plus for married joint filers.

Savings Bond exclusion for higher education: Savings bonds are another way to help pay for some higher education costs.

Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.

In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.

Savings bonds

This exclusion will start phasing out in 2023 for single filers with MAGI of more than $91,850. That's a nice hike from 2022's $85,800 earnings level. The e income trigger for joint filers next year is $137,800. That's up from this year's $128,650 on joint returns.

The tax-free savings bond interest exclusion is completely phased out in 2023 for joint filers with MAGI of $167,800. That's again up substantially from the 2022 earnings cap of $158,650. There's no Savings Bond exclusion for single filers in 2023 when their MAGI hits $106,850. In 2022, these single bond redeemers face a $100,800 elimination cap.

Lifetime Learning Credit: The Lifetime Learning Credit (LLC) is great not just for full-time younger college students, but also covers continuing education courses once you're out of school, such as a class you took to improve your workplace skills.

This educational tax credit was expanded so that more could claim it under the Taxpayer Certainty and Disaster Tax Relief Act of 2020. The change was made to account for the end of the tuition and fees above-the-line deduction.

That swap actually is a better tax break. The now defunct tuition and fees deduction reduced income, which may or may not (depending on your tax bracket) have helped cut your taxes. But the LLC is a tax credit, which as noted earlier means a dollar-for-dollar reduction of any tax you owe. In this tax credit's case, it can zero out any tax you owe.

The LLC still is calculated as 20 percent of the first $10,000 in tuition expenses paid per year, up to a maximum credit of $2,000.

Like many tax breaks, the LLC maximum is reduced and ultimately phased out if you make what the IRS considers a lot of money. The phase-out begins at MAGI of $80,000 for single filers and $160,000 for jointly filing married taxpayers. The credit is unavailable for single taxpayers making $90,000 and joint filers earning $180,000.

These phase-out ranges used to be adjusted for inflation, but beginning in 2021, the law change set them at these now increased, but fixed, MAGI amounts.

So if there's no inflation adjustment, why is this here? Because sometimes I get tax nostalgic, and because some folks might not have yet realized the Lifetime Learning Credit/tuition and fees change.

Educators' expenses deduction: Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction.

This tax break was made a permanent part of the tax code as part of 2015 tax extenders bill (formally known as the Protecting Americans from Tax Hikes or PATH Act). PATH set the baseline deduction at $250, but also initiated inflation tweaks to this amount.

In 2023, this amount remains at the 2022 level of $300. Last year's $50 hike was the first since the above-the-line deduction was made eligible for inflation adjustment.

Not that I or any teacher will complain about any tax break, even a modest one like this, but the truth is that this paltry tax break generally isn't nearly enough to cover out-of-pocket classroom costs.

Small businesses pass-through break: The TCJA, aka the Republican tax reform bill back in 2027, include a new Section 199A tax deduction for certain small businesses.

The §199A tax break allows eligible businesses, known as pass-through entities, to deduct up to 20 percent of qualified business income, or QBI. Limits, however, apply based on income and type of business.

In 2023, the QBI threshold will increase to $364,200 for married couples filing joint returns, and to $182,100 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.

Those are increases from 2022's QBI thresholds of $340,100 for married couples filing joint returns, and $170,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.

The QBI limitations are phased in as income increases. The §199A tax break won't be available in 2023 once the pass-through taxpayer's MAGI exceeds $464,200 for married couples filing joint returns, and to $232,100 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.

The 2022 QBI elimination amounts are more than $440,100 for married couples filing joint returns, and to $220,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.

Transportation fringe benefits: Commuting can tax your patience. Some companies countered this stress by offering their workers a tax-free fringe benefit that covered some getting-to-and-from-work travels (and travails).

No more. Under the TCJA, and through tax year 2025, employers cannot deduct fringe benefits they offer commuting employees by subsidizing some or all of their parking, transit and van pooling costs. The law also suspended bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.

Some businesses, however, still have the option to offer workers the vehicular commuting benefits and cover the costs themselves.

In 2023, they can provide up to $300 a month to employees to offset their commuter highway vehicle travel, any transit pass or qualified parking. That's $20 more than the $280 a month allowed this year.

Retirement Saver's Credit: It's tough sometimes to save for retirement when you've got lots of other day-to-day expenses to meet. Uncle Sam wants to help encourage you to stash at least a little for your golden years via this special tax credit.

The Saver's Credit was noted in Part 3 of the 2023 inflation series, which has more details on this retirement tax break. But since it's often overlooked, it deserves another mention in this deduction, credit, and income exclusion post.

You can claim the Saver's Credit based on the money you put into IRAs and workplace (both as an employee or as the self-employed boss) plans. However, it's limited to folks who meet the annual earning requirements.

In 2023, the Saver's Credit maximum earnings caps go to:

  • $36,500 for singles and married filing separately taxpayers, up from $34,000 in 2022;
  • $54,750 for heads of household, up from $51,000 this year; and
  • $73,000 for married couples filing jointly, up from the 2023 limit of $68,000.

Again, there's more, including 2022 and 2023 Saver's Credit tax year tables showing phase out ranges, in Part 3 of the inflation series. 

More inflation tax info on the way: Speaking of more, as I mentioned at the top of the post (many, many paragraphs ago), this is just one part, Part 4 to be exact, of the ol' blog's annual look at how inflation might affect our taxes in the upcoming year.

All the 2023 tax year inflation posts, ranging from today's to the previously posted ones, are listed in the full series directory at the end of the first 2023 inflation item.

Thanks for reading this one and all the rest. And thanks especially for your tax inflation interest and explanation patience.

This post on inflation's effects on 2023 tax deductions, credits, exclusions, and more
is Part 4 of the ol' blog's annual series on myriad tax inflation adjustments. 
The 10-part series started with a look at next year's
income tax brackets and rates.
That first item also has a directory, at the end of the post,
of all of the posted and upcoming tax-related inflation updates for 2023.
Note: The 2023 figures in this post apply to that tax year's returns to be filed in 2024.
For comparison purposes, you'll also find 2022 amounts that apply
to this year's 2022 taxes that will be due April 18, 2023.

 

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