Tax season starts today. You could be getting a bigger refund
Whether someone’s tax refund is bigger than last year’s depends on a host of factors, including income, credits and deductions, and so on. But it’s a real possibility thanks to the inflation adjustments the IRS made this year to tax brackets and to the standard deduction.
A taxpayer whose income hasn’t really changed from last year, for example, could get a bigger refund, according to tax prep company Jackson Hewitt. That’s because the IRS bumped up the seven brackets by 7% for tax year 2023, meaning higher incomes fall into lower brackets than in the past, resulting in less income tax paid.
The 24% marginal rate for individual filers, for example, was applied to taxable income from $89,075 to $170,050 in tax year 2022; for 2023, it will apply to taxable income starting at $95,375 to $182,100. That’s over $6,000 that’s shifted to a lower tax bracket: An individual filer with an income of $95,000 will pay hundreds of dollars less in federal taxes for tax year 2023 than they did for 2022.
Additionally, the standard deduction, which lowers filers’ taxable income, was increased by 7%, or $900, compared with last year for single filers (double that for married couples filing jointly), from $12,950 to $13,850. (The brackets and standard deduction will also change for tax year 2024, which will be filed in 2025.)
That’s a big shift from last year, when many filers saw refunds shrink compared with a year earlier because many pandemic-era tax benefits expired.
Of course, many people received raises that outpaced inflation last year. That means they may have a bigger tax bill, says Eric Bronnenkant, head of tax at financial advisory company Betterment.
“There will be some people who will get greater refunds and some who will get less,” Bronnenkant says.
But that’s true every year. Overall, this year, things are getting closer to the way they were before the pandemic, he says.
Here are some other things to keep in mind when filing 2023 returns.
IRS dropping pins
Tax scams run rampant, especially right before the filing deadline on April 15. There are any number of scams, but a common one occurs when fraudsters simply file on behalf of taxpayers with personal information they’ve accessed on the internet.
One tip Bronnenkant has is to get an identity protection, or IP, pin from the IRS. This is a six-digit number you include when filing your tax return; if you request one, a return filed without the pin will not be accepted by the IRS. This can prevent scammers from using stolen Social Security numbers or similar personal details to file bogus returns and steal refunds.
Again, though, be careful: An IP pin is a free service from the IRS; if you receive an email or some other correspondence asking you to pay a fee, that’s a scam.
“Everyone’s Social Security number and name is somewhere out there on the internet—it’s not hard for people to get that information and file fraudulent claims,” says Bronnenkant. “This is a great tool to reduce that likelihood.”
You still have time
While most tax-planning maneuvers needed to occur before the end of 2023 to make a difference in your tax bill, it’s still possible to lower your bill by contributing to an IRA or health-spending account.
Taxpayers have through April 15 to contribute to a traditional, Roth, or SEP IRA. Going the traditional route can lower how much you pay in taxes now on a dollar-for-dollar basis if you qualify for the deduction: An individual in the 24% bracket who maxes out their traditional IRA would pay around $1,500 less in federal income tax this year (though taxes will be due when a withdrawal from the account is made).
And contributing to a Roth IRA can help you save on taxes in the long term. You will pay income taxes upfront, but then your funds grow tax-free; when you make a withdrawal in retirement, you won’t owe Uncle Sam anything (assuming you follow all of the other withdrawal rules). If you’re in a lower tax bracket now—and you’re likely in one of the lowest you will be in, considering the current historically low rates—then it can make sense to try to max out your Roth IRA.
The limit for 2023 is $6,500 for traditional and Roth accounts for individuals and $7,500 for those 50 or older.
Up for debate
Though tax season is now underway, Congress is currently discussing legislation that could affect many filers.
A bipartisan bill is making its way through the legislative chamber that could enhance the Child Tax Credit for many people (and in return provide corporations some tax breaks). This is a long-time wish of Democrats, and could leads to hundreds of thousands of low-income people receiving a bigger credit. If the bill manages to become law this tax season, filers may have to amend their returns.
1099-K delay
The IRS announced a few year ago that it was lowering the threshold for reporting income from business transactions from $20,000 to $600. The rule caused a lot of confusion—including social media users claiming it was a tax on personal Venmo transactions between friends, which is false—but was basically meant to require payment companies like Venmo or PayPal to send out 1099-K forms to people on the platform who had business transactions worth at least $600.
To be clear: If you are a small business owner or have a side hustle and get paid through one of those apps, you should already be reporting the income to the IRS. “All income, no matter the amount, is taxable unless it’s excluded by law, whether a Form 1099-K is sent or not,” the IRS says.
The IRS has so far delayed implementing the rule because of all of the confusion it’s caused. That means this year, taxpayers in that situation don’t necessarily have a bunch of 1099-Ks to wrangle up.
“The good news is people won’t be overwhelmed with 1099-Ks,” says Bronnenkant. “But everyone should still report their income regardless of if they receive a tax form.”
