For more than 60 tax provisions, the IRS recently released its cost-of-living adjustment numbers for 2023. Many values increased significantly over 2022 estimates due to the significant increase in inflation this year. Be sure to take these 2023 modifications into account when you put 2022 year-end tax preparation techniques into action.

Remember that the calculations for annual inflation adjustments use the chained consumer price index under the Tax Cuts and Jobs Act (TCJA). You may know it as C-CPI-U. This calculation increases tax-bracket thresholds, the standard deduction, certain exemptions, and other figures at a slower rate than when the consumer price index was in use. This potentially pushes taxpayers into higher tax brackets and making various breaks worth less over time. The TCJA permanently adopts the C-CPI-U.

Education and child-related breaks

For 2023, the maximum advantages of a few breaks relating to schooling and raising children will remain the same. However, most of these exemptions are subject to a taxpayer’s modified adjusted gross income (MAGI). Partial breaks are available to taxpayers with MAGIs within an applicable phaseout range. In contrast, breaks are no longer available for taxpayers whose MAGIs exceed the maximum allowed.

Depending on the break, the MAGI phaseout ranges will either usually remain the same or slightly rise for 2023. For instance:

1. The American Opportunity credit. The MAGI value used by joint filers to calculate the reduction in the American Opportunity credit is not updated for inflation for tax years beginning after December 31, 2020. The credit is phased away for taxpayers with MAGI over $80,000 ($160,000 for joint returns). Each qualified student may receive up to $2,500 in credit.
2. The Lifetime Learning credit. The MAGI value used by joint filers to calculate the reduction in the Lifetime Learning Credit for tax years beginning after December 31, 2020, is not updated for inflation. The credit is phased away for taxpayers with MAGI over $80,000 ($160,000 for joint returns). Per tax return, the maximum credit is $2,000.00.
3. The adoption credit. For 2023, the phaseout ranges for qualified taxpayers who adopt a child will also rise by $15,820 to $239,230-$279,230 for joint, head-of-household, and single filers. In addition, the maximum credit will rise to $15,950 in 2023, an increase of $1,060.

Note that married couples who file separate returns are typically ineligible for these credits.

These are just a few of the breaks concerning education and children that could be helpful to you. Also, remember that your child may be able to claim an education tax credit on their tax return if your MAGI is too high for you to qualify for one.

Gift and estate taxes

The generation-skipping transfer (GST) tax exemption and the unified gift and estate tax exemption are yearly inflation-adjusted exclusions. As a result, the sums will increase to $12.92 million in 2023 from $12.06 million in 2022.

For 2023, the annual exclusion from gift taxes will rise by $1,000 to $17,000.

The 2023 cost-of-living

Understanding how the 2023 cost-of-living adjustment amounts may affect your tax and financial circumstances is critical because they are much greater than the 2022 amounts. We’d be happy to assist with the math calculations and explain the best tax-saving techniques based on the 2023 data. Contact our RRBB accountants and advisors for more information.

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