2023 Tax Inflation Adjustment: What CPAs Need to Know to Help Their Clients

As tax laws and regulations change, CPAS must keep updated with the latest tax inflation adjustments. These changes can significantly impact their clients’ tax returns, so CPAS must have a thorough understanding of the updates. Tax inflation adjustments can affect various aspects of tax filing, including standard deductions, marginal rates, Alternative Minimum Tax (AMT) exemptions, and more.

CPAs must also understand how these changes can impact their client’s financial planning and overall tax strategy. This article will discuss the latest tax inflation adjustments and offer tips on how CPAs can navigate these changes and provide better value to their clients.

Due to historically large inflation adjustments made by the IRS, Americans may be able to reduce their taxes this year. The agency modified several tax rules for 2023 to prevent “bracket creep,” which occurs when workers are placed into higher tax brackets due to inflation adjustments despite having the same standard of living.

On average, the IRS raised each provision by approximately 7% for 2023. These changes could result in tax savings for some taxpayers, providing relief during high inflation and eroding their purchasing power. For example, some taxpayers may be in lower tax brackets due to the modifications. In contrast, those who rely on the standard deduction (which 86% of taxpayers use) can deduct a greater portion of their income from their taxes.

STANDARD DEDUCTION INCREASE

For the tax year 2023, the standard deduction for married couples filing jointly will increase to $27,700, a rise of $1,800 from the previous year. The standard deduction for single taxpayers and married individuals filing separately will increase by $900 to $13,850, and for heads of households, it will be $20,800, up $1,400 from the previous tax year, 2022. This change is significant for CPAs because it impacts their clients’ taxable income calculation.

MARGINAL TAX RATES

• Top Tax Rate for Single Individuals: 37% For the 2023 tax year, single individuals earning over $578,125 will be taxed at a top rate of 37%.
• Top Tax Rate for Married Couples Filing Jointly: 37% For married couples filing jointly, the top tax rate for the 2023 tax year remains at 37% for those earning over $693,750.
• 35% Tax Rate: $231,250 (Single) and $462,500 (Married Filing Jointly) For individuals earning over $231,250 and married couples filing jointly earning over $462,500, the tax rate for the 2023 tax year is 35%.
• 32% Tax Rate: $182,100 (Single) and $364,200 (Married Filing Jointly) Incomes over $182,100 for single individuals and $364,200 for married couples filing jointly will be taxed at a rate of 32% for the 2023 tax year.
• 24% Tax Rate: $95,375 (Single) and $190,750 (Married Filing Jointly) Individuals earning over $95,375 and married couples filing jointly earning over $190,750 will be taxed at a rate of 24% for the 2023 tax year.
• 22% Tax Rate: $44,725 (Single) and $89,450 (Married Filing Jointly) For single individuals earning over $44,725 and married couples filing jointly earning over $89,450, the tax rate for the 2023 tax year is 22%.
• 12% Tax Rate: $11,000 (Single) and $22,000 (Married Filing Jointly) Finally, for the 2023 tax year, individuals earning over $11,000 and married couples filing jointly earning over $22,000 will be taxed at a rate of 12%.

ALTERNATIVE MINIMUM TAX EXEMPTION 

In 2023, the Alternative Minimum Tax (AMT) exemption amount will be $81,300 and will start phasing out at $578,150. For married couples filing jointly, the exemption will start phasing out at $1,156,300 and the AMT exemption amount for them will be $126,500. This change impacts those who are subject to AMT.

EARNED INCOME TAX CREDIT INCREASE

The maximum Earned Income Tax Credit amount for qualifying taxpayers with three or more qualifying children is set to increase from $6,935 for the tax year 2022 to $7,430 for the tax year 2023. This change allows CPAs to help their clients receive more money on their tax returns.

TRANSPORTATION FRINGE BENEFIT INCREASE

In 2023, the limit for the monthly qualified transportation fringe benefit and qualified parking increases by $20 to $300, as compared to the 2022 limit. This change impacts the tax-free benefits that employers can provide to their employees, such as parking or transit passes.

HEALTH FLEXIBLE SPENDING ARRANGEMENTS INCREASE

The limit for employee salary reductions for health flexible spending arrangements contribution will increase to $3,050 in 2023. Additionally, the maximum amount allowed to be carried over for unused funds in cafeteria plans will be $610, which is $40 more than the previous year (2022). This change allows clients to contribute more to their healthcare accounts, which can help them manage their medical expenses.

HEALTH FLEXIBLE SPENDING ARRANGEMENTS

The limit on the maximum dollar amount that employees can reduce from their salaries for health flexible spending arrangements contributions is slated to increase to $3,050 for the taxable year 2023. Additionally, the maximum carryover amount for cafeteria plans that permit the carryover of unused amounts is rising to $610 for taxable years beginning in 2023.

MEDICAL SAVINGS ACCOUNT (MSA)

For the tax year 2023, the annual deductible for MSA participants with self-only coverage is not less than $2,650 and not more than $3,950. The maximum out-of-pocket expense is $5,300 for self-only coverage and $9,650 for family coverage.

FOREIGN EARNED INCOME EXCLUSION

The foreign-earned income exclusion is increasing to $120,000 for the tax year 2023. This exclusion applies to U.S. citizens and resident aliens who live and work abroad. CPAs with foreign-earned income must be familiar with this adjustment to ensure their clients take advantage of this exclusion.

ESTATE TAX EXCLUSION

The basic exclusion amount for estates of decedents who died during 2023 is $12,920,000, up from $12,060,000 for those who died in 2022. CPAs should be aware of this adjustment to help their clients with estate planning and minimize their tax liabilities.

ANNUAL GIFT EXCLUSION

The annual exclusion for gifts is increasing to $17,000 for 2023, up from $16,000 for 2022. This exclusion allows taxpayers to gift up to $17,000 to anyone without incurring gift tax.

ADOPTION CREDIT

The maximum credit allowed for adoptions for the tax year 2023 is the number of qualified adoption expenses up to $15,950, up from $14,890 for 2022.

UNDERSTANDING THE SIGNIFICANCE OF TAX INFLATION ADJUSTMENTS FOR CPAS AND ACCOUNTING FIRMS

As a CPA or accounting firm, staying current with tax laws and regulations is crucial to ensuring clients’ accurate and compliant tax filings. The inflation adjustments outlined in Revenue Procedure 2022-38 for the tax year 2023 affect various tax items, including standard deductions, marginal tax rates, contribution limits for health savings accounts, and flexible spending arrangements.

For example, the standard deduction for married couples filing jointly increases by $1,800 to $27,700 for the tax year 2023, and the top tax rate remains at 37% for single taxpayers with incomes over $578,125. Understanding and communicating these adjustments effectively to clients can help CPAs, and accounting firms provide informed tax planning advice and minimize the risk of errors or non-compliance.

Additionally, knowing the updates to the Earned Income Tax Credit and foreign earned income exclusion can provide opportunities for CPAs and accounting firms to advise clients on maximizing tax savings. It is critical for CPAs and accounting firms to know about these tax inflation adjustments to deliver comprehensive and effective tax services to their clients.

Here are some tips for CPAs to navigate through these tax inflation adjustments:

• Stay informed: Keep yourself updated with the latest tax laws and regulations, including the recent tax inflation adjustments, to ensure you provide your clients with the most accurate advice.
• Review client information: Review your clients’ data to ensure they are aware of the recent changes and can make any necessary adjustments to their financial plans.
• Communicate with clients: Communicate clearly and proactively with your clients about the changes and guide them on taking advantage of any new opportunities or tax breaks.
• Use tax software: Consider investing in tax software designed to help you navigate the recent tax inflation adjustments and make the tax preparation process more efficient.
• Attend webinars and conferences: Attend webinars and discussions focusing on tax laws and regulations to stay updated with the latest developments and network with other professionals.
• Seek advice from experts: If you are unsure how the recent changes will impact your clients, seek advice from other tax professionals or legal experts to ensure that you provide accurate advice.
• Consider outsourcing: Outsourcing is another solution for CPAs and accounting firm owners to consider when navigating tax inflation adjustments. Outsourcing can help to alleviate the stress and workload associated with the additional compliance requirements.

How can outsourcing help CPAs navigate through tax inflation adjustments?

By outsourcing tasks such as bookkeeping, payroll, and tax preparation, CPAs can focus on higher-level tasks such as consulting and advisory work, leading to higher revenue and increased client satisfaction. Additionally, outsourcing can help to reduce overhead costs associated with hiring additional staff to handle the increased workload. Outsourcing providers can offer flexibility and scalability, which allows for a more agile and cost-effective solution to managing the effects of tax inflation adjustments.

Outsourcing tax return preparation can also help with tax planning and preparation. With the changes in tax inflation adjustments, CPAS must have access to up-to-date tax knowledge and expertise. Outsourcing to a reputable tax outsourcing company can provide this expertise, save time and increase efficiency. These companies employ experienced tax professionals who can assist with tax planning, research, and preparation, freeing the CPA’s time to focus on other business areas.

Additionally, outsourcing can help accounting firms stay competitive by providing access to the latest tax technology and software, which can streamline processes and reduce costs. By outsourcing, CPAs and accounting firms can better navigate the changes in tax inflation adjustments, ensure compliance, and stay ahead of the competition.