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Changes in tax legislation are unavoidable for anyone who pays taxes, and they can have a considerable impact on an individual's particular situation. Tax law changes can affect your income, investments, and financial planning whether you're a high-earner or a middle-class family. It can be hard to keep up with new federal and state tax regulations and how they might affect you.
To make informed financial decisions and plan for the future, it's necessary to be aware about tax law changes and their potential influence on your finances. Here, the expert Better Accounting Solutions team discuss recent tax law changes and help you understand how tax law changes affect your personal finances and how to minimize your tax burden.
An Overview of the Most Recent Changes to Tax Law
The federal and state governments of the United States made major tax code changes in 2023. The changes addressed inequality in income, economic growth, and government revenue needs.
At the federal level, one of the most known adjustments was an increase in the standard deduction, which was one of the biggest changes. This move allows non-itemizers to reduce their taxable income without proving expenses. Eliminating personal exemptions may raise some people's taxes.
Another major government reform was the higher top tax bracket for high-income earners. This policy was meant to reduce income disparity by taxing the wealthy at a greater rate.
Some states changed income tax brackets. In California, tax brackets were changed to reflect the high cost of living. This shift may put people with high earnings in a higher tax rate.
When it comes to making financial decisions, having a solid understanding of your tax rate is really necessary. Tax brackets are income levels subject to a specified tax rate. Your tax bracket determines your tax liability. If you make $80,000 and are in the 22% tax rate, your federal income taxes will be $17,600.
Alterations to the tax bracket system have the possibility to have a considerable influence on one's annual tax liability. For example, a higher tax bracket means higher taxes. If your income is lower, you may pay less in taxes.
Your tax bill may also be affected by standard deduction and personal exemption changes. You can deduct the standard deduction from your taxable income without proving expenses. Taxes may decrease if the standard deduction increases. If personal exemptions are eliminated, your taxes may increase.
How to Figure Out Your Tax Bracket?
The amount of federal income tax that you owe each year is based on the tax bracket that you belong in. The bigger your income, the higher your tax bracket. The Tax Cuts and Jobs Act not only reduced overall tax rates, but it also shifted the income thresholds that determine which individuals fall into which tax brackets. For persons earning over $518,400 in 2022, the highest tax bracket will be 37%, which is a decrease from the 39.6% it was prior to the changes in the tax legislation. Your tax bill may also be affected by standard deduction and personal exemption adjustments. The standard deduction for individuals in 2022 is set at $12,950, while the deduction for married couples filing jointly is set at $25,900.
Related: Top 15 Massive Tax Deductions and Write Offs for Businesses
Credits and Deductions
Your overall tax liability can be decreased by lowering the amount of income that is considered taxable thanks to the deductions and credits available to you. The Child Tax Credit was doubled and the state and local tax deduction was capped at $10,000 under the Tax Cuts and Jobs Act. The mortgage interest deduction was also altered, and the maximum was reduced from $1 million to $750,000 for new loans. Previously, it had been $1 million. Depending on your specific circumstances, these alterations can have an effect on the amount of taxes you owe.
Related: Taxes for the Independent Contractor: Deductions, Credits, and Forms Explained
Retirement Accounts
Individuals who put money away for retirement through retirement plans such as 401(k)s and IRAs are eligible for tax benefits. The Tax Cuts and Jobs Act raised the 2022 401(k) contribution limit to $19,500. The law also eliminated the ability to recharacterize Roth IRA conversions, which might affect people who converted standard IRAs to Roth IRAs.
Related: Top 15 Tax Deductions and Write Offs for Self-Employed 1099 Entrepreneurs
Estate tax
Estate taxes are taxes that are imposed on the transfer of assets after a person has passed away. In 2021, the Tax Cuts and Jobs Act raised the estate tax exemption to $11.7 million for individuals and $23.4 million for married couples, although these adjustments expire after 2025. Estate taxes vary by state. Estate planners should monitor estate tax changes and consider using trusts to reduce their tax liability.
State and Local Taxes
Your tax liability may also be affected by state and local taxes, which is especially likely if you live in a state with a high overall tax burden. Because the Tax Cuts and Jobs Act limited the deduction for state and local taxes to a maximum of $10,000, this may have an effect on individuals whose property taxes or state income taxes are particularly high. Staying educated about state and local tax law changes can affect your tax burden.
Related: 7 Smart Year-End Tax Planning Strategies for Small Business Owners
When it comes to the proper management of your personal finances, it is absolutely necessary to remain current on changes in tax regulations. You may minimize your tax liability and maximize your savings by knowing current tax law changes, your tax bracket, deductions and credits, retirement accounts, estate taxes, and state and local taxes. If you're unsure how these changes will affect you, consult a tax specialist.
Taxes are inevitable, but you may manage how much you pay. Staying educated about tax law changes and using deductions and credits helps reduce the financial effect of taxes. To guarantee you're taking advantage of all tax reduction opportunities, assess and alter your tax strategies constantly. Your financial status determines how tax law changes affect you. Staying informed and proactively reducing your tax liability can help you reach your financial objectives and safeguard your financial future.
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