Tax Season Starts Soon. Here Are 3 Big Changes.

Tax season kicks off on Jan. 29, and a few things are new for 2023 returns, including changes in standard deductions and expanded tax breaks for clean energy. Here are some provisions for taxpayers to be aware of when filing their return.

The Internal Revenue Service expects more than 128.7 million individual returns to be filed by the April 15, 2024 deadline. (Taxpayers in Maine and Massachusetts have until April 17 due to local holidays.)

There’s an interim deadline, too: The last quarterly estimated payment for 2023 is due on Jan. 16 for workers who make freelance or other income not subject to tax withholding and expect to owe $1,000 or more. This interim deadline is an opportunity to pad your tax payments for 2023 if your income exceeded your expectations, to avoid underpayment penalties, says April Walker, lead manager, tax practice and ethics at the American Institute of Certified Public Accountants.

The IRS aims to build on its customer service improvements of last year. Upgrades include expanded in-person service at Taxpayer Assistance Centers nationwide, increased help on the toll-free line, an expanded customer call-back feature to reduce wait times, and more detailed updates added to the popular “Where’s My Refund” tool.

Here’s what’s new for this year:

Inflation Adjustments for 2023

The IRS adjusts the standard deduction and income tax brackets every year for inflation. The 2023 bumps are bigger than usual due to the steep price increases of 2022. The following amounts represent a 7% increase, the largest automatic adjustment to the standard deduction since 1985, according to The Wall Street Journal.

The standard deduction for married couples filing jointly for tax year 2023 is $27,700. For single taxpayers and married individuals filing separately, the standard deduction is $13,850, while for heads of households, it’s $20,800. The additional standard deduction amounts for taxpayers who are 65 and older or blind are $1,850 for single or head of household and $1,500 for married taxpayers or qualifying surviving spouse.

For 2023, the marginal tax rates remain unchanged, topping out at 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). Here are all the rates:

Expanded Home Improvement & Clean Vehicle Credits

The energy efficient home improvement credit offers a dollar-for-dollar reduction of your tax liability for expenses that meet the requirements on energy.gov for qualified energy efficiency improvements, residential energy property expenses and home energy audits.

The  lifetime limit on this credit was lifted for 2023, and the amount you can now take is 30% up to an annual maximum of $1,200  or $2,000 for heat pumps, biomass stoves and boilers.

The residential clean energy credit allows a credit of 30% of total improvement expenses for categories such as solar and wind. While this is unchanged from 2022, battery storage was added as a category of qualifying expenses for 2023. There is no annual maximum or lifetime limit.

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Also new for 2023, used electric vehicles or fuel cell vehicles may qualify for a used clean vehicle credit of 30% of the sale price up to a maximum credit of $4,000.

New Pilot Program for Filing

The IRS is launching a new program to help qualifying taxpayers file directly with the agency for free. The IRS Direct File pilot is available to eligible taxpayers in 12 states: Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

The agency has an existing  program that offers free, guided help to file for taxpayers with incomes of $73,000 or less, but the IRS Free File program uses outside tax preparation software. The Direct File pilot will use software developed in-house and aims to further streamline the filing process.

No matter what program you use to file, do so electronically. While about 93% of individual taxpayers now e-file their federal income tax returns, the agency still receives millions of paper returns each year, according to the National Taxpayer Advocate’s Annual Report to Congress presented on Jan. 10. (In some of these cases, taxpayers would have preferred to file electronically, the report notes, but their software could not accommodate the attachments they needed to add.) Paper returns are processed more slowly and may delay a refund.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com