Changes in tax laws affect some families more than others. Some tax changes can have a profound impact on the financial outcomes of families that have a loved one with special needs.
Given their unique challenges and circumstances, changes to rules regarding tax brackets, deductions, credits, flexible spending accounts and other tax-advantaged accounts, capital gains are typically of particular interest to families that have a child or loved one who needs long-term or lifelong care. Keep reading to learn which 2023 federal tax changes matter most to families that have a child or other loved one who has a disability, a chronic illness or another serious health condition.
Overview of 2023 Federal Tax Changes
Americans experienced record-breaking inflation in 2022. The Social Security Administration (SSA), according to preexisting law, increased benefits for 2023 by 8.7% as a cost-of-living adjustment.
Inflation exacerbates the already heavy burdens on families with special needs children. Special needs do not discriminate. Families of all income levels can be impacted. But relief for low and moderate-income families is sorely needed.
Congress enacted the Inflation Reduction Act of 2022 which lowers prescription drug costs, health care costs, and energy costs. All of these costs have been a burden for families. But they have doubly burdensome for families with special needs who already deal with extraordinary costs not borne by most of us.
The Inflation Reduction Act tax provisions focused on energy-related investments, including electric vehicles, other clean energy incentives, and tax fairness, including a 15% minimum corporate tax.
Under pre-existing tax laws, the Internal Revenue Service (IRS) was required to make several tax adjustments to account for inflation.
2023 Federal Tax Bracket Adjustments
Tax brackets are a key element of a progressive tax system. The fundamental policy of a progressive tax system is that the tax burden is born in proportion to one’s ability to pay. Hence, the rate of tax progresses higher as the taxpayer’s income increases. Wealthy taxpayers pay tax on the high end of their income at a rate higher than lower-income taxpayers pay on their highest income.
In 2022, the extraordinary inflation pushed many taxpayers into a higher tax bracket with a higher tax rate on the margin. Known as “bracket creep”, it is regarded as an unfair consequence of inflation.
Under existing law, the IRS is required to adjust the tax brackets to reflect changes in the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U published by the Bureau of Labor Statistics.
While there are some significant 2023 federal tax changes, some things will remain the same. As was the case in 2022, in 2023 the same seven tax rates will be imposed, depending on the income bracket. They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These are the rates that apply to marginal incomes above the applicable income bracket. They remain unchanged from 2022.
For 2023 the IRS increased the bracket applicable to each tax rate. Thus, a taxpayer will be able to make more income before their marginal income is taxed at the higher tax rate.
For example, in the case of a married taxpayer filing jointly, their taxable income would have to exceed $364,200 In 2023 compared to $340,100 in 2022 before the marginal rate would jump from 24% to 32%
2023 Federal Standard Deduction
The income tax is assessed on net income, not gross income. The tax code lays out tax deductions that are allowed for determining net (taxable) income. Many of those deductions do indeed reflect economic net income. Others are allowed more as preferences that encourage certain kinds of investment.
In any case, taxpayers must report their gross income and itemize those allowed deductions to determine taxable income.
In an attempt to simplify the tax system, taxpayers are allowed to claim a standard deduction instead of itemizing deductions. The standard deduction is a fixed amount approximated to be the average amount of allowable deduction for taxpayers of certain categories with various family sizes.
The existing law requires the IRS to adjust the standard deduction to reflect inflation. Substantial increases to the standard deduction will be among the most welcomed 2023 federal tax changes for families with special needs. For the 2023 tax year, the standard deduction for married taxpayers filing jointly will be $27,700, an increase of $1,800 over the 2022 amount. The standard deduction for 2023 is increased by $900 for single taxpayers and $1,400 for heads of household.
2023 Federal Earned Income Tax Credit (EITC)
Tax credits are dollar-for-dollar offsets against tax liability. Some credits are refundable to the extent they exceed a person’s tax liability.
The earned income tax credit (EITC) is a refundable credit for low- to middle-income working families. The amount of the credit depends on the amount of earned income, filing status, and the number of children.
For the 2022 tax year, the credit is between $560 to $6,935 depending on the amount of earned income, filing status, and the number of children.
The credit is available only to taxpayers who meet income qualifications and do not have more than a certain level of investment income.
The IRS is required to increase the maximum income levels annually in response to inflation. For example, the 2022 maximum credit for married taxpayers with two children was $6,164 on a maximum adjusted gross income (AGI) of $55,529. For 2023, the maximum credit is $6,604 on a maximum AGI of $59,478. The increases in this refundable credit that can put money in the pockets and bank accounts of families with special needs will certainly make this one the 2023 federal tax changes families with extraordinary expenses and responsibilities appreciate most.
2023 Federal Child Tax Credit
Parents are allowed, for the tax year 2023, a tax credit of 15% of their household adjusted gross income above the first $2,500 until the credit reaches the maximum of $2,000 per child. The credit is refundable up to $1,400. The fact that this increase in the child tax credit can result in a larger refund for families with special needs will surely make it one of the 2023 federal tax changes they will find most beneficial.
2023 Federal Child and Dependent Care Tax Credit
Up to 35% of childcare expenses are recoverable through the Dependent Care Tax Credit. The credit is capped at $3,000 of expenses ($1,050 credit) for one child and up to $6,000 of expenses ($2,100) for two or more. As the taxpayer’s adjusted gross income exceeds $15,000 the credit is reduced by 1% per $2,000 until the credit is 20%. The difference this credit can make in the wallets of families with special needs will make it among their most favored 2023 federal tax changes.
2023 Contributions to Health Flexible Spending Accounts (FSA)
Parents with special needs children must provide for the health care of all of their children. Health flexible spending accounts (FSA) are encouraged by tax preferences.
FSAs are arranged through one’s employer to pay for medical expenses before-tax dollars. That is, they allow an employee to deduct contributions to a plan that can be used to pay for insurance co-pays and deductibles, drugs, and medical devices.
The limit on contributions can be limited by the employer, but for 2023 the maximum is $3,050. Up to $610 of unused contributions can be carried over to the next year.
2023 Federal Adoption Tax Credit
Many parents adopt children with special needs. The law allows a credit for qualified adoption expenses up to a limit. For 2023, the IRS has increased the limit to $15,950 from $14,890 in 2022. Both adoption expenses and the cost of caring for children with special needs with expenses, families that adopt children with special needs will find that the increase in this credit is among the 2023 federal tax changes that will go a long way towards helping families manage these costly expenses.
2023 Federal Capital Gains
Throughout taxation history, income from capital has been taxed at more favorable tax rates than ordinary income from labor. The original policy was that gains from a sale of capital assets were accrued over multiple taxable years. In theory, if they were taxed as accrued each annual accrual would be subject to a lower tax rate in a progressive system.
This might have been a realistic policy when the spreads between the lowest tax rates and the highest tax rates were much wider. More plausibly, preferential capital gains rates merely reflect a higher status than afforded ordinary income from labor.
There are only three capital gains tax rates, 0%, 15%, and 20% depending on the applicable bracket. For 2023, the capital gains must exceed $553,851 before the rate flips from 15% to 20%, while for 2022 the flip occurred for gains in excess of $517,201.
2023 Federal Income Tax Filing Deadline
Knowing about the 2023 federal tax changes that most benefit families with special needs could be a huge advantage with 2023 filing deadlines right around the corner. The 2023 federal income tax filing deadline is April 18, 2023 for taxpayers who live in every state other than Maine or Massachusetts. Taxpayers in those two states have until April 19, 2023, to file their federal income tax returns due to the Patriot’s Day holiday. Taxpayers that request an extension will have until October 17, 2023, to file their federal returns.
2023 State Tax Changes That Affect Families with Special Needs
Most states impose a state income tax. Usually, they mirror the federal income tax. They also make tax inflation adjustments similar to those made by the IRS that result in state tax changes.
Contributor B. C. Gregg is a retired tax attorney who has extensive experience in taxation and tax policy.
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