Some Key Terms for Understanding Your 2023 Tax Return

The deadline for filing individual, 2023, tax returns is right around the corner – April 18.  Maicher CPA Pllc prepares returns and  provides strategies for reducing clients’ tax obligations.  The tax code, however, is filled with numerous key, though often obscure terms, essential to understanding these strategies.  What are some of the terms?    

• Above-the-Line Deductions.  Above-the-line deductions are amounts reducing the tax owed.  These deductions are permitted regardless of whether deductions are itemized  and include, for example: retirement contributions, educator expenses, student loan interest deduction and contributions to health savings accounts.  
• Adjusted Gross Income.  Adjusted gross income,  or AGI for short, is taxable income minus certain deductions.  AGI is used to determine whether you qualify for other tax credits or deductions.
• Below-the-Line Deductions.  These deductions are the amounts that can be claimed to reduce overall taxes and include two categories of deductions: itemized deductions and the standard deduction.  Itemized deductions include a lengthy list of expenses, including, for example: mortgage interest, medical/dental costs, charitable donations, state income taxes and casualty losses, to name a few.   The standard deduction for married couples filing jointly for tax year 2023 is $27,700, and $13,850 for single taxpayers/married individuals filing separately.   Maicher advises clients whether itemizing or electing the standard deduction best reduces their tax bill.  
• Capital Gains Tax.  In general, a capital gains tax occurs when a capital asset is sold, such as real estate, stocks or bonds, for more than what was paid for it.  The tax varies depending on the taxpayer’s income, how long the asset is held and other circumstances. 
• Capital Losses.  A capital loss occurs when a capital asset is sold for less than what was paid for it.  For example, if a bond is purchased for $5,000 in 2021 and sold for $3,000 in 2023, there would be a capital loss of $2,000.  If total capital losses exceed total capital gains in a year, these losses can be claimed up to certain amounts and losses may also be carried forward to a certain extent.   Maicher advises clients about these complex issues.  
• Dependents.  A dependent is someone, for instance, a child less than 19 or a student less than 24, who relies on the taxpayer for financial support.  If a dependent is claimed, it may result in a tax reduction.  We advise you as to who qualifies as dependents and the related tax benefit.  

Take away:  Maicher provides tax preparation services along with strategic advice to individuals and businesses.  Call us today for an appointment.

Sources:

IRS Publication: Topic No. 409 Capital Gains and Losses (January 26, 2023).

IRS Publication: IRS provides tax inflation adjustments for tax year 2023 (December 8, 2022).

“20 Tax Terms You Need to Know,” Forbes (Nov. 15, 2022).