You hopefully already know that standard deductions and limits on certain retirement account contributions tend to rise each year to account for inflation.
But these are not the only thresholds that the IRS imposes or oversees that tend to increase annually. Limits on certain federal income tax credits also tend to rise each year to account for inflation.
The IRS recently announced that the following credits are among those on which limits will rise for the 2023 tax year — the one for which your tax return is due by April 2024.
Earned income credit
This tax credit is for eligible workers. More specifically, it’s for folks with earned income, such as wages.
The earned income credit is refundable. That basically means it not only reduces your tax bill, but it also might result in you receiving a tax refund or a receiving a bigger refund than otherwise.
Income limits: For 2023, you might be eligible for the earned income tax credit if your adjusted gross income (AGI) is not more than:
- Married filing jointly: $24,210 to $63,398, depending on whether and how many of your children qualify for the credit (up from $22,610 to $59,187 for 2022)
- All other tax-filing statuses: $17,640 to $56,838, depending on whether and how many of your children qualify for the credit (up from $16,480 to $53,057)
Credit limits: For 2023, the maximum amount that this credit is worth ranges from $600 (if you have no qualifying children) to $7,430 (if you have three or more qualifying children). Those amounts have increased from $560 and $6,935, respectively, for 2022.
To learn more: Visit the IRS’ Earned Income Tax Credit webpage.
This tax break is for qualified expenses associated with the legal adoption of an eligible child, such as adoption fees, court costs and attorney fees.
It’s nonrefundable, so it could lower your tax bill but can’t affect your tax refund.
Income limits: For 2023, the full value of the adoption credit is available to eligible taxpayers with a modified AGI (found on your tax return) of up to $239,230 (up from $223,410 for 2022). The credit is not available at all to those earning $279,230 or more (up from $263,410). Eligible taxpayers with a modified AGI of more than $239,230 but less than $279,230 can take advantage of the adoption credit in part but not in full.
Credit limits: For 2023, the adoption credit is worth up to $15,950 (up from $14,890 for 2022).
To learn more: You can use the IRS’ Interactive Tax Assistant, which is a free online tool, to determine if you are eligible for the adoption credit.
Other tax credits
The above credits are among the few federal income tax credits that have limits that tend to change each year, but they are not the only tax credits that Uncle Sam offers.
It’s worth taking a moment to see if you might qualify for these or any other tax credits, as they would directly impact your tax bill.
As we explain in “9 Words Every Taxpayer Needs to Know,” a tax deduction can reduce your taxable income but not your tax bill. A tax credit, on the other hand, can reduce your tax bill — dollar for dollar.
For example, a $1,000 tax deduction would lower your taxable income by $1,000 — which may or may not lower the amount of money you owe Uncle Sam — while a $1,000 tax credit would take $1,000 off the amount you owe.
For help determining whether you’re eligible for a given tax credit, check out the IRS’ free Interactive Tax Assistant tool.