Higher Tax Brackets and Other Inflation Adjustments
Over the past few weeks, the IRS has been rolling out tax brackets and other adjustments for the year 2023, as they are required to do annually to adjust for inflation. With inflation roaring at a 40-year high, as you can imagine, the adjustments are quite significant.
From where I sit, it's never too early to be thinking ahead when it comes to tax planning, and because the foundation of good tax planning is information, presented here are a few of the over 60 some-odd adjustments recently announced.
Individual Tax Brackets –
the tax bracket for ordinary income, as well as for capital gains and qualified dividends were adjusted by 7%. While space limits printing them all, here are the 2023 ordinary income tax brackets for single filers, as well as married couples filing jointly:
- 10% for incomes of $11,000 or less ($22,000 or less for married couples filing jointly).
- 12% for incomes over $11,000 ($22,000 for married couples filing jointly);
- 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
- 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
- 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
- 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
- 37% for incomes over $578,125 ($693,750 for married couples filing jointly).
The new capital gain/qualified dividend rates for 2023 are:
- 0% when taxable income is $44,625 or less ($89,250 for married couples filing jointly);
- 15% when taxable income is over $44,625 ($89,250 for married couples filing jointly);
- 20% when taxable income is over $492,300 ($553,850 for married couples filing jointly).
Standard Deduction –
the standard deduction amount is more important now than ever, with more than 85% of taxpayers claiming it instead of itemizing their deductions. These deductions also saw a significant increase. For a married couple filing jointly the 2023 amount is $27,700 (up from $25,900) for singles and marrieds filing separately it is $13,850 (up from $12,950) and for a head of household $20,800 (up from $19,400). The additional standard deduction for someone age 65 or older is now $1,500 each ($1,850 if unmarried), both of which are up $100 over 2022.
Alternative Minimum Tax Exemption –
the Alternative Minimum Tax (or AMT) is in essence a second parallel tax system designed to make sure that higher-income taxpayers taking advantage of certain tax deductions considered "preferences" to lower their tax liability at least pay a base minimum amount of tax. While not minimum taxpayers find themselves subject to AMT, if you happen to be one of them, the AMT exemption amount will be of interest to you.
The AMT exemption amount for 2023 will be $81,300, phasing out beginning at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly with the exemption phasing out beginning at $1,079,800).
Tax Credits – several factors involving tax credits have been adjusted for 2023, among them being the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), and the Adoption Tax Credit (ATC).
For the EITC, there are several different EITC amounts for different categories of taxpayers. Also, the credit can be affected by the amount of income one has, as well as the amount of any investment income. The maximum credit amounts, income phase-out ranges, and investment income limits are all adjusted for inflation annually.
For example, a married couple with three children will begin to see their EITC phase out at $28,120 of income in 2023, but won't lose the entire credit until their income hits $63,398. In 2023, the EITC for eligible taxpayers with no children is $560. The maximum credit for eligible taxpayers with one child is $3,995, $6,604 for filers with two children, and $7,430 for filers with three or more children.
As to the CTC, while the overall $2,000 CTC is not adjusted for inflation, the portion that is "refundable" (i.e., it can be refunded to you even if you have no tax liability and no tax paid in) is adjusted. For 2023, the refundable part increases from $100 to $1,600.
Finally, the ATC was adjusted slightly as well. The maximum credit allowed for adoptions for 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 in 2022.
Retirement Contribution Limits –
there are lots of changes related to funding retirement accounts for 2023 as well.
First, the maximum that can be contributed to individual retirement accounts (IRAs), including Roth IRAs, is increasing to $6.500 for those under age 50 and to $7,500 if 50 or older. Further, the income ranges for determining eligibility to make deductible traditional IRA and Roth IRA contributions will increase as well. These vary based on filing status and participation in an employer's retirement plan and can be easily found on irs.gov.
Likewise, the amount someone can defer to an employer-sponsored 401(k), 403(b), and most 457 plans will increase from $2,000 to $22,500. Further, the catch-up contribution limit for employees aged 50 and over is increased to $7,500, up from $6,500.
For SIMPLE plans, the amount individuals can contribute is increased to $15,500, up from $14,000. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased from $3,000 to $3,500.
Lastly, the income limit for taking the retirement savings contributions credit is being raised to $73,000 for married couples filing jointly, $54,750 for heads of household, and $36,500 for singles and married individuals filing separately.
Other Adjustments of Note –
while there are many more adjustments too numerous to mention, a few of notes include the following:
Flexible Spending Accounts available through an employer will have a pre-tax contribution limit in 2023 of $3,050, up $200 over 2022.
If you are enrolled in a qualifying high deductible health insurance plan, the individual contribution limit is rising to $3,850 while family coverage will have a limit of $7,750, on top of which those age 55 or older can make a $1,000 "catch-up" contribution (an amount unchanged from 2022).
And finally, for folks that wish to make sizeable transfers of wealth to their heirs, the amount you can give to anyone else without having to worry about paying the gift tax (or using up part of your lifetime gift and estate exemption) is going up to $17,000 per year per recipient, regardless of the number of recipients. And while not too many people have estates big enough to currently be concerned about exceeding the lifetime exemption, in case you are one of the lucky ones who do, the lifetime exemption is increasing from $12.06 million to $12.92 million.
One important financial item affecting millions of taxpayers but that is unfortunately NOT indexed for inflation is the income level at which Social Security benefits begin to be taxed. This could mean that due to inflationary increases in other types of income, more and more moderate-income Social Security recipients will have to pay federal income tax on some of their benefit amount, especially considering the 8.7% cost of living benefit adjustment that is coming.