2023 Tax Changes
2023’s tax changes are more significant than in years past due to the IRS’s response to the rise in inflation (up 8.4% over the last 12 months, as of December 2022). The IRS decided to make adjustments to tax brackets and standard deductions to combat what they refer to as “bracket creep,” in which taxpayers are pushed into higher tax brackets due to cost-of-living pay increases but without a change in their standard of living.
Tax Brackets & Standard Deduction
Popular Tax Credits
Retirement Planning
Social Security
Estate & Gifts
Tax Brackets & Standard Deduction
2023 income thresholds were adjusted for all filing statuses to help account for inflation. Most brackets were moved up about 7%, and for the 90% of taxpayers who claim the standard deduction, they were adjusted by a similar percentage from $12,950 and $25,900 to $13,850 and $27,700, for single and MFJ filers, respectively.
| Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | Up to $11,000 | Up to $22,000 | Up to $15,700 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 | $95,350 to $182,100 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 | $182,100 to $231,250 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 | $231,250 to $578,100 |
| 37% | Over $578,125 | Over $693,750 | Over $578,100 |
| Filing Status | Deduction Amount |
|---|---|
| Single | $13,850 |
| Married Filing Jointly; Qualifying Widow(er) | $27,700 |
| Head of Household | $20,800 |
As a reminder, if you choose to itemize instead of taking the standard deduction, be sure to save and keep records of your property taxes, medical expenses, mortgage payments, charitable donations, and more.
Popular Tax Credits
Many of the education and child-related tax breaks and Modified AGI phase-out ranges remain generally the same in 2023.
The Child Tax Credit (CTC) remains the same at $2,000 per child under the age of 17. This begins to be phased out at Adjusted Gross Incomes (AGIs) of $400,000 and $200,000 for married filing jointly and single filers, respectively.
The America Opportunity Tax Credit can still provide up to $2,500 in tax credit per individual on $4,000 in qualified expenses (e.g. tuition). MAGI phase-outs are staying put at $160,000 and $80,000 for married filing jointly and single filers, respectively. Keep in mind, 40% of this credit is refundable.
The Lifetime Learning Credit can provide up to a $2,000 tax credit on qualified education expenses. For those not eligible for the America Opportunity Tax Credit this can be a beneficial alternative (you cannot claim both for the same student in the same year). The MAGI phase-out for married filing jointly and single filers begins at the same level as applied to the American Opportunity Tax Credit.
The Federal Adoption Tax Credit can now be worth up to $15,950 ($14,890 in 2022). This amount is not refundable, but unused credits can be carried forward for up to five years.
| Tax Credit | Amount | Details |
|---|---|---|
| Child Tax Credit | $2000 per child under 17 and $500 per non-child dependent | AGI phase-outs at $400,000 (MFJ) and $200,000 (S) |
| American Opportunity Tax Credit | $2500 per individual on up to $4,000 in qualified expenses | AGI phase-outs at $160,000 (MFJ) and $80,000 (S); 40% refundable |
| Lifetime Learning Credit | $2,000 on qualified expenses | Potential alternative for those ineligible for the America Opportunity Tax Credit |
| Federal Adoption Tax Credit | $15,950 | Not refundable but can be carried forward |
Retirement Planning
Almost all retirement plan-related limits and phase-out ranges increase in 2023. The limit on annual contributions to an IRA will increase to $6,500. Other retirement plans (e.g. 401k and SEP IRAs) received large increases (~10%) heading into the new year. AGI phaseout limits on retirement accounts increased by ~7%.
| Tax Filing | 2022 | 2023 |
|---|---|---|
| Single with Qualified Plan | $68k-$78k | $73k-$83k |
| MFJ both with QP | $109k-$129k | $116k-$136k |
| MFJ one with QP | $204k-$214k | $218k-$228k |
| Tax Filing | 2022 | 2023 |
|---|---|---|
| Single (S) | $129k-$144k | $138k-$153k |
| Married Filing Jointly (MFJ) | $204k-$214k | $218k-$228k |
SEP IRAs are limited up to 25% of compensation or $66,000, whichever is less. Up from 2022’s dollar limit of $61,000.
Simple IRAs employee contributions are increased to $15,500 from $14,000. Catch-up contributions increased to $3,500 (age 50+).
401(k) and 403(b) plans increased their contribution limits from $20,500 to $22,500. Catch-up increases to $7,500.
Maximum defined benefit plan annual benefits increase to $265,000 for 2023.
| SEP IRA Limits | 25% of compensation or $66,000 (whichever is less) |
|---|---|
| Simple IRA Limits | $15,500 ($3,500 for catch-up (age 50+)) |
| 401(k) and 403(b) Contribution Limits | $22,500 ($7,500 for catch-up) |
| Maximum Defined Plan Benefits | $265,000 |
Social Security
Social Security recipients receive the biggest increase in benefits since 1981 in response to the high inflation rate and seniors’ loss of purchasing power.
The maximum compensation subject to Social Security tax continues to grow at a strong pace; now up to $160,200 which is ~9% greater than 2022’s $147,000 maximum amount. The cost-of-living adjustment (COLA) for 2023 benefits is 8.7%.
Taxes on Medicare still have no limit.
The maximum monthly benefit at Full Retirement Age (67) is $3,627. Keep in mind, this can grow if deferred past FRA up to the age of 70.
| Max Compensation Subject to Social Security Tax | $160,200 |
|---|---|
| Cost of Living Adjustment (COLA) | 8.7% |
| Limit on Medicare Taxes | None |
| Max Monthly Benefit at Full Retirement Age* | $3,627 |
Estate & Gifts
For the 12th year in a row, the estate and lifetime gift exemption will grow (now up to $12.92 million per person from $12.06 million in 2022) and the annual gift exclusion received an increase from $16,000 to $17,000 ($34,000 for MFJ). There are expectations that lifetime exemptions will be cut significantly in the coming years. And as of now, we know that the Tax Cuts Jobs Act is scheduled to sunset after 2025. You may want to consider some estate planning depending on your current and anticipated net worth.
| Annual Gift Exclusion | Lifetime Gift Exemption |
|---|---|
| $17,000 | $12.92 million |
Planning for 2023
It’s important to think about your income, giving, saving, and estate planning expectations for the upcoming year so that you can make decisions early to help optimize your tax bill and investable assets.
It may be a good year for you to utilize your annual gift exclusions early or to fund your monthly charitable gifts for the year by donating long-term appreciated securities in the first quarter. Determine early whether you should be putting money into a Roth or pre-tax 401(k) and if IRA contributions make sense. If your income is expected to be low, maybe 2023 will be a good year for Roth conversions. Or maybe you need to get into the bi-annual routine of “clumping” tax-deductible items to get the maximum benefit. Or, use a Donor Advised Fund to capture increased benefits that come with “multi-year” or extended charitable deductions. There may be more options available to you than you realize!
If you need help putting the puzzle pieces together, please reach out to any of our team members at Kings Path. We would be happy to discuss how you can plan your taxes effectively, in 2023 and beyond.
