2023 Tax Update
As the result of The Fed’s measured approach to adjusting interest rates, coupled with consumers’ willingness to modify spending habits, inflation has begun to drop, bringing a bit of relief as we enter fully into the holiday season.
More help is on the way. In 2023, we’ll all benefit from recent actions taken by the IRS.
In October the IRS released its annual tax rate inflation adjustments for 2023. As a result, many key tax provisions — especially the income thresholds for federal tax brackets — will increase by roughly 7% to provide some relief from the pain of the high inflation Americans have endured throughout 2022. Because the size of this adjustment is much higher than usual, it means that many taxpayers may end up staying in a lower tax bracket. Some may even be fortunate enough to pay a smaller tax bill in 2024. It’s important to note that while tax rates themselves aren’t changing, the result of the IRS inflation adjustment has effectively shifted income cutoffs upward across all tax brackets.
In addition to income tax bracket adjustments, other IRS Code provisions subject to COLA adjustments will also go up, including the following:
- Standard Deduction: The standard deduction for single filers is increasing by $900, to $13,850, in 2023. For married couples filing taxes jointly, the standard deduction is double that of single filers. In 2023, it rises from $25,900 to $27,700.
- FICA Tax: Employers and employees are required to have a percent of their wages withheld for taxes under the Federal Insurance Contributions Act – or FICA. FICA payroll taxes are composed of social security taxes (old-age, survivors and disability insurance taxes) and Medicare taxes (hospital tax insurance). The maximum amount of earnings subject to these payroll taxes will increase in 2023 to $160,200 up from the $147,000 in 2022.
- 401k & IRA Contribution Limits: The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has increased to $22,500 for 2023 (up from $20,500 in 2022).The limit on annual contributions to an IRA increased to $6,500 for 2023 (up from $6,000 in 2022). The IRA catch up contribution limit for individuals aged 50 and over has not changed and remains at $1,000.
- Qualified Adoption Expenses: The maximum credit allowed for adoptions for tax year 2023 is up to $15,950, up from the maximum of $14,890 for 2022.
- Estate Tax Exclusion: The estate tax exemption will be $12.92 million per individual for 2023 gifts and deaths, up from $12.06 million in 2022. This increase means that a married couple can shield a total of $25.84 million without having to pay any federal estate or gift tax. For a couple who has already maxed out lifetime gifts, this means that they may now give away another $1.72 million in 2023.
- Annual Gift Tax Exclusion: For those gifting, the annual exclusion for gift tax increases to $17,000 per recipient for calendar year 2023, up from $16,000 for calendar year 2021.
- Health Savings Accounts (HSA): The annual inflation-adjusted limit on HSA contributions for self-only coverage will be $3,850, up from $3,650 in 2022. The HSA contribution limit for family coverage will be $7,750, up from $7,300. The adjustments represent approximately a 5.5 percent increase over 2022 contribution limits, whereas these limits rose by about 1.4 percent between 2021 and 2022.
- Capital Gain Tax Rates: Generally, capital gains are profits you made from a sale of assets and investments – think stocks, bonds, cryptocurrency, real estate. Depending on how long you have held the asset (short term vs long term) will determine how it is taxed. Most net capital gain is no higher than 15% for most people and some or all net capital gains may be taxed at 0% depending on your income. For tax year 2023, a capital gains rate of 15% applies if your taxable income is more than $44,625 but less than or equal to $492,300 for a single filer (or more than $89,250 up to $553,850 for those married filing joint returns). The top rate of 20% will not apply until single filers income is more than $492,300 or more than $553,850 for married filing joint filers.
For more information, please contact us, or go to IRS.gov to see further details.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a fiduciary financial planner, accountant, and/or legal counsel for advice for your specific situation.