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Just a few weeks after the announcement of record-breaking Social Security increases, the IRS announced their own set of record-breaking changes—mainly a result of soaring inflation. Starting in 2023, you will be able to save more in your retirement accounts, enjoy higher standard deductions on your tax return, and experience more favorable tax rates through tax bracket changes.
Rising Retirement Account Contribution Limits
Starting in 2023, individuals will now be able to put up to $22,500 in 401(k) accounts and $6,500 in IRAs, a significant increase from the $20,500 and $6,000 limits in 2022. To put these limits in perspective, this is the largest change in annual retirement contributions since the 1986 tax code was implemented.
For employees over 50, catch up contributions also saw a significant increase. Participants over 50 will be able to contribute $7,500 in additional catch-up contributions, raising the total contribution limit to $30,000. Unfortunately, the catch-up contribution limit for IRAs remains at $1,000, meaning that those over 50 and without a 401(k) or other employer-sponsored retirement plan will be limited to a $7,500 IRA contribution.
Retirement savings are also greatly affected by high inflation, as rising costs erode the impact of saving for retirement lifestyles.
Higher Standard Deduction in 2023
The standard deductions will also increase in 2023. The 2023 standard deduction for married couples filing jointly will be $27,700, an $1,800 increase from 2022. Similarly, single and married filing separately taxpayers will see their standard deduction rise to $13,850, a $900 bump from 2022.
Since the Tax Cuts and Jobs Act (TCJA) of 2018 gave a massive boost to standard deductions, most taxpayers have shifted to taking the standard deduction. The Urban-Brookings Tax Policy Center estimated that roughly 90% of households began taking the standard deduction since 2018.
Married taxpayers who are 65 or older can add $1,500 per person to their standard deduction, while single taxpayers who are 65 or older can add $1,850 to their standard deduction.
Changes To the Federal Tax Rates For 2023
The 2023 tax brackets will not inherently change, but the income ranges that fit into each tax bracket will change in 2023. Each tax bracket in 2023 has been adjusted to account for inflation.
As an example: A married couple with $250,000 in taxable income in 2022 will have a federal tax bill of $47,671 in 2022. That same couple with the same income in 2023 will see their federal income tax bill drop by $1,000 due to more income being taxed in lower brackets.
| Single Tax Brackets | |
|---|---|---|
Tax Rate | 2022 Taxable Income | 2023 Taxable Income |
10% | $0-$10,275 | $0-$11,000 |
12% | $10,276-$41,775 | $11,001-$44,725 |
22% | $41,776-$89,075 | $44,726-$95,375 |
24% | $89,076-$170,050 | $95,376-$182,100 |
32% | $170,051-$215,950 | $182,101-$231,250 |
35% | $215,951-$539,900 | $231,251-$578,125 |
37% | $539,901+ | $578,126+ |
| Married Filing Jointly Tax Brackets | |
|---|---|---|
Tax Rate | 2022 Taxable Income | 2023 Taxable Income |
10% | $0-$20,550 | $0-$22,000 |
12% | $20,551-$83,550 | $22,001-$89,450 |
22% | $83,551-$178,150 | $89,451-$190,750 |
24% | $178,151-$340,100 | $190,751-$364,200 |
32% | $340,101-$431,900 | $364,201-$462,500 |
35% | $431,901-$647,850 | $462,501-$693,750 |
37% | $647,851+ | $693,751+ |
Summary
As tax rates effectively decrease and retirement contributions increase due to inflation, the need for proactive tax planning guidance is more important than ever. At Monotelo Advisors, we use this information to determine how to reduce your lifetime tax liability while determining how to best manage your short-term tax liability.
To set up a meeting to see how we can come alongside you, schedule a meeting below.
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.
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