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The IRS recently published its Inflation adjustments. According to Bloomberg, the IRS has raised tax brackets and the standard deduction by about 7% to address high consumer prices and perhaps leave more money in our pockets. Bloomberg noted it was the most significant standard deduction increase since the IRS first indexed the tax system to inflation in 1985. (1)
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Click here to read our blog article on IRS’ recent announcement on RMDs for inherited IRAs.
Highlights Directly From Changes in Revenue Procedure 2022-38: (2)
The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.
The Standard Deduction
For married couples filing jointly for the tax year 2023 rises to $27,700, up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900. For heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from the amount for the tax year 2022.
Marginal Rates:
For the tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes higher than $578,125 ($693,750 for married couples filing jointly).
The other rates are:
35% for incomes over $231,250 ($462,500 for married couples filing jointly);
32% for incomes over $182,100 ($364,200 for married couples filing jointly);
24% for incomes over $95,375 ($190,750 for married couples filing jointly);
22% for incomes over $44,725 ($89,450 for married couples filing jointly);
12% for incomes over $11,000 ($22,000 for married couples filing jointly).
The lowest rate is 10% for single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
Estate Exclusion
Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
Annual Gift Exclusion
The annual exclusion for gifts increases to $17,000 for the calendar year 2023, up from $16,000 for the calendar year 2022.
The Alternative Minimum Tax
The alternative minimum tax exemption amount for the tax year 2023 is $81,300 and begins to phase out 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 for whom the exemption started to phase out at $1,079,800).
Earned Income Tax Credit
The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers with three or more children, up from $6,935 for the tax year 2022. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
Qualified Transportation
For the tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.
Contributions to Health Flexible Spending Arrangements
For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
Medical Savings Account
For the tax year 2023, for participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from the tax year 2022; but not more than $3,950, an increase of $250 from the tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For the tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for the tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for the tax year 2023, an increase of $600 from the tax year 2022.
Foreign earned income exclusion
For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
Maximum Credit Allowed for Adoptions
The maximum credit allowed for adoptions for the tax year 2023 is the number of qualified adoption expenses up to $15,950, up from $14,890 for 2022
Items unaffected by indexing:
Certain items indexed for inflation in the past are currently not adjusted by statute.
- The personal exemption for the tax year 2023 remains at 0, as it was for 2022. This personal exemption elimination was a provision in the Tax Cuts and Jobs Act.
- There is no limitation on itemized deductions for 2023, as in 2022, 2021, 2020, 2019, and 2018, as the Tax Cuts and Jobs Act eliminated that limitation.
- The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
Highlights of 401 (K) Changes for 2023(3)
401 (K) Increases
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan who are 50 and older can contribute up to $30,000 starting in 2023.
The catch-up contribution limit for employees aged 50 and over participating in SIMPLE plans is increased to $3,500, up from $3,000.
Increases for IRAs
The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2023.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If, during the year, either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced or phased out until it is eliminated, depending on filing status and income. If a retirement plan at work covers neither the taxpayer nor the spouse, the deduction phase-outs do not apply.
Here are the phase-out ranges for 2023:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000.
For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.
The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.
Click here to pre-order our laminated one-page Key Financial Data for 2023.
(1) Blomberg Evening Briefing, October 20, 2022
(2) https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
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