Inflation is running rampant right now. Fortunately, the IRS takes inflation seriously and does its part to ease the sting to your wallet by making cost-of-living (COLA) adjustments every year. Not all sections of the Internal Revenue Code are tied to inflation but, the IRS takes a look at these numbers and, when warranted, adjusts them to keep rising prices from also meaning higher taxes. Below are some highlights.
RETIREMENT ACCOUNTS
- You can contribute to a traditional IRA with pre-tax dollars and, depending on your income, marital status, and retirement options at work, possibly claim a deduction for at least some of the amount you’re saving. Or you can put already-taxed money into a Roth IRA and not have to worry about taxes on that retirement account ever again. When it comes to either a traditional IRA or Roth version, COLA tweaks for the maximum annual contribution to such plans will increase in 2023 to $6,500. That’s $500 more than the 2022 limit of $6,000. The IRA catch‑up contribution limit for individuals aged 50 and over remains $1,000.
- The contribution limit for employees who participate in their company’s 401(k), 403(b), most 457 plans and the TSP goes up in in 2023 to $22,500. That $2,000 bump up from the 2022 contribution cap of $20,500 is, according to some benefits providers, the largest increase ever in terms of dollars and percentage. The workplace plan catch-up contribution limit in 2023 for employees aged 50 or older and who participate in these plans will go to $7,500. That’s a grand more than this year’s $6,500 level.
- The self-employed were not left behind. SEP-IRAs (or, from the glossary, Simplified Employee Pension) and Solo 401(k) plans are popular retirement vehicles for the self-employed small business owners. The maximum amount that can be put into either of these plans as an employer is determined by a percentage of salary. Once those calculations are completed (thank goodness for tax pros and/or tax software!), the maximum in 2023 will be $66,000. That’s a $5,000 increase from 2022’s $61,000.
STANDARD TAX DEDUCTION
- For filers who claim the standard deduction in tax year 2023, those amounts for most taxpayers younger than 65 are:
- $13,850 for single taxpayers and married taxpayers filing separate returns, $900 more than 2022’s $12,950
- $20,800 for heads of household, a bump of $1,400 from this year’s $19,400; and
- $27,700 for married filing jointly couples and surviving spouses, up $1,800 from $25,900 the 2022 tax year.
- For the 2023 tax year, filers age 65 or older and/or legally blind taxpayers get an additional standard deduction amount. It will be $1,500 for each qualifying circumstance. That’s $100 more than the $1,400 allowed on 2022 returns. The additional standard deduction amount in age/vision situations is increased next year to $1,850 if the taxpayer also is unmarried and not a surviving spouse. Again, that’s $100 more than 2022’s $1,750 addition.
Remember, a key component of annual tax planning is determining whether you’d be better off claiming the standard deduction or itemizing all your allowable tax expenses on Schedule A.
PASS THROUGH ENTITIES
Certain small businesses get a break too, by way of increased thresholds to the Section 199A tax deduction. The 199A tax break allows eligible businesses which are pass-through entities,\ to deduct up to 20% of qualified business income, or QBI. Limits, however, apply based on income and type of business.
- In 2023, the QBI threshold will increase to $364,200 for married couples filing joint returns, and to $182,100 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses. Those are increases from 2022’s QBI thresholds of $340,100 for married couples filing joint returns, and $170,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
- The QBI limitations are phased in as income increases. The 199A tax break won’t be available in 2023 once the pass-through taxpayer’s MAGI exceeds $464,200 for married couples filing joint returns, and to $232,100 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
- The 2022 QBI elimination amounts are more than $440,100 for married couples filing joint returns, and to $220,050 for married individuals filing separate returns, single taxpayers, and heads of households who operate pass-through businesses.
TAX BRACKETS
The income tax brackets and other inflation impacted tax areas addressed recently by the IRS apply to the 2023 tax year. They will come into play on our 2023 taxes, which we won’t file until 2024, but are useful to have when making tax planning moves that can lower the amount we owe next year. The 2022 tax year inflation amounts were already announced and govern the tax returns you send to the IRS in 2023.
Comparing the 2022 and 2023 can help determine if you should postpone some earnings into 2023, where the income tax brackets are a bit wider, so you won’t be bumped into a higher one on your 2022 return. Or maybe it will be better for your tax bottom line to itemize in 2022, and then take the larger inflation adjusted standard deduction the next year. Looking at the two tax years’ numbers can help determine whether bunching expenses in 2022 or pushing them into 2023 will produce a better tax result for either or both years.
We LOVE charts –
2022 Individual Tax Rates and Income Brackets
(for completing your 2022 tax return to be filed in 2023)
Tax Rate 2022 | Single | Head of Household | Married Filing Jointly or Surviving Spouse |
Married Filing Separately
|
10% | Up to $10,275 | Up to $14,650 | Up to $20,550 | Up to $10,275 |
12% | $10,276 to $41,775 | $14,651 to $55,900 | $20,551 to $83,550 | $10,276 to $41,775 |
22% | $41,776 to $89,075 | $55,901 to $89,050 | $83,551 to $178,150 | $41,776 to $89,075 |
24% | $89,076 to $170,050 | $89,051 to $170,050 | $178,151 to $340,100 | $89,076 to $170,050 |
32% | $170,051 to $215,950 | $170,051 to $215,950 | $340,101 to $431,900 | $170,051 to $215,950 |
35% | $215,951 to $539,900 | $215,951 to $539,900 | $431,901 to $647,850 | $215,951 to $323,925 |
37% | $539,901 or more | $539,901 or more | $647,851 or more | $323,926 or more |
2023 Individual Tax Rates and Income Brackets
(for completing your 2023 tax return to be filed in 2024)
Tax Rate 2023 | Single | Head of Household | Married Filing Jointly or Surviving Spouse |
Married Filing Separately
|
10% | Up to $11,000 | Up to $15,700 | Up to $22,000 | Up to $11,000 |
12% | $11,001 to $44,725 | $15,701 to $59,850 | $22,001 to $89,450 | $11,001 to $44,725 |
22% | $44,726 to $95,375 | $59,851 to $95,350 | $89,451 to $190,750 | $44,726 to $95,375 |
24% | $95,376 to $182,000 | $95,351 to $182,100 | $190,751 to $364,200 | $95,376 to $182,100 |
32% | $182,001 to $231,250 | $182,101 to $231,250 | $364,201 to $462,500 | $182,101 to $231,250 |
35% | $231,251 to $578,125 | $231,251 to $578,100 | $462,501 to $693,750 | $231,251 to $346,875 |
37% | $578,126 or more | $578,101 or more | $693,751 or more | $346,876 or more |
Our next newsletter will talk about the inflation adjustments to the capital gains Tax. Heirs in 2023 just might get to keep more out of Uncle Sam’s pocket thanks to inflation adjustments!
Reach Out To Us: Now is the time to start planning ahead to cut your tax bill for next year, don’t wait till December 31st. Let our tax experts help you minimize your tax liability so you can hold on to more of what you make and put more profit in your pocket! Reach out to us at CPA@fuoco.com, or call 855-542 -7537.