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The annual inflation rate in the United States has hit a decade-long high of 8.2%. While households may be feeling the impacts of this in their day-to-day lives, there are some positives to note. Looking ahead in 2023, households may see increased tax savings after certain credits and deductions have been significantly increased. In the same light, there are increased retirement savings opportunities.
New Tax Brackets for 2023
The IRS has adjusted the income limits associated with marginal tax rates to account for increased inflation in 2023. The United States tax system is progressive– the first $20,550 of income is taxed at 10%, income up to $83,550 is taxed at 12%, moving all the way up the brackets until $647,850 of income and above taxed at 37% (assuming married filing jointly). In 2023, the 37% tax bracket will increase from $647,850 to $693,751.
As a result—expect to see a little bit more in your paycheck as each bracket has increased, meaning more income will be taxed at lower rates as you climb through the brackets.
A household, married filing jointly earning $100,000, will expect to see a $600 federal tax savings in 2023
A household, married filing jointly earning $500,000, will expect to see a ~3,700 federal tax savings in 2023
A household, married filing jointly earning $1M, will expect to see a ~$4,600 federal tax savings in 2023
Increased Standard Deduction Limits for 2023
To calculate one’s taxable income, one must first take their gross income (ex: wages, salaries, capital gains) and subtract any above-the-line deductions (ex: Traditional IRA contributions, pre-tax 401(k) contributions) to determine their adjusted gross income (AGI). Once AGI is finalized, one can either take the standard deduction or the sum of their itemized deductions– whichever is greater. For most, the standard deduction results in the larger tax savings– and that limit is being increased for 2023. For single filers, the standard deduction is jumping from $12,950 to $13,850 (a $900 increase). For those married filing jointly, the deduction increases even further from $25,900 to $27,700 (an $1,800 increase).
Increased Annual Gifting Limits for 2023
For those who are implementing a gifting strategy during their lifetime, the annual exclusion for gifts will increase from $16,000 to $17,000 per year. With this increased limit, an individual can give $17,000 to an individual without having to file a Form 709 to the IRS, or have it count against your lifetime gift exemption. For example, let’s assume two spouses have three children and want to maximize their intrafamily lifetime gifting strategy for 2023. The two spouses can elect to “split gift” and combine their two $17,000 limits ($34,000 total) to each of their three children. This results in a $102,000 transfer ($34,000 gift to each of their three children) that now avoids a 40% estate tax upon death– a $40,800 estate tax savings each year if the household is over the lifetime gift exemption (set to increase to $12,920,000 from $12,060,000 in 2023). *Note that this lifetime exemption is set to decrease by approximately half in 2026, unless legislation changes.
Increased 401(k) and IRA Limits for 2023
The 402(g) limit, or amount that one can defer from his/her salary to a 401(k) plan will increase from $20,500 to $22,500 in 2023. Likewise, IRA contributions (both Traditional and Roth) will increase from $6,000 to $6,500. These cost-of-living adjustments help ensure that retirement savings are keeping up with inflation.
Other items to note moving forward into 2023:
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Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.
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