Andrea McClelland, CFP®
Each year, the IRS makes incremental adjustments to dozens of tax provisions, in order to keep pace with inflation, and to mitigate tax burdens as incomes rise.
Due to the current high rate of inflation, 2023 adjustments are larger than usual. In addition to significant increases to the standard deduction and tax brackets, 2023 adjustments include substantial increases to retirement contribution limits and gift/estate tax exemption amounts, which may offer tax savings and increased gifting opportunities for taxpayers.
Social Security Bump Up
The adjustment with the biggest impact for retirees is the 8.7% increase to Social Security payments for 2023, the largest Social Security cost-of-living adjustment since 1981. This substantial increase compounds on top of a 5.9% increase in 2022.
Increased Retirement Contribution Limits
For 2023, taxpayers can sock away 7-10% more in tax-deferred accounts, potentially lowering taxable income:
- 401k, 403b and other qualified retirement plan contribution limits increase to $22,500 for 2023 (up from $20,500).
- Qualified plan “catch-up” contributions for those age 50-plus increase to $7,500, bringing the total contribution limit to $30,000 for qualified plan participants over 50. Coming soon: starting in 2025, qualified plan participants age 60-63 will be allowed a catch-up amount of $10,000 (indexed for inflation), per Secure Act 2.0.1
- IRA contribution limit increases to $6,500 for 2023, up from $6,000. The IRA catch-up contribution limit for those age 50 and above remains at $1,000, but starting in 2024, Secure Act 2.0 mandates that the IRA catch-up amount will be indexed for inflation annually.
- SEP contribution limit increases from $61,000 to $66,000 for 2023.2
Higher Income Limits for Roth Contributions
Per IRS rules, only those below certain income limits are allowed to make a Roth IRA contribution.3 For 2023, income limits are up about 7%:
- For single/head of household filers, the income limit is $153,000 (with the maximum contribution amount phasing out between $138,000 and $153,000).
- For married couples filing jointly, the income limit is $228,000 (phasing out between $218,000 and $228,000).
- Married individuals filing separately phase-out range remains at $0-10,000.
Increased Standard Deduction and Tax Brackets
The standard deduction will increase about 7% for 2023:
- $27,700 Married Filing Jointly (up from $25,900)
- $13,850 Single (up from $12,950)
- $20,800 Head of Household (up from$19,400)
While Federal tax rates (10%, 12%, 22%, 24%, 32%, 35% and 37%) remain unchanged for 2023, marginal tax brackets (the income range taxed at each rate) increase about 7%, allowing more income to be taxed at lower rates:
For example, a married couple filing jointly in 2022 with taxable income of $190,000 would have $11,850 fall into the 24% tax bracket, as the 2022 MJF 22% bracket tops out at $178,150. In 2023, the MFJ 22% bracket tops out at $190,750, keeping the a couple with $190,000 from crossing over into the 24% bracket.
Federal capital gains tax brackets also increase - you guessed it! - about 7%.
Expanded Opportunities for Tax-Free Gifting
The annual gift tax exclusion is the amount that any individual may give to another individual in a given tax year with no tax reporting or gift tax consequences. After holding steady at $15,000 for several years, the annual gift tax exclusion increased to $16,000 in 2022. For 2023, another $1,000 has been added, for a total eligible gift exclusion of $17,000 per person, per beneficiary.
The Federal lifetime estate and gift tax exemption increased from $12.06 million in 2022 to $12.92 million per person, or $25.84 million per couple, in 2023. This means that a couple who had maxed out their lifetime gift tax exclusion amount by year-end 2022 could gift an additional $1.72 million in 2023, and stay within their lifetime exemption amount. It’s important to note that under current law, the federal estate tax exclusion is scheduled to decrease in 2026 to half of its then-current level.4
On the flip side...
While most recent tax adjustments have the potential to decrease taxes, there are a few changes that move the needle in the opposite direction:
- Increased Social Security wage limit: Employees are subject to 7.65% payroll taxes on earned income: 6.2% to Social Security and 1.45% to Medicare. While the amount subject to Medicare tax is uncapped, the 6.2% Social Security tax applies only up to the annual Social Security wage cap. The 2023 Social Security wage cap increased to $160,200, up from $147,000 in 2022 - an increase of nearly 9% - meaning more of high earners’ income will be subject to Social Security tax.
- Child tax credit reverted: As of tax year 2022, the child tax credit reverted to a maximum of $2,000 per child (down from $3,600 max for children under 6 and $3,000 max for children ages 6-17 in 2021).
- Above-the-line charitable deduction no longer available: The $300 single/$600 married filing jointly charitable deduction available for those taking the standard deduction was also phased out as of 2022.
Though most of these tax changes won’t have a huge impact on the bottom line, it’s good to know that IRS adjustments should help keep inflation-adjusted tax burdens steady in the face of today’s high-inflation environment.
- Note that workers with earnings over $145,000 (also adjusted for inflation) will be required to make catch-up contributions to a Roth account.
- The allowable contribution is about 18% of self-employment income, capped at the $66,000 limit.
- Taxpayers with incomes above the limit may be eligible to make a “Backdoor Roth” IRA contribution - consult your tax or financial advisor for guidance.
This content is developed from sources believed to be providing accurate information as of the date of publication, and is intended for informational purposes only. No content should be construed as legal or tax advice.
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