Certain tax code changes taking effect now could impact the financial decisions you make throughout the rest of this year. Bottom Line Personal asked tax expert Maryann Reyes, CPA, to explain the seven details worth noting…
Tax brackets and the standard deduction will rise to reflect inflation. Inflation raged in 2022, but key numbers, including tax-bracket thresholds and standard deductions, inched upward only modestly.
For 2023: More inflation adjustments will take effect—many key figures are rising by around 7%. Examples: A married couple filing jointly will find that the 22% tax bracket applies to income above $89,450 in 2023, up from $83,550 in 2022…the 24% bracket applies to income above $190,750, up from $178,150…and the standard deduction is $27,700, up from $25,900.
Result: Taxpayers will pay lower income tax rates on thousands of dollars of income in 2023 than they would have on the same income in 2022—that could be a consideration when making money moves. Examples: Retirees who have money in traditional 401(k)s/IRAs and Roth accounts might opt to take more from their traditional 401(k)/IRAs in 2023 than they had planned…and a bit less from their Roth accounts because they can make more withdrawals from those tax-deferred traditional accounts without pushing themselves into higher tax brackets. People still in the workforce might want to reduce their withholding to improve their cash flow throughout the year without worrying about creating a big tax bill next April.
401(k) contribution limits are much higher.
For 2023: Eligible employees can contribute up to $22,500 to their 401(k) plans, up 9% from 2022’s $20,500 limit. Employees who will be 50 or older before the end of 2023 can contribute an additional $7,500 on top of that, up from 2022’s limit of $6,500. Add it up, and a two-income married couple, with both spouses 50 or older, can contribute as much as $60,000 for 2023 to their
401(k)s. These new limits apply to 403(b)s and most 457 plans as well.
Even better: Employees who failed to adjust contributions to account for 2023’s increased limits during open enrollment are not necessarily out of luck. Most employers’ plans allow employees to adjust their contributions during the plan year. Caution: Increasing 401(k) contributions mid-year to max out 2023’s new contribution limits is better done sooner than later—the longer you wait, the larger the amount taken from each paycheck…and waiting too long even might mean that it’s impossible to reach the contribution limit if, say, your employer limits your contributions to some percentage of your paycheck.
Related: IRA contribution limits are increasing in 2023, but the dollar figures are more modest than with
401(k)s. The 2023 IRA contribution limits are $6,500—or $7,500 if you are 50 or older—up $500 from 2022.
Long-term capital gains tax threshold is much higher.
For 2023: Married couples filing joint returns will pay a 0% tax rate on their long-term capital gains as long as their taxable income is no higher than $89,250, up from $83,350 in 2022. For single filers, this figure is $44,625, up from $41,675. Above those income levels, a 15% rate generally applies…or, for taxpayers with incomes of mid-six figures or above, a 20% rate applies.
Result: This year’s higher thresholds mean that many investors can sell appreciated investments from taxable accounts without incurring long-term capital gains taxes. Reminder: Long-term capital gains tax rates apply only to sale assets held for more than one year. Assets held for less than one year are taxed at the taxpayer’s ordinary income tax rate.
Social Security benefits have shot up—and taxation of those benefits will shoot up, too.
For 2023: Social Security recipients are already aware that their benefits increased by 8.7% to keep pace with inflation. That’s a welcome income boost for many retirees in these inflationary times. But: The thresholds that determine whether Social Security recipients must pay taxes on their benefits are not indexed to keep pace with inflation.
Result: The larger payments the Social Security system is sending to retirees in 2023 mean that many of them will have to make larger payments to the IRS.
When Social Security benefit taxation began, it affected only relatively wealthy retirees, but this no longer is the case. Married couples with a combined income of just $32,000 to $44,000 must pay income taxes on up to half of their Social Security benefits…and for income above $44,000, they must pay taxes on up to 85% of their benefits. For single filers, these thresholds are $25,000 and $34,000. Combined income is calculated by adding adjusted gross income to nontaxable interest plus 50% of Social Security benefits.
Starting age for required minimum distributions (RMDs) is higher, and penalties for missed RMDs are lower.
For 2023: The starting age for RMDs has been pushed back to 73 from 72 in 2022 (it is going up to 75 in 2033). But another RMD rule modification received somewhat less attention—penalties for missing RMDs, previously 50% of the missed withdrawal, have been slashed to 25%…or 10% if the missed RMD is made by the end of the second year following the year it was due.
Dramatic changes are being made to many state income tax codes. State taxes have always been a consideration when selecting a retirement destination or making relocation decisions. But now anyone thinking about choosing a new state to call home should pay close attention—many states are enacting or planning changes to tax codes.
For 2023: State income tax rates are dropping in Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New York and North Carolina, according to the nonprofit Tax Foundation. Some or all retirement income and military pension income have been made exempt from income taxes in Alabama, Delaware, Iowa, Rhode Island and Nebraska. New Hampshire lowered its tax rates on interest and dividend income—that state already did not tax earned income. Massachusetts bucked this state tax–cutting trend and increased some of its income tax rates in 2023. Those aren’t the only states with changes taking effect in 2023—many more have income tax cuts in the planning or discussion phase.
Result: Anyone thinking about relocating should read up on the current tax rates in the state they are considering and the status of proposed changes under discussion for the years ahead.
Bonus depreciation is being phased out. In 2022, business owners could write off 100% of the cost of certain assets in the year that those assets were put into service for their companies, rather than depreciate the assets over many years.
For 2023: This is being phased out. “Bonus depreciation” is limited to 80% in 2023…60% in 2024…and so on, dropping 20 percentage points per year until it disappears altogether in 2027.
Result: Business owners should speak with their accountants about the timing of planned business asset and equipment purchases.