Inflation has impacted almost everything in the economy. Your dollar doesn’t typically go as far as it has in past years. And now, inflation will cause your taxes to look different in 2023. The Internal Revenue Service (IRS) recently released their adjusted tax brackets for next year. Subsequently, you may see a take-home pay increase on your checks starting January 1, 2023. Below are some highlights of the announced changes that may affect your household.

The IRS is raising the standard deduction and altering income thresholds for tax brackets for the 2023 taxable year. These changes begin on January 1, 2023, and may be seen as a lower tax withholding on your paycheck, which means you may see an increase in your total take-home pay. The new standards will apply to taxable income, which is your remaining income after deductions.

To prevent what’s referred to as a “bracket creep” (when someone is moved into a higher tax bracket as taxable income increases (2)), income thresholds have risen by 7%, which is high, compared to a typical year’s adjustment due to the current inflationary environment. Without this change, people may have been shifted into a higher tax bracket despite their standard of living not changing.

This change will automatically be applied, and you will not need to adjust anything on your W4 to see these additional tax savings.

The IRS will allow you to contribute more money to your 401(k) in 2023. If you are saving for retirement via a 401(k), you’ll be able to increase your yearly contributions by almost 10% next year. The IRS allows employees to save up to $22,500 in 2023, an increase from the former $20,500 limit. Included are 401(k), 403(b), and other taxed-advantaged employer savings plans along with 457 plans (retirement savings plans offered by state and public employers and some nonprofit employers). Limits on IRA contributions have risen to $6,500 from $6,000 for 2023.

The IRS increased the standard deductions for the 2023 tax year. Standard deductions for many taxpayers will rise by 6.9% next year. Single and married-filing-separately filers will see their standard deduction cap out at  $13,850, compared to $12,950 in 2022. Married-filing-jointly filers will increase their standard deduction from $25,900 in 2022 to $27,700 in 2023.

While there have been many changes to the tax code for 2023, the IRS left some tax-related items alone. IRA “catch-up” contributions for those 50 years or older were exempt from the increases next year and remain at $1,000. Because it is not related to inflation, the child tax credit will also stay the same in 2023 as it is in 2022 (which is $2,000 per child and starts to phase out at incomes of $200,000 for single filers and $400,000 for married applicants and those who are filing jointly).

Some additional tax changes that are going into effect in 2023 include:

  • Flexible health spending account contributions will rise 6.7% to $3,040 next year, an increase from $2,850 in 2022. Additionally, you will be able to carry over (if your plan allows) $610 instead of the $570 limit for 2022. 
  • The estate tax exemption grew to $12,920,000 from the previous $12,060,000 limit in 2022. 
  • The adoption credit will be $15,950 for 2023, compared to the $14,890 in 2022. 

 

Remember, these changes are for your 2023 taxes, which you will file in 2024. This article is a partial list of the IRS’s adjustments for next year. For more information, please refer to the IRS website for a complete list.

Taxes are complicated and can erode a retiree’s financial plan if a retirement plan that incorporates a forward-looking strategy is not in place. Don’t let Uncle Sam take money when it could have been avoided with the help of an Osiwala Financial Group Financial advisor and CPA. Believe it or not, the order and amounts you withdraw from your retirement accounts matter, and we can help you make sense of all of that. For more information, click here to schedule a 20-minute “ask anything” appointment with an OFG advisor by phone, in-office, or virtually. You’ll be able to ask all the questions related to tax, investment, Social Security, estate, or insurance that you need clarity on. Click HERE to schedule your “ask-anything” session today.

(1) https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023

(2) https://www.investopedia.com/terms/b/bracketcreep.asp