We all know that inflation over the past year or so has not been good for our pocketbooks, but there are some hidden benefits in the form of tax savings. What I want to talk about today is the tax rate and other tax changes for 2023 that are directly tied to inflation.
OK, LET’S GET STARTED?
Since most taxpayers take the standard deduction, let’s start there. I don’t want to push a lot of numbers at you since it can be looked up pretty easily, but if you are married, the 2023 amount is $27,700, up $1,800 from 2022. This would result in a $400 tax savings.
This is going to make it even harder for people to itemize since for most people, they do not have enough of the big four deductions – medical, taxes, interest and charity to qualify.
WHAT ABOUT TAX RATES?
Although the marginal tax rates have stayed the same so far, the size of the brackets have gone up 7%.
Remember here that there are five tax brackets ranging from 12% up to 35% and just because your income may go up to the next bracket because of a raise or bonus, all your income is not taxed at that new bracket. You always get the benefit of the lower brackets which is why they call it the marginal tax rate.
WHAT ABOUT GIFTING?
As most people now know, any person can give any other person up to $16,000 a year without any questions asked. This is called the annual gift tax exclusion. This gift is not deductible for the giver or taxable to the person who receives it. For 2023, the gift tax exclusion will go up to $17,000.
THE ESTATE TAX WAS ALSO IN THE NEWS LAST YEAR, DID THAT CHANGE?
It did. If you remember, the Build Back Better Act looked to decrease these limits substantially. Since this bill was not passed, the estate limits are still at the higher levels and increased for inflation in 2023. The new 2023 limit is $12,920,000, up by $860k over 2022.
WHAT ABOUT RETIREMENT PLANS?
There were lots of changes here. IRA’s are going up to $6,500, plus $1,000 catchup for those 50 or older.
401(k), 403(b) plans employee contribution went up by $2,000 to $22,500. And if you are age 50 or older, the catch-up contribution increased to $7,500. So if you are age 50 or older in 2023, you can put away $30,000 per year.
Contributions to a SIMPLE Plan (which is basically a 401(k) light) increased to $15,500 plus a $3,500 catch-up for those over 50. The total here now is $19,000. These are the plans that we recommend for small businesses since it is easy to administer and still allows employees to put away a pretty good sum of money.
If you have an SEP, the maximum amount for 2023 will be $66,000, a $5k increase. This is the recommended plan for those employers without any employees.
Be sure to talk to one of our professionals if you have any questions regarding 2023 inflation adjustments.