One of the few positives to come from recent inflation is the Internal Revenue Services’ inflation-adjusted changes to 2023 tax rules. These changes span many areas, from income tax brackets to social security to retirement plan contribution limits.
We outline below a summary of certain upcoming changes to consider for 2023 financial planning.
- Beginning in 2023, 401(k), 403(b), most 457, and Thrift Savings Plans annual elective deferral limits increase to $22,500. Those over age 50 can contribute an additional $7,500 for a total contribution of $30,000.
- Limits to SIMPLE IRA plans rise to $15,500 with an additional $3,500 contribution for those age 50+.
- Simplified Employee Pension Plan (SEP) IRA limits also increase to the lesser of 25% of the employee’s compensation, or $66,000.
- Defined contribution plans’ pay-in limit increases to $66,000.
- Traditional and Roth IRAs will allow for a $6,500 contribution in 2023. An additional $1,000 catch-up contribution is also available for those aged 50+.
- Income ceilings for Roth IRAs will phase out at AGIs of $218,000 to $228,000 for married filing jointly, and $138,000 to $153,000 for singles.
- Deductible traditional IRA contributions will phase out at AGIs of $116,000 to $136,000 for married filing jointly and $73,000 to $83,000 for singles.
- The annual gift tax exclusion amount will increase to $17,000.
- The federal lifetime estate and gift tax exclusion amount for any decedent dying in 2023 will increase from $12.06 million to $12.92 million. The exclusion amount is set to sunset after December 31, 2025 and will revert to $5.0 million plus adjustments for inflation.
- Tax bracket income levels will increase by 7.1% in 2023 resulting in more income falling under lower brackets. For example, the start of the 37% rate bracket for married filing jointly has been adjusted from $628,300 in 2021 and $647,851 in 2022, up to $693,751 in 2023.
- The standard deduction will increase by $1,800 to $27,700 for joint filers and by $900 to $13,850 for singles.
- The health savings account (HSA) pretax contribution limit increases to $3,850 for individuals, $7,750 for family coverage plus $1,000 for those 50 and older.
- Social Security and Supplemental Security Income (SSI) benefits will increase by a cost-of-living adjustment of 8.7% in 2023.
- Earnings up to $160,200 will be subject to Social Security tax.
- The income thresholds for the income-related monthly adjustment amount (IRMAA) on Medicare Parts B and D will increase $6,000 for single filers and $12,000 for joint filers while the premiums will decrease.
- If you are still working and claim Social Security, your benefits will be reduced subject to the so-called Earnings Test. The earnings limit will be $21,240 for those younger than their full retirement age and $56,520 for those at their full retirement age. There is no limit on earnings for those at their full retirement age or older.
If you have any questions regarding how these changes might affect your particular situation in 2023, please contact Parkside Advisors.