2022 will likely be remembered as the year of high inflation. Nearly everything will cost more in 2023 than at the beginning of 2022, and we are reminded of this fact every time we go to the grocery store or gas station. Yet the effects of high inflation may not all be bad, thanks to a few new opportunities for tax-efficient saving.
Retirement Savings
There is good news for anyone who is still working and wants to maximize their contributions to an employer-sponsored retirement plan. High inflation has caused the limits on contributions to increase for 2023:
- For 401(k), 403(b), and 457 accounts, contribution limits are $22,500, up from $20,500 in 2022.
- Employees born before 1974 can contribute an extra $7,500.
- This means anyone over age 50 can save up to $30,000 pretax in an employer-sponsored plan.
IRA and Roth IRA contribution limits have also increased:
- The annual contribution limit rose from $6,000 in 2022 to $6,500 in 2023.
- People over age 50 can contribute an extra $1,000.
- The income ceilings for taxpayers wanting to make Roth contributions have also increased, phasing out at a Modified Adjusted Gross Income (MAGI) of $218,000 to $228,000 for couples and $138,000 to $153,000 for singles.
Additionally, lower-income taxpayers will find it easier to qualify for the retirement saver’s credit. This tax credit is for certain individuals who save in an IRA, 401(k), 403(b), SEP, or similar retirement plan. The maximum saver’s credit of $2,000 for joint filers and $1,000 for others is capped at 50%, 20%, or 10% of retirement contributions, depending on Adjusted Gross Income (AGI). In 2023, the credit phases out at AGIs over $36,500 for single filers, $54,750 for heads of household, and $73,000 for married couples filing jointly.
Social Security
Another positive impact is that Social Security benefits are also going up. In 2023, recipients will receive an 8.7% increase in their benefits.
The earnings test limits for younger seniors have also increased: Recipients age 62 through 65 (by the end of 2023) can earn up to $21,240 before their benefits are reduced, while for recipients turning 66 that year, the threshold is $56,520. (There is no earnings cap after age 66.)
One downside is that the Social Security wage base is also increasing—from $147,000 in 2022 to $160,200 in 2023. This means that employees and employers will have to pay the Social Security tax rate of 6.2% on an additional $13,200 of income.
Health Savings Accounts (HSA)
For 2023, individuals can contribute up to $3,850 for self-only coverage or up to $7,750 for family coverage. Those age 55 or older at the end of the year can add an extra $1,000 in catch-up contributions.
These contribution limits are reduced by any employer contributions excludable from income. This includes amounts contributed to an HSA account through a cafeteria plan. If you are looking to put more money in an HSA for 2022, you have until the due date for 2022 federal income tax returns, which is April 18, 2023.
Gift Limits and Estate Tax Exemption
In 2023, the annual gift tax exclusion will be increasing to $17,000 per recipient—the highest it is ever been.
In addition, the estate and gift tax exemption will be $12.92 million per individual, up from $12.06 million in 2022. Therefore, a married couple can shield $25.84 million without paying any federal estate or gift tax. A couple who had already maxed out lifetime gifts at the end of 2022 could give away another $1.72 million in 2023.
Income Taxes
While federal tax rates have not changed since 2018, tax bracket income ranges are adjusted for inflation each year. Here’s a look at the ranges for 2023:
2023 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | $0 to $11,000 | $0 to $22,000 | $0 to $15,700 |
| 12% | $11,000 to $44,725 | $22,000 to $89,450 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $89,450 to $190,750 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $190,750 to $364,200 | $95,350 to $182,100 |
| 32% | $182,100 to $231,250 | $364,200 to $462,500 | $182,100 to $231,250 |
| 35% | $231,250 to $578,125 | $462,500 to $693,750 | $231,250 to $578,100 |
| 37% | $578,125 or more | $693,750 or more | $578,100 or more |
Remember that the tax rate only applies to income within the applicable range. This is the case regardless of filing status. For example, a married (filing jointly) couple with $100,000 of taxable income will not pay tax at the full 22% (or $22,000). The first $22,000 of income is taxed at 10% ($2,200), the next $67,450 is taxed at 12% ($8,094), and the last $10,550 is taxed at 22% ($2,321). This adds up to a total tax bill of $12,615.
For 2023, the standard deduction amounts are $13,850 for single taxpayers, $27,700 for married couples filing jointly, and $20,800 for heads of household. Taxpayers at least 65 years old and those who are legally blind can claim an additional standard deduction of $1,500 ($1,850 for single or head of household filing status). The additional deduction is doubled if both taxpayers are 65 or older, or legally blind.
Planning Ahead
The current tax rates created under the Tax Cuts and Jobs Act of 2017 are only temporary—they are set to expire after 2025. Unless Congress acts, starting in 2026, the tax rates will revert to: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The future of the federal income tax code is always uncertain in Washington. However, the current national debt is over $31 trillion, and budget deficits are still more than $1 trillion annually. So how likely is it that Congress will lower income taxes anytime soon?
Tax planning is all about thinking ahead, and long-term tax minimization should be part of everyone’s financial plan. It is not too early to start thinking about how to handle your 2023 finances more tax efficiently.
Insights
- Workers age 50 or older in 2023 can save up to $30,000 pretax in an employer-sponsored plan.
- Social Security recipients do not lose benefits based on their earned income after age 66.
- A couple who had maxed out lifetime gifts in 2022 could give away another $1.72 million in 2023 free of gift taxes.
