Tax Code Inflates with Everything Else

Looking back on 2022, the biggest financial story is that inflation returned in a big way for the first time in decades.  This has wreaked havoc on family budgets as wages and investments have not kept up with rising costs.  If there is a silver lining to the inflation we have experienced, it is that many of the provisions in the Federal Tax Code are automatically linked to the rate of inflation.  The simplest way of understanding this is that the same income will result in lower taxes in 2023.

The standard deduction for married couples filing jointly for the tax year 2023 rises to $27,700, up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction increases to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from the amount for the tax year 2022.  In addition, taxpayers aged 65 and over get a bonus of $1,750 to their standard deduction for singles and $1,400 each for married filers.

The tax rates remain the same as in 2022, but the level of income needed to be included in these brackets has gone up.  The tax bracket income levels have all increased by just over 7%.  For example, for married filers to stay in the 12% bracket, they will need to keep their income under $89,450 in 2023 compared to $83,550 in 2022.  The tax rates for ordinary income are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Contribution limits to Health Savings Accounts and retirement accounts have also been increased for 2023.  HSA limits have increased from $3,650 to $3,850 for single taxpayers and up to $7,750 from $7,300 for families.  In addition, taxpayers 55 or older can contribute an extra $1,000 to their HAS accounts. 

Traditional and Roth IRA contribution limits are also increasing in 2023.  The new limit is $6,500 per person in 2023, up from $6,000 in 2022.  Those who are aged 50 and over can contribute $7,500 this year.  Taxpayers can contribute to either traditional or Roth IRAs or both as long as the total contribution does not exceed these limits.  However, you or your spouse must have earned income equal to or greater than the amounts contributed.

The limit on employee contributions to a 401(k) is now $22,500 instead of $20,500 last year.  Those aged 50 and older can now defer an additional $7,500 to bring the total up to an even $30,000.  Simple IRA contribution limits are up from $14,000 to $15,500, with a $3,500 catch-up bonus for those 50 and over.  SEP IRA contribution limits saw the biggest increase in dollars from $61,000 to $66,000.

For those interested in making gifts to family or friends, the annual gift tax exclusion has jumped from $16,000 to $17,000 in 2023.  The amount is the maximum gift that can be made from any individual to another individual without requiring a gift tax form to be filed.

On the flip side, the Social Security wage base has also been indexed to inflation.  This is the amount of earned income that is subject to Social Security taxes before the tax doesn’t apply.  The wage base has increased to $160,200, up from $147,000 in 2022. 

After a year of mostly bad financial news, hopefully, we can be grateful for the automatic increases in tax code provisions and Social Security benefits.  This should be a better year for most taxpayers.  As always, we will provide our clients with tax planning updates throughout the year based on their specific situations.  If you would like to see the impact of these changes, please let us know, and we will prepare a customized tax projection for you.