Understanding the tax codes and how they apply to your situation is an important aspect of your financial planning. Therefore, you need to pay attention to new developments and changes. While most tax codes remain consistent, thresholds and contribution limits can change from year to year. As inflation continues to impact individual finances and reduce your purchasing power, the IRS has implemented some changes to help you keep more of your hard-earned money. Here are 7 important tax changes in 2023 that everyone should know about.
Reasons for the Recent Tax Changes
On October 18, 2022, the IRS announced adjustments due to inflation starting for the 2023 fiscal year. Key tax provisions and thresholds for each tax bracket will increase by approximately 7% to account for the elevated inflation rates to alleviate the financial strain many Americans are feeling.
To prevent what financial analysts refer to as “bracket creep”, the IRS has made a larger adjustment to compensate for the unusually high inflation rates. These tweaks to the tax code are based upon the Chained Consumer Price Index (C-CPI-U) and are intended to prevent people from being pushed into a higher tax bracket. Though many of these changes won’t apply until you file taxes in 2024, it’s wise to be aware of how these changes will affect your finances.
7 Important Tax Changes in 2023
Based on the recent updates, here are 7 important tax changes in 2023 that everyone should know about as we start the new year.
1. An Increase in the Standard Deduction
According to the IRS, the standard deduction is a set amount that reduces how much of your income they tax. Although not all taxpayers will qualify, many people rely on this deduction to reduce their tax burden.
Starting in 2023, the IRS increased the standard deduction for American taxpayers. Single filers or married people filing separately can now claim $13,850, which is an increase from $12,950 in 2022. Similarly, heads of household will now be able to claim $20,800, up from $19,400 the previous year. And married couples who file jointly can deduct $27,700 for 2023, increasing from the standard deduction in 2022 of $25,900.
2. Increased Marginal Tax Thresholds
Another significant change has been an increase in the marginal tax rates. These thresholds have been adjusted due to inflation to prevent the “bracket creep” which would place them in a higher tax bracket. While the rates haven’t changed, the thresholds for each bracket have.
- 10% for incomes up to $11,000 ($22,000 for married couples who file jointly)
- 12% for incomes above $11,000 ($22,000 for married couples who file jointly)
- 22% for incomes above $44,725 ($89,450 for married couples who file jointly)
- 24% for incomes above $95,375 ($190,750 for married couples who file jointly)
- 32% for incomes above $182,100 ($364,200 for married couples who file jointly)
- 35% for incomes above $231,250 ($462,500 for married couples who file jointly)
- 37% for incomes above $578,125 ($693,750 for married couples who file jointly)
3. Raising the Earned Income Tax Credit
The Earned Income Tax Credit is especially important for larger families. The EITC was designed to help low-income earners by lowering their taxable income and reducing how much they owe. In order to qualify, the taxpayer must have three children or more to claim this credit.
In 2022, the EITC was set at $6,935. However, the Earned Income Tax Credit will increase to $7,430 for 2023 to account for the increased cost of living.
4. Higher Contribution Limits to Your IRA
In the past, there has always been a strict limit for those contributing to a traditional or Roth IRA. The contribution limit was $6,000 for most people. Although people over the age of 50 could add $7,000 for catch-up contributions.
The big news here is that these limits will increase by $500 in 2023. So, Americans can now contribute $6,500 to their IRA. This figure increases to $7,500 for those over 50.
5. Increased Contributions to Your 401(k)
In the same line of thought, the contribution limits have also increased for 401(k) accounts. For 2022, the employee contribution threshold was $20,500. But in 2023, the limit will increase by $2,000, so you now have a maximum limit of $22,500. Those who qualify for catch-up contributions can also save more for retirement with an increased contribution limit of $30,000.
If you have several 401(k)s, these limits include any salary deferrals and total contributions made to all of your 401(k) accounts. However, any funds you contribute to other types of accounts, such as an IRA, don’t affect these thresholds.
6. Higher Contribution Limits to Your HSA
Health Savings Accounts are also included in the types of accounts that are seeing important tax changes in 2023. Although most people use these to cover medical expenses, your HSA can also be used as an investment vehicle.
Individuals will be allowed to add an additional $200 per year, raising their maximum contribution limit to $3,850. The threshold for family coverage will also go up by $450 to a maximum of $7,750 for the fiscal year. However, you must meet the minimum deductibles to qualify for an HSA plan, which are $1,500 for the individual and $3,000 for families.
7. Increased Thresholds for Capital Gains Tax
And last but not least, the IRS has also changed the thresholds for taxes on long-term capital gains. However, short-term gains will still be taxed as ordinary income.
The zero rate will still apply to those gains within these limits:
- $0 – $44,625 for individuals or married people who file separately
- $0 – $59,750 for heads of household
- $0 – $89,250 for married couples who file jointly
However, the maximum amount of 15% will apply to gains in these ranges:
- $44,626 – $492,300 for individuals
- $44,626 – $276,900 for married people who file separately
- $59,751 – $523,050 for heads of household
- $89,251 – $553,850 for married couples who file jointly
Any gains that exceed these upper limits will be taxed at 20%.
Keep In Mind
Although many taxpayers are grateful to see these changes, it’s important to remember they will apply to your earned income and tax return for 2023. Therefore, they won’t see the savings until you file your return in 2024.
Additionally, the Inflation Reduction and Secure 2.0 Acts have provided some modest changes to the tax code. However, it seems like there is little hope for any major changes in tax legislation for 2023 and 2024. And, there is a lot of uncertainty about what will happen if Congress allows them to expire in 2025. Therefore, it’s important to take advantage of these provisions for wealth preservation while they are available and to make sure you understand how the changes apply to you.
If you have any doubts or confusion about the important tax changes in 2023, make sure you discuss them with your financial advisor. They can help you make the best decisions for your financial situation and your future.
- The 2022 Year-End Financial Checklist
- 5 Types of Retirement Accounts for the Self-Employed
- Ways to Make Filing Taxes Online Safer
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.