Rising interest rates, high inflation, the Ukraine/Russia war and China’s lockdowns are a handful of items which greatly affected all of us in 2022. What do these domestic and international themes have in common? We’re not able to control them. During uncertain times, it’s valuable to focus on items wecan control – how much we pay in taxes, spend, save, etc. While completely avoiding taxes is impossible, you may be able minimize with thoughtful and proactive planning throughout the year. Below are a handful of tax moves to note for 2023:
1. Ordinary Income Taxes. Brackets have been updated and widened by the IRS for every type of filer – single, married filing jointly, qualifying widow(er)s and head of household. There is more room in each bracket to consider additional tax planning strategies such as Roth conversions, thoughtful withdrawals from tax deferred accounts, etc.
2. Important Thresholds and Limits. The IRS increased the standard deduction for single and married filing jointly folks from $12,950 (2022) to $13,850 (2023) and $25,900 (2022) to $27,700 (2023). As a friendly reminder, there is an additional standard deduction for folks 65+ from $1,750 (2022) to $1,850 (2023). While taking the standard deduction (fixed amount) is not automatic, it is something you should be reviewing each year and compare the differences to itemizing your deductions. It comes down to simple math and with thoughtful tax planning you may be able to take advantage of certain strategies to ensure you’re not overpaying in taxes over your lifetime.
Maximum elective deferral to retirement plans (401k, 403b, 457) also increased from $20,500 (2022) to $22,500 (2023). That’s roughly 10% and folks should be reviewing their existing work plan contributions to ensure they’re taking full advantage of the annual increase. Catch-up contribution limits for retirement plans also increased from $6,500 (2022) to $7,500 (2023). In a perfect world, folks over the age of 50 are eligible to contribute $30,000 into a retirement plan.
Staying on the topic of retirement plans, the limit on annual additions to defined contribution and SEP plans increased from $61,000 (2022) to $66,000 (2023). This is great news for folks who are high earners in the top marginal income tax bracket as you there will be additional thousands in tax savings each tax year. In addition, the maximum annual compensation taken into account for contributions to retirement plans increased to $330,000 (2023) from $305,000 (2022).
The FSA maximum salary reduction contribution increased from $2,850 (2022) to $3,050 (2023). The HSA contribution limits for both individual and family coverage increased from $3,650 (2022) to $3,850 (2023) and $7,300 (2022) to $7,750 (2023). The catch-up contribution of $1,000 for HSA plans did not adjust for 2023.
Lastly, two of the most common investment vehicles we manage here at ACM are IRA’s and Roth IRAs. The contribution limit for IRA’s increased from $6,000 (2022) to $6,500 (2023) and the catch-up contribution of $1,000 did not adjust for 2023. Similar to the ordinary income tax brackets, the contribution eligibility for Roth IRAs also increased which will allow more folks to contribute directly. Please see below:
Tax planning is not a one-and-done exercise and almost everything we do could be viewed through a tax lens. To help reduce lifetime taxes, it is important to be proactive throughout the year so when life or legislation changes, we can take full advantage of the adjustments and pivot accordingly. Please do not hesitate to reach out to your ACM Wealth Advisor if you have any questions.