As 2022 draws to a close, tax filing season is just around the corner, but it’s never too early to start planning ahead for the changes coming to tax policies in 2023 and how those will impact your finances. While the changes won’t affect the 2022 taxes due on April 18th, several are important for taxpayers to be aware of as they budget for 2023 and plan retirement contributions.
Mark Steber, the Chief Tax Information Officer for Jackson Hewitt Tax Services, told Fox Business that “tax law changes can be made any time during the year; and we’ve seen in recent years that they can even be retroactive. That’s why it’s important to pay attention year-round as your personal income tax situation might be impacted due to national or state laws, or at least speak with a tax pro who understands the changes.”
Here’s a look at five of the most important upcoming changes for taxpayers to know about before 2023 begins:
The Internal Revenue Service (IRS) adjusts the thresholds that apply to the various federal income tax brackets each year to account for inflation, and with inflation near a four-decade high, the changes will be more noticeable in 2023. Steber notes, “There’s a possibility that taxpayers could change tax brackets next year because of this, meaning they could also pay a different tax rate on some of their income.”
The income tax rates are progressive, so the more a taxpayer earns, the more their earnings are subject to higher rates. The income thresholds for each bracket are 10% for single taxpayers with income of $11,000 or less; 12% for income over $11,000; 22% for income over $44,725; 24% for incomes over $95,375; 32% for income over $182,100; 35% for income over $231,250; and 37% for income over $578,125. For married couples filing joint returns, the dollar amounts can be doubled for each bracket.
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The IRS also adjusts the amount of the standard deduction year based on inflation. The vast majority of taxpayers choose to claim the standard deduction instead of itemizing, or separately listing expenses such as mortgage interest, taxes and charitable contributions. The proportion of taxpayers who itemize has increased to roughly 90% in the years since the Tax Cuts and Jobs Act of 2017 doubled the standard deduction.
In 2023, the standard deduction for individual taxpayers will rise by $900 to $13,850; increase by $1,800 for married taxpayers filing joint returns to $27,700; and climb to $20,800 for heads of households, up $1,400 from 2022. Taxpayers who are at least 65 years old or blind can claim additional amounts depending on your filing status.
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The IRS is raising the contribution limits for retirement accounts, including employer-sponsored plans like a 401(k) and Individual Retirement Accounts (IRAs) in 2023 to account for inflation.
The cap for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will rise by $2,000 to a maximum of $22,500. The catch-up contribution limit for employees aged 50 and up who participate in such plans will also rise to $7,500.
IRA contribution limits will increase by $500 to $6,500 — a figure that represents the maximum combined amount that can be contributed to a traditional IRA and a Roth IRA. The income phase-out range for contributing to a traditional IRA, which allows taxpayers to claim a deduction upfront in the tax year of the contribution, will shift upwards to a range of $68,000 and $78,000 for single taxpayers; $116,000 and $136,000 for married couples filing joint returns.
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The Earned Income Tax Credit (EITC) remains available for low- to moderate-income workers and families to reduce their tax burden and potentially increase their tax refund.
For eligible taxpayers with no children, the EITC will provide a maximum credit of $600 in 2023. The EITC is larger for filers with qualifying children, reaching $3,995 for one-child households; $6,604 for two children; and $7,430 for three or more children – up from $6,935 in the 2022 tax year.
The IRS has an app to let you see whether you qualify for EITC and how much credit you are entitled to.
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Another tax policy aimed at helping low- to moderate-income taxpayers is the Retirement Savings Contribution Credit, better known as the Saver’s Credit. The Saver’s Credit gives taxpayers who contributed to retirement accounts a tax break worth as much as 50% of their contribution. The credit amount is larger for lower-income taxpayers and gradually
In 2023, the Saver’s Credit phases out entirely at $36,500 for single filers, an increase of $2,500; and at $73,000 for married couples filing jointly — a $5,000 increase from last year. Taxpayers earning less than $21,750 as individuals and $43,500 as joint filers will be able to claim the maximum tax credit equal to 50% of their retirement contribution.