By Brittany Manning, CPA, CFP®, Director of Wealth Management Services
In late fall, the Internal Revenue Service (IRS) released adjusted income tax brackets for the 2023 tax year. The 7.1% adjustment to the brackets was one of the biggest we have seen in decades. These adjustments added thousands of dollars to most of the marginal tax brackets, which could mean more money in your pockets come tax filing time.
The 2023 adjustments are due to inflationary numbers, which saw quite a jump throughout 2022. The changes to the IRS marginal brackets also were paired with increases to the standard deduction for files, which in 2023 will be $27,700 for married couples filing jointly ($13,850 for single filers).
So, what does all this mean in practical terms for you? Simply put, as the brackets widen, more of your taxable income can be taxed at a lower marginal rate. This is especially true if your income will not change substantially between 2022 and 2023.
Additionally, there are some other planning tactics to consider implementing.
- Review your itemized deductions. With the higher standard deduction in 2023, it may be more advantageous for more people to use the standard deduction for 2023. It could be beneficial to review which expenses cause you to itemize to see if there can be any manipulation of these. It may also be worthwhile to review charitable giving in coordination with your itemized deductions, as these can swing you from being a standard deduction to an itemizer.
- Consider Roth conversions. With the expanded brackets, there may be some opportunities to take advantage of reduced taxes on converting some pre-tax funds to Roth in 2023.
- Review your retirement contribution savings plan. The limits for individual contributions to 401(k) and 403(b) accounts has been increased to $22,500. For participants over age 50, there is an additional catch-up contribution of $7,500, for a total of $30,000. IRA contribution limits have also been increased to $6,500 ($7,500 for those over 50). These pre-tax contributions reduce your taxable income.
- Review any HSA savings. Contribution limits for Health Savings Accounts have also seen increases. The total for individuals in 2023 is $3,850 and for a family is $7,750. These are also pre-tax deferrals that can reduce your taxable income in the 2023 filing year.
The 2023 changes to the income tax brackets as well as savings limits are intended to help offset some of the pain of inflation felt by many Americans. To discuss how you can take advantage of these changes to benefit your individual tax situation, please reach out to schedule a time discuss.
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