Important Numbers and Tax News for 2023
It is hard to believe 2022 is almost over! It’s been a bumpy ride for consumers as high inflation reared its ugly head for the first time in over 40 years. The good news is that it has been steadily decreasing since its peak in June 2022. Some more good news is that tax changes and contribution limits have also increased at a higher rate than over the past several years. However, the bad news is that certain favorable tax incentives have not been extended.
I am writing the following as an update to my December 2021 post about 2022 tax and congressional updates. I will refer to the most common tax filing statuses, single and MFJ (Married Filing Joint).
Student Loan Interest Deferment Extended (Yet Again)
The last deferment was supposed to be the grand finale, but due to some challenges to Biden’s $10k and $20k student loan cancellation from a few Republican-led states, the President has chosen to defer payments yet again through June 2023. While federal loan payments do not have to be made, you can still continue to pay at a 0% rate, meaning every dollar will be put towards the principal, reducing your balance by the same amount.
The Expanded Child Tax Credit Is Gone
The 2021 Expanded Child Tax Credit increased the usual $2,000 per dependent child to $3,600 for children under age 6 and $3,000 for children ages 6-17. So far, this has not been extended for tax year 2022. All other dependents remain at $500.
Health Savings and Retirement Plan Contribution Limits Increase
All annual retirement plan contribution limits have increased in 2023. The SIMPLE IRA limit is now $15,500, up from $14,000, and the SEP IRA is up an additional $5,000 to $66,000, or 25% of net earnings, whichever is less. The 401k, 403b, and 457b annual limits are now $22,500. Remember that only the 457b allows you to contribute up to the annual maximum to both a 457b and a 401k, SIMPLE IRA, or 403b. As an example, Taylor can contribute $22,500 to a 457b and $22,500 to a 401k if her employer(s) offer both. For those over age 50, the catch-up amount is now $7,500, up from $6,500 last year.
In addition, annual limits for HSAs (Health Savings Accounts) increased by $200 to $3,850 for individuals and $7,500 for families. HSAs are only available with high-deductible health plans and offer an unprecedented triple federal tax benefit. They can be used to pay for out-of-pocket health care costs or used as an investment and withdrawn for any purpose at age 65 or older with no penalty.
The Mega Backdoor Roth IRA is still available, although this could change at any moment, so if you're eligible, you may want to take advantage soon. A mega backdoor Roth IRA allows those whose employer permits after-tax contributions and in-service withdrawals to convert after-tax money to a Roth IRA. You will pay taxes only on the gains. These accounts are advantageous for high earners who are able to max out other retirement plans and are not eligible to contribute directly to a Roth IRA due to income limits. For 2023, the Roth IRA income phaseout starts at $138,000 for singles and $218,000 for those who are MFJ.
Tax Brackets and Other Updates
Inflation has also been kind to federal tax brackets. Remember, the brackets are progressive, meaning the last dollar of income you earn is taxed higher than the first. Your effective tax rate is typically less. For example, Rachael is single and her taxable income is $100,000 in 2022. She pays 10% tax on income up to and including $11,000. She pays 12% on anything over that until she reaches $44,726, and then the rate becomes 22% and so on. The graduating rates continue until she reaches $100,000.
The standard deduction has gone up to $13,850 for singles and $27,700 for MFJ. However, Congress has not extended the $300 and $600 “above-the-line” cash deduction for charities. This means you will need to itemize to receive a charitable deduction.
And finally, for those selling stocks or an investment property, the Long-Term Capital Gains and Dividends rate is 0% for singles with taxable income less than $44,626 and $89,251 for MFJ. This means if you have held a taxable investment for one year or longer, you will not pay any taxes on the gains under those amounts. After that, 15% applies. Once you get above $492,300 (single) and $553,850 (married), you are taxed at 20%. These rates are still well below the income tax rates at those levels of income.
There are other changes I have not specifically mentioned, but many of the most common items are mentioned here. Remember to review your tax situation each year (ideally before the new year) to ensure you are prepared and there are no surprises. Better yet, consult with a tax professional or financial planner to review your situation to determine how these changes may affect you and what might be the best strategy heading into next year.