The Internal Revenue Service (IRS) recently announced the annual inflation adjustments for tax year 2023. As a result of these adjustments, more than 60 tax provisions have been altered. Below are highlights of some essential changes and what they mean to you.
Changes to Standard Deduction:
- $27,700 for married couples filing jointly, an increase of $1,800 from prior tax year
- $13,850 for single taxpayers and married individuals filing separately, an increase of $900 from prior tax year
- $20,800 for heads of households, an increase of $1,400 from prior tax year
Marginal Rates:
| Tax Rate | Single Filers | Joint Filers | Head of Household Filers |
|---|---|---|---|
| 10% | Under $11,000 | Under $22,000 | Under $15,700 |
| 12% | Over $11,000 | Over $22,000 | Over $15,700 |
| 22% | Over $44,725 | Over $89,450 | Over $59,850 |
| 24% | Over $95,375 | Over $190,750 | Over $95,350 |
| 32% | Over $182,100 | Over $364,200 | Over $182,100 |
| 35% | Over $231,250 | Over $462,500 | Over $231,250 |
| 37% | Over $578,125 | Over $693,750 | Over $578,100 |
The Alternative Minimum Tax:
The alternative minimum tax exemption amount for tax year 2023 is:
- $81,300 and begins to phase out at $578,150 for single filers ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300)
- The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption started to phase out at $1,079,800)
Wage Cap for Social Security:
- For 2023, the wage base for the 6.2 percent portion of social security tax, also known as old age, survivors, and disability insurance, is increased to $160,200. There is no wage cap for the 1.45 percent Medicare tax, also known as hospital insurance.
Additional Medicare Tax:
Higher-income workers may have to pay an Additional Medicare tax of 0.9%. This tax applies to individuals with wages and self-employment income exceeding:
- $250,000 for married taxpayers who file a joint return
- $125,000 for married taxpayers who file separate returns; and
- $200,000 for other taxpayers
Retirement Plan:
The 2022 and 2023 values for various retirement plan cost-of-living adjusted amounts are as follows:
| Description of Limit | 2022 | 2023 |
|---|---|---|
| Maximum Section 401(k) Salary Deferral | $20,500 | $22,500 |
| Catch-Up Contributions | $6,500 | $7,500 |
| Section 457(b) Plan Deferrals | $20,500 | $22,500 |
| Annual Compensation Limit | $305,000 | $330,000 |
| Dollar Limit on Annual Benefits in a Defined Benefit Plan | $245,000 | $265,000 |
| Dollar Limit on Annual Additions under a Defined Contribution Plan | $61,000 plus Catch-Up | $66,000 plus Catch-Up |
| Limits Used in Definition of Highly Compensated Employees Under 414(q) | $135,000 | $150,000 |
| Key Employee | $200,000 | $215,000 |
| Social Security Wage Base | $147,000 | $160,200 |
Earned Income Tax Credit:
The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers with three or more children, up from $6,935 for tax year 2022.
Qualified Transportation Fringe Benefit:
- For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and qualified parking increases to $300, up $20 from the limit for 2022.
Contributions to Health Flexible Spending Arrangements:
- For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
Medical Savings Account:
- For tax year 2023, participants who have self-only coverage must have a plan with an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022.
- The maximum out-of-pocket expense amount is $5,300, up $350 from 2022.
- For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022.
- For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.
Foreign Earned Income Exclusion:
- For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
Estate Tax Exclusion:
- Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
Annual Gift Exclusion:
- The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.
Adoption Credit:
- The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.
Items Not Affected:
By statute, certain items that were indexed for inflation in the past are currently not adjusted and unaffected by indexing. With that in mind:
- The personal exemption for tax year 2023 remains at zero, as it was for 2022. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- There is no limitation on itemized deductions for 2023, as in 2022, 2021, 2020, 2019, and 2018. The Tax Cuts and Jobs Act eliminated that limitation.
- The adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
If you would like to discuss any of these changes and their impact on your tax situation please do not hesitate to contact us.
