Tax Updates for 2023

2022 has been an incredibly complicated year, to put it mildly. Between the ongoing effects of the COVID pandemic, a global energy crisis, rising interest rates, 40-year high inflation, and a slowdown in economic activity, uncertainty appears to be everywhere. Throw in changing tax laws to top things off and it’s hard to know what the right decisions are.

It’s important not to underestimate the significance of strategic tax planning as we move into 2023. One byproduct of generationally high inflation is that several tax code adjustments are notably higher.

Key Inflation Adjustments

The IRS recently announced the annual inflation adjustments for the 2023 tax year. Many key provisions, including the income thresholds for the federal tax brackets, will increase by roughly 7% to account for the 40-year high in inflation. As a result, most workers will see higher take-home pay starting in January. The income threshold for capital gains taxes will also increase by about 7%.

The standard deduction increases to:

• $13,850 for single filers (an increase of $900)
• $20,800 for head of household filers (an increase of $1,400)
• $27,700 for married couples filing jointly (an increase of $1,800)

According to the Tax Foundation, only 13.7% of taxpayers itemized deductions in 2019 (most recent data). Therefore, the increase in the standard deduction will benefit most taxpayers.

Planning pointer: Consider bunching charitable gifting – making several years’ worth of contributions in one year. This strategy could allow the taxpayer to itemize deductions during bunching years while taking the standard deduction in other years. One way to accomplish this is through a Donor Advised Fund. For more information, see our January 2019 article “Tax-Efficient Charitable Donations”.

Other Increases

• The IRS also made several other changes for the 2023 tax year: The annual exclusion for gifts will increase from $16,000 to $17,000.
• The basic estate tax exclusion for inheritances will increase from $12,060,000 to $12,920,000.
• The contribution limits for Health Savings Accounts are $3,850 for individual coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000.
• The maximum tax credit for qualified adoption expenses increases from $14,890 to $15,950.
• Taxpayers who contribute to a Health Flexible Spending Account, or FSA, can contribute up to $3,050 and, if allowed by their plan, carry over up to $610 into the next tax year.

Contribution Limits for Retirement Plans

The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500, up from $20,500.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, in these plans, participants who are 50 and older can contribute a maximum of $30,000, up from $27,000.

If you are interested in contributing the maximum amount into your company retirement plan for 2023, consider adjusting your contribution amount in January.

The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch up contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment and remains $1,000.

Required Minimum Distributions for Inherited IRAs

The Secure Act of 2019 drastically changed the rules for required minimum distributions (RMDs) from inherited retirement accounts. Most beneficiaries now need to withdraw money from an inherited account within 10 years after the owner’s death. The ability to “stretch” the IRA withdraws in annual installments over the beneficiary’s life expectancy has been eliminated except in a few cases. Only a few categories of eligible beneficiaries would still be allowed to use the life expectancy payout method.

The IRS language under the Secure Act did not specifically address whether annual withdrawals were required during the 10-year period. Therefore, beneficiaries could withdraw as much or as little as they wanted in the first nine years after the owner’s death, as long as they took 100% of the remaining balance in the 10th year. In February of this year the IRS issued proposed regulations interpreting the new RMD rules: annual distributions are required in year one through nine if the decedent died after their RMDs had already started.

Since the proposed regulations came well after the Secure Act’s effective date, the IRS recently issued Notice 2022-53. The notice grants relief for inherited IRA beneficiaries that did not take an RMD in 2021 or 2022. The IRS did not waive the RMD requirements for 2021 and 2022, it just said that it will not enforce the 50% excise tax on beneficiaries that did not take a distribution.

For 2023, inherited IRA beneficiaries will be required to take RMDs, and the 10-year withdrawal period was not extended. For example, if you received an inherited IRA from a decedent in 2020, you would need to take annual RMDs starting in 2023 and also deplete the account by the end of 10 year withdrawal period (2030).

Final Thoughts

Inflation has hit taxpayers hard this year, but the changes the IRS has made to 2023 taxes means workers can keep more money starting in January. No matter what tax bracket you fall into, it’s important to have a plan in place. Please contact your JMG advisor with any questions that you might have.   We invite you to share this article with others who may also find it helpful.

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