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TAXES:  Inflation Adjustments, Deduction Limits, and Optimization Tips

TAXES: Inflation Adjustments, Deduction Limits, and Optimization Tips

| November 22, 2022
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TAX INFLATION ADJUSTMENTS1

The Internal Revenue Service announced the tax year 2023 annual inflation adjustments, including the tax rate schedules and other tax changes.

The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.

The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400.
  • Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). The other rates are:
    • 35%, for incomes over $231,250 ($462,500 for married couples filing jointly);
    • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
    • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
    • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
    • 12% for incomes over $11,000 ($22,000 for married couples filing jointly);
    • The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
  • The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.
  • For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
  • 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
  • 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

 

Read the full list of tax adjustments for 2023 on the IRS website. 

 

RETIREMENT PLAN LIMITS2,3

Retirement plan contributions are tax deductible. By putting money aside in a tax-advantaged retirement account, you are saving for your future and also reducing your taxable income. And remember, you have until April 15, 2023, to make your 2022 IRA plan contributions!


ROTH PLANS

For Roth accounts, you can only contribute to them if you make less than a certain amount of money. This salary amount was increased for 2023. Note that your contributions may be phased out at certain income levels so it is best to speak with your financial or tax advisor about your specific situation.

 

YEAR-END TAX OPTIMIZATION TIPS

With the winter holidays just around the corner, the clock is ticking for taxpayers who want to minimize what they will pay next spring. Many money-saving tax strategies need to be implemented by December 31st to have an effect on tax filing in the spring.3

If you’re looking for ways to increase your savings and minimize the amount of federal income tax you'll pay for 2022, talk to your tax professional about implementing some or all of these savings and tax strategies:

    • DEFER INCOME: Consider opportunities to defer income to 2023, particularly if you think you may be in a lower tax bracket then.
    • ACCELERATE DEDUCTIONS: If you itemize deductions, making payments for deductible expenses before the end of the year (instead of paying them in early 2023) could make a difference on your 2022 return.
    • MAKE CHARITABLE CONTRIBUTIONS: You can generally deduct charitable contributions, but the deduction is limited to 60%, 30%, or 20% of your adjusted gross income (AGI), depending on the type of property you give and the type of organization to which you contribute. 
    • INCREASE WITHHOLDINGS: If it looks as though you’re going to owe federal income tax for the year, consider increasing your withholding on Form W-4 for the remainder of the year to cover the shortfall. 
    • MAXIMIZE RETIREMENT CONTRIBUTIONS: Deductible contributions to a traditional IRA and pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) can help reduce your 2022 taxable income. The window to make 2022 contributions to an employer plan generally closes at the end of the year, while you have until April 15, 2023, to make 2022 IRA contributions. 
    • TAKE YOUR RMD: If you are age 72 or older, you generally must take RMDs from traditional IRAs and employer-sponsored retirement plans. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.
    • YEAR-END INVESTMENT MOVES: If you have realized net capital gains from selling securities at a profit, you might avoid being taxed on some or all of those gains by selling losing positions. Any losses above the amount of your gains can be used to offset up to $3,000 of ordinary income or carried forward to reduce your taxes in future years.


 

We know that proper tax planning is unique to every individual, and one strategy may not work for all. Our tax preparation services can help you optimize your taxes. Our certified tax preparer can not only help guide you through tax law changes but can also make sure you aren't missing any deductions or credits.

The Tax Team provides the following services:

  • e-file
  • Same-day filing services
  • 1040, 1040EZ, 1040x, Schedule A, C, & D
  • Federal & State tax return preparation

 

Even if you didn't make all these money moves by December 31st for your 2022 taxes, you can start preparing to optimize your savings and taxes in 2023.

CONTACT our tax specialist today to get started tackling your taxes.



SOURCES:

  1. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
  2. https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
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