Even the Internal Revenue Service isn’t immune to the effects of inflation. In response to rising prices, the IRS is adjusting many income thresholds upward for tax-year 2023. This may reduce what many taxpayers will owe to Uncle Sam.
Here are some of the highlights.
Higher tax bracket limits
The ordinary income ranges for each federal tax bracket will rise, which may reduce tax bills for many Americans.
For example, if you’re married and filing jointly and your combined income of $180,000 puts you in the 24% federal tax bracket in 2022, you’ll move “down” into the 22% tax bracket in 2023 if your income remains the same or doesn’t rise above $190,750.
The two tables below compare the 2022 and 2023 federal tax bracket limits.
Higher standard deductions
If you’re unable to itemize deductions or your aggregated deductions don’t exceed the IRS standard deduction amount, you’ll get some relief next year. In 2023, the standard deduction for married couples will rise to $27,000, up from $25,200 in 2022. For single taxpayers and married couples filing individually, the standard deduction will rise from $12,950 in 2022 to $13,850 in 2023.
Higher earned income credits
In 2023, the maximum earned income tax credit amount will be $7,430 for taxpayers who have three or more qualified children, up from $6,935 for tax year 2022.
More generous estate and gift tax exclusions
In 2023, people can give up to $17,000 per recipient without gift tax implications, up from $16,000 for gifts made in 2022.
The basic estate tax exclusion for those who die in 2023 will rise to $12,920,000, up from $12,060,000 in 2022.
Increased Alternative Minimum Tax exemptions
The Alternative Minimum Tax (AMT) exemption for married couples filing jointly will rise from $118,110 in 2022 to $126,500 in 2023. For single filers, the AMT exemption will rise from $75,900 to $81,300. These exemptions will start to phase out for married couples with Alternative Minimum Tax Income (AMTI) of $1,156,300 or more and single filers with AMTI of $578,150 or more.
Higher out-of-pocket medical expenses for many health plan participants
Unfortunately, not all of this news is good. If you participate in a high-deductible-health plan (HDHP) at work, you may have to pay more of your own money for certain medical expenses. That’s because the IRS is raising minimum deductibles and maximum out-of-pocket amounts.
In 2023, the annual HDHP minimum deductible for families will rise $200 to $3,000 (self-only subscriber deductible minimums will increase $100, to $1,500). Annual HDHP maximum total out-of-pocket amounts for families will increase $900, to $15,000 (self-only subscriber limits will increase $450, to $7,500).
The good news is that Health Savings Account (HSA) participants will be able to make larger pre-tax contributions next year. HSA contribution limits for families will rise from $7,300 in 2022 to $7,750 in 2023. (Self-only HSA participants’ contribution limits will rise from $3,650 to $3,850.)
Weighing the impact of these changes
This is by no means an exhaustive list of IRS changes for 2023. For a complete list, visit the IRS web site.
Since these changes apply to the 2023 tax year, taxpayers won’t experience benefits in terms of lower tax bills or refunds until they file their 2023 tax returns in 2024. Even still, you may want to speak with your accountant or tax preparer to see if there is anything you should do to take advantage of these changes—or reduce their potential impact.
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This article was authored by Dan Flanagan and Jeffrey Briskin. Dan is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or dflanagan@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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