With three major pieces of tax legislation passed within the last three years, we have more nuances, more inflation adjustments, more expiring tax breaks, and more rules to follow than ever before. Stay on top of the details with our annual compilation of the various tax rates, thresholds, limitations and exemptions for the new year.
The ink was barely dry on the SECURE Act when coronavirus became an international tragedy, with a variety of stimuli passed in 2020 to try to address the economic challenges. In 2021, we ushered in a new president and a new set of proposed tax changes under the Biden administration.
As a result, we have seen three major pieces of tax legislation passed within the last three years, and with each piece of legislation, we have more nuances, more inflation adjustments, more expiring tax breaks, and more rules to follow. Taxpayers will need to be mindful, too, that numerous provisions from the TCJA were enacted only temporarily. Many are sunsetting at the end of 2025, while others were made permanent, meaning that taxpayers should be ever aware of their tax situation (and plan around it) lest they be in for a nasty shock come 2025.
Looking at the present moment, with inflation rates being the highest in several decades, the Internal Revenue Service (IRS) announced inflation adjustments for tax year 2023, and these are more impactful now than ever before. Some of the biggest adjustments made in history, they will change individual income tax brackets and increase some key tax deductions and credits for tax year 2023. Your clients can shield more money from taxes next year, thanks to inflation, and automatic annual adjustments mean higher thresholds for income tax brackets and a heftier standard deduction. Needless to say, with all of these changes and more to come, understanding taxes matters now more than ever.
Tax brackets, tax rates and standard deductions
The big news is the tax brackets and tax rates for 2023. On a yearly basis, the Internal Revenue Service (IRS) adjusts more than 60 tax provisions for inflation to prevent what is called “bracket creep.” Bracket creep occurs when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, rather than through any increase in real income.
There are still seven tax brackets in 2023, along with a 0% tax rate. Some clients will get into lower brackets because of inflation adjustments. This is the largest move from 2022 to 2023, where more funds can be passed through the lower tax brackets. That’s all scheduled to end after 2025. That’s because many of the provisions of recent tax legislation are due to sunset in 2025.
For 2023, the standard deduction will increase by 7% from the previous year. This is the largest automatic inflation-adjusted increase to the standard deduction since 1985, according to the Wall Street Journal.
Table 1 shows how the brackets break out by filing status, and the trust and estates schedule is shown at the end of the table.
|Table 1: 2023 Tax Rate Schedule|
|Taxable income ($)||Base amount of tax ($)||Plus||Marginal tax rate||Of the amount over ($)|
|Married filing jointly and surviving spouses|
|Head of household|
|Married filing separately|
|Estates and trusts|
|10,551 to 14,450||2,126.00||+||35.0||10,550.00|
Standard deduction. The standard deduction, shown in Table 2, increases slightly from $25,900 in 2022 to $27,700 in 2023, for married-filing-jointly filers; from $12,950 to $13,850, for single and married-filing-separately filers; and from $19,400 to $20,800, for head-of-household filers.
Personal exemption. Remember that the ability to take personal exemptions has been eliminated, a change which to some degree tempers the benefit of the higher standard deduction.
|Table 2: 2023 Standard Deductions and Child Tax Credit|
|Filing status||Standard deduction|
|Married filing jointly and qualifying widow(er)s||$27,700|
|Single or married filing separately||$13,850|
|Head of household||$20,800|
|Dependent filing own tax return||$1,250*|
|Additional deductions for non-itemizers|
|Blind or over 65||Add $1,500|
|Blind or over 65, unmarried and not a surviving spouse||Add $1,850|
|Child Tax Credit|
|Credit per child under 17||$2,000
|Income phaseouts begin at AGI of:||$400,000 joint
$200,000 all other
*Cannot exceed greater of $1250 or $400 plus the individual’s earned income
The additional standard deduction amounts went up slightly from 2022. Thus, people who are blind or over age 65 receive an extra deduction of $1,500 each in 2023 up from $1,400 in 2022. The additional deduction also increases from $1,750 in 2022 to $1,850 in 2023 for unmarried taxpayers.
For 2023, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,250 or the sum of $400 and the individual’s earned income (not to exceed the regular standard deduction amount).
Deduction for medical expenses. Taxpayers who itemize can claim a deduction for medical expenses if those expenses exceed 7.5% of adjusted gross income. Consider decreasing taxable income and bunching medical expenses to exceed the floor.
SALT and sales tax deduction is capped. The tax law limits the total deduction for property taxes, state and local income taxes, and state and local sales taxes to $10,000 a year. This amount is not adjusted for inflation and applies to single and married filing jointly, although married taxpayers filing separately only get $5,000.
Long-term care premiums. Taxpayers who are paying for long-term care generally can deduct a portion of their premiums as a qualified medical expense. The deductible varies based on the taxpayer’s age and is subject to the 7.5% floor for medical expenses. See Table 3 below for the specific amounts, which are slightly higher than they were in 2022.
|Table 3: 2023 Deductibility of Long-Term-Care Premiums on Qualified Policies|
|Age before close of tax year||Amount of LTC premiums that qualify as medical expenses in 2022|
|40 or younger||$480|
|41 to 50||$890|
|51 to 60||$1,790|
|61 to 70||$4,770|
Limitations on deductions. Before the Tax Cuts and Jobs Act, the Pease and PEP provisions reduced the value of itemized deductions for wealthy taxpayers. The law ends the limitation on deductions, but only until the end of 2025.
Capital gains and qualified dividends
Capital gains and dividends. Tax rates on long-term capital gains and qualified dividends generally are unchanged, at 0%, 15% and 20%, but the brackets for the rates will change. For 2023, the 15% rate applies to capital gains or dividends that push taxable income above $89,250 for joint returns and surviving spouses, $59,750 for heads of household, $44,625 for single and married-filing-separately taxpayers and $3,00 for estates and trusts.
The 20% rate applies to long-term capital gains or qualified dividends that propel taxable income past $553,850 for joint filers and surviving spouses, $523,050 for heads of household, $492,300 for single filers, $276,900 for married-filing-separately filers and $14,650 for estates and trusts.
Remember that exceptions also apply for art, collectibles, and section 1250 gains (related to depreciation).
Tax on net investment income. Some high-income taxpayers owe the net investment income tax (NIIT) of 3.8%, which is levied on the lesser of net investment income or modified adjusted gross income (MAGI) over $200,000 for single or $250,000 for married filing joint (see thresholds in Table 4). These amounts remain unchanged from 2022. Net investment income includes taxable interest, ordinary dividends, capital gains and other income categories, and some expenses can be subtracted.
|Table 4: 2023 Tax Rates on Long-Term Capital Gains and Qualified Dividends|
|Taxable income||Tax rate|
|If taxable income falls below $44,625 (single/married-filing separately), $89,250 (joint), $59,750 (head of household), $3,000 (estates)||0%|
|If taxable income falls at or above $44,625 (single/married-filing separately), $89,250 (joint), $59,750 (head of household), $3,000 (estates)||15%|
|If taxable income falls at or above $492,300 (single), $276,900 (married-filing separately), $553,850 (joint), $523,050 (head of household), $14,650 (estates)||20%|
|3.8% tax on lesser of net investment income or excess of MAGI over|
|Married, filing jointly||$250,000|
|Married, filing separately||$125,000|
Alternative minimum tax. The AMT has been adjusted for inflation and will continue to affect fewer and fewer taxpayers under the TCJA. In 2022, the exemption amounts rise to $126,500 for married filing jointly taxpayers, up from $118,100 in 2022; $81,300 for single filers, up from $75,900 in 2022; and $63,250 for filers who are married filing separately, up from $59,050 in 2022. The exemption amount for estates and trusts rises to $28,400 from $26,500 in 2022.
Kiddie tax. The kiddie tax applies to unearned income for children under the age of 19 and college students under the age of 24. Unearned income is income from sources other than wages and salary, like dividends and interest. The exemption from the kiddie tax for 2023 will be $2,500 ($2,300 in 2022). A parent will be able to elect to include a child’s income on the parent’s return for 2023 if the child’s income is more than $1,250 and less than $12,500 ($1,150 and $11,500 in 2022)
Gifting and estates
Estate tax. Estate, gift and GST exclusions rise from $12,060,000 in 2022 to $12,920,000 in 2023. The top federal estate-tax rate remains 40%. The IRS has issued final regulations that there will be no “clawback” at sunset, so you should discuss potential gifting strategies with all high-net-worth clients. Remember that these higher lifetime exemption amounts are due to “sunset” at the end of 2025.
Gift tax. The value of gifts one person can give another without reporting it on a gift tax return increases to $17,000 in 2023 from $16,000 in 2022. Unlimited payments for tuition and medical expenses are permitted.
Education and other credits
Education credits and deductions. As in 2022, the law continues to allow up to $10,000 a year in 529-plan distributions to pay for qualified private-school K-12 education costs (excluding homeschooling), a provision that might encourage taxpayers to focus on 529 plans rather than Coverdells. (Previously, for a 529 distribution to be qualified, it had to be used for higher-education costs, whereas K-12 expenses have been a qualified expense for Coverdell plans.)
The law also allows rollovers from 529 plans to ABLE accounts for disabled beneficiaries until December 31, 2025. But, make sure to check with the specific state, because some states are decoupling from the federal and not treating the 529 plan withdrawal for K-12 expenses as a qualified distribution, and they will also have specific rules in connection with ABLE account rollovers.
American Opportunity Tax Credit. The same as in 2022, in 2023, taxpayers with qualified education expenses can reduce their tax bill by up to $2,500 (of which $1,000 is refundable) thanks to the AOTC, if their modified adjusted gross income doesn’t exceed $80,000 ($160,000 for married-filing-jointly filers). At that income level, the credit starts to phase out.
Lifetime Learning Credit. This nonrefundable credit is worth up to $2,000. In 2023, the Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns). The Lifetime Learning Credit offers two main advantages over the American Opportunity Tax Credit. First, the LLC can be claimed for an unlimited number of tax years while the AOTC is limited to four tax years per eligible student. Second, the student doesn’t need to be pursuing a degree, while the AOTC requires the student to be pursuing a degree or other credential.
Child tax credits and alimony
Child tax credit. The child tax credit remains the same as in 2022. It stays at $2,000 per qualifying child and is refundable up to $1,600, subject to phaseouts. Phaseouts will begin with adjusted gross income of more than $400,000 for married taxpayers filing jointly and more than $200,000 for all other taxpayers (also unchanged from 2022).
Alimony. Alimony is no longer taxable to the recipient nor is it deductible for the payor after 2018 as a result of the Tax Cuts and Jobs Act. Reconsider property settlements and alimony for all divorces going forward.
Education incentives and accounts
Student loan interest deduction. The student loan interest deduction allows an above-the-line deduction of up to $2,500. The deduction starts to phase out once modified adjusted gross income reaches $75,000 ($155,000 for married-filing-jointly filers) and is unavailable to taxpayers with modified adjusted gross income higher than $90,000 ($185,000 for joint filers).
Tax-free savings bond interest. In 2023, the ability to enjoy tax-free interest from savings bonds that are redeemed to pay for higher-education costs starts to phase out for taxpayers with modified adjusted gross income of $91,850 ($137,800 for joint filers). This is higher than in 2022, when income phaseouts began at $85,800 ($125,650 for joint filers).
Coverdell Education Savings Accounts. Parents and others who want to save for a student’s education costs can contribute a maximum of $2,000 to these accounts (contributions are after-tax, like a Roth IRA), and then withdraw the contributions and investment earnings tax-free if the funds are used to pay qualified education expenses. The maximum contribution stays the same in 2023 as in 2022, and starts to phase out for taxpayers with modified adjusted gross income of $95,000 ($190,000 for married-filing-jointly filers).
Business income and QBI
Schedule C and pass-through business income, aka, QBI Deduction. Don’t forget about the 20% deduction against qualified business income for pass-through entities and business owners who file a Schedule C. Phaseouts for those in a specified trade or business begin at $364,200 for married filing jointly (or $182,100 for single).
Retirement plan rules
Retirement plan contribution limits. Retirement plans (see Table 5) continue to remain in the news and are the subject of much debate. The total amount that employers and employees combined can contribute to a 401(k) or similar defined-contribution plan rises to $66,000 in 2023, up from $61,000 in 2022. The maximum annual employee contribution increases from $20,500 in 2022 to $22,500 in 2023. The catch-up contribution for people aged 50 and older increases to $7,500 in 2023 up from $6,500 in 2022. The limit on how much compensation can be counted under a qualified plan rose to $330,000, from $305,000 in 2022. Meanwhile, the basic annual benefit limit for defined-benefit increased to $265,000 from $245,000 in 2022. As a reminder, RMDs do not start until age 72.
New parent withdrawals. Following the birth or adoption of a child, a new parent (or parents) may now withdraw up to $5,000 each from his or her account without incurring the usual 10% penalty on early withdrawals. Parents can make this withdrawal up to one year after the birth of the child and may put the money back into the retirement fund at a later date.
|Table 5: 2023 Retirement Plan Contribution Limits|
|Plan type||Contribution limit|
|Annual compensation used to determine contribution for most plans||$330,000|
|Defined-contribution plans, basic limit||$66,000|
|Defined-benefit plans, basic limit||$265,000|
|401(k), 403(b), 457(b), Roth 401(k) plans, elective deferral limit||$22,500|
|Catch-up provision for individuals 50 and over, 401(k), 403(b), 457(b), Roth 401(k) plans||$7,500|
|SIMPLE plans, elective deferral limit||$15,500|
|SIMPLE plans, catch-up contribution for individuals 50 and over||$3,500|
Individual retirement accounts. In 2023, taxpayers who save for retirement in a traditional IRA or Roth IRA are limited to a $6,500 contribution (up from $6,000 in 2022), plus a $1,000 catch-up for those 50 and older. However, there is no age limit on your ability to contribute to an IRA, as long as you have earned income.
Deductible IRA. Taxpayers who aren’t participating in a retirement plan at work generally can fully deduct their contributions to a traditional IRA. However, income thresholds limit the deductibility of such contributions for taxpayers who are participating in a workplace plan (or if their spouse participates). Table 6 details the income thresholds, which are slightly higher in 2023, due to IRS inflation adjustments.
|Table 6: Individual Retirement Accounts—2023 Income Limits for Deduction of Contributions|
|IRA type||Contribution limit||Catch-up at 50+||Income limits|
|Traditional deductible||$6,500||$1,000||If covered by a plan:
$73,000–$83,000 single, HOH
$0–$10,000 married filing separately
If one spouse is covered by a plan:
$138,000–$153,000 single, HOH
$0–$10,000 married filing separately
|Roth conversion||No income limit|
IRA contributions. As stated in Table 6, income thresholds limit who can contribute directly to a Roth IRA (there are no such income limits on Roth conversions). Consider “back-door” Roth conversions or partial conversions if your client doesn’t qualify, assuming they are still available.
Tax-free IRA distributions to charity, or qualified charitable distributions (QCDs). People aged 70½ or older can make tax-free distributions of up to $100,000 from an IRA directly to a charity. The distribution will decrease taxable income and, with limited exceptions, should be used by all those over 70½ who plan to make charitable contributions.
Health savings accounts
Health savings accounts offer the rare tax trifecta: Contributions are made pretax, enjoy tax-free investment returns, and money comes out tax-free if used for qualified medical expenses. The downside is that such accounts currently are available only to those who are enrolled in a high-deductible health plan, which can pose steep up-front costs for consumers. For 2023, the minimum annual deductible for a qualifying health plan is $1,500 for an individual plan (up from $1,400 in 2022) and $3,000 for family coverage (up from $2,800 in 2022). The maximum deductible contribution to an HSA in 2023 is $3,850 for individuals. For family coverage, the maximum deductible contribution is $7,750, and there is a $1,000 catch-up contribution available for ages 55 and older.
|Table 7: Health Savings Accounts|
|Annual limit||Maximum deductible contribution||Expense limits (deductibles and co-pays)||Minimum annual deductible|
|Catch-up for 55 and older||$1,000||N/A||N/A|
As in 2022, in 2023 the income brackets used to determine Medicare premium surcharges for high-income retirees will be indexed to inflation. As a result, some retirees may experience an increase in their Medicare surcharge costs next year. The standard premium amount in 2023 is $164.90, though some Part B beneficiaries pay less due to the “hold harmless” provision that protects them if Social Security benefits rise slower than Medicare premiums. The people who pay the higher figure include: those signing up for Medicare Part B for the first time, those who don’t receive Social Security benefits, those who don’t have their Part B benefits automatically deducted from their Social Security benefits, and others. Meanwhile, some higher-income beneficiaries will pay more than the standard premium, as shown in Table 9. Remember that Medicare premiums apply to income from two years prior, and that decisions that are made today will have a future impact.
|Table 8: 2023 Medicare Deductibles|
|Aspect of coverage||Deductible cost|
|Part B deductible||$226|
|Part A (inpatient services) deductible for first 60 days of hospitalization||$1,600|
|Part A deductible for days 61–90 of hospitalization||$400/day|
|Part A deductible for more than 90 days of hospitalization||$800/day|
|Table 9: 2023 Medicare Premiums and IRMAA Surcharge|
|2021 MAGI Income||IRMAA Surcharge|
|Single||Married filing jointly||Part B premium||Part D income adjustment|
|$97,000 or less||$194,000 or less||$164.90||–|
|More than $500,000||More than $750,000||$560.50||$76.40|
Social Security beneficiaries will be glad to learn that they’re set to receive an 8.7% cost of living adjustment to their benefits, an increase from the 5.9% cost of living adjustment from 2022. The estimated maximum monthly benefit is $3,627 in 2023, up slightly from $3,345 in 2022. The maximum taxable wage base in 2023 is $160,200, up from 2022’s $147,000. The tax rate remains the same: 6.2% each for the employer and employee (12.4% for self-employed people).
Tax on Social Security benefits. Sometimes retirees are surprised to find their Social Security benefits are taxed. Table 10 below shows the income thresholds at which benefits start to be taxed. To figure their bill, beneficiaries must compute their “provisional” income, which is also known as “combined” income. Combined income = Income + Nontaxable interest + Half of Social Security benefits. And don’t forget the Social Security Tax torpedo where benefits are taxed at a significantly higher rate when a taxpayer reports additional income.
|Table 10: Social Security—2023 Income Thresholds for Taxation on Benefits|
|Estimated maximum monthly benefit if turning full retirement age (FRA) of 66 in 2023||$3,627|
|Retirement earnings exempt amounts||$21,240 under FRA
$56,250 during year you reach FRA
No limit after FRA
|Tax on Social Security benefits: Income brackets|
|Filing status||Provisional income*||Amount of Social Security subject to tax|
|Married filing jointly||Under $32,000
Up to 50%
Up to 85%
|Single, head of household, qualifying widow(er), married filing separately and living apart from spouse||Under $25,000
Up to 50%
Up to 85%
|Married filing separately and living with spouse||Over 0||Up to 85%|
SS tax paid on income up to $160,200
|Percent withheld||Maximum payable tax|
|Employer pays||1.45%||Varies per income|
|Employee pays||1.45% plus 0.9% on income over $200,000 (single) or $250,000 (joint)||Varies per income|
|Self-employed pays||2.90% plus 0.9% on income over $200,000 (single) or $250,000 (joint)||Varies per income|
Source: Social Security Administration
*Provisional income = adjusted gross income (not including Social Security) + tax-exempt interest + 50% of Social Security benefit
Full retirement age. The so-called “full” or “normal” retirement age for claiming unreduced Social Security benefits is 66 for people who were born from 1943 through 1954. For those born after 1954 but before 1960, full retirement age is 66 plus some number of months, depending on the birth year. For those born in 1960 or later, full retirement age is 67.
The earliest anyone can claim benefits is age 62, though claiming before one’s full retirement age leads to a permanently reduced monthly benefit amount. On the other hand, delaying benefits past one’s full retirement age can lead to higher benefits—as much as 8% a year higher up to age 70. The decision of when to claim benefits is a complex one; the best answer will vary depending on an individual’s circumstances. Note that even if someone delays Social Security benefits, he or she should sign up for Medicare at age 65 to avoid a late-enrollment penalty.
Retirement earnings test. When Social Security beneficiaries earn money from working, they risk a temporary reduction in benefits if their earnings exceed a certain amount—this only applies to people who are younger than their full retirement age. For every $2 in earnings above an income threshold, $1 is withheld from their benefits. That earnings threshold is $21,240 in 2023. In the year that the beneficiary reaches full retirement age, $1 of benefits is withheld for every $3 of earnings above $56,250 in 2023, up from $51,960 in 2022. There is no reduction in benefits after full retirement age. Once the beneficiary reaches full retirement age, the benefit is adjusted to remove the actuarial reduction for those months in which benefits were withheld.
Our tax code has evolved from a two-page form in 1913 to over 75,000 pages of complex rules that are constantly changing. Keeping up with these changes will enable you to better advise clients in this very important area. And as we have in the past, Horsesmouth will be running side by side with you to address these tax law changes and how they impact your clients.