Introduction to 2023 Tax Policy Shifts
As 2022 ends, tax filing season approaches, but planning for 2023 tax policies is essential. These changes do not impact 2022 taxes due April 18, but they affect 2023 budgeting and retirement planning. Mark Steber, Chief Tax Information Officer at Jackson Hewitt Tax Services, emphasized that tax law changes can occur anytime and may even apply retroactively, underscoring the need for year-round awareness and consultation with tax professionals.
Tax law changes can be made any time during the year; and we’ve seen in recent years that they can even be retroactive.
Inflation-Adjusted Tax Brackets
The IRS annually adjusts federal income tax bracket thresholds for inflation. With inflation near four-decade highs, 2023 adjustments will be significant. Taxpayers may shift brackets, altering rates on portions of income. Progressive rates apply: higher earnings face higher rates. For reference, 2022 single filer brackets start at 10% up to $11,000, 12% over $11,000, 22% over $44,725, 24% over $95,375, 32% over $182,100, 35% over $231,250, and 37% over $578,125. Married joint filers see roughly doubled thresholds.
There’s a possibility that taxpayers could change tax brackets next year because of this, meaning they could also pay a different tax rate on some of their income.
Standard Deduction Increases
The IRS also inflates the standard deduction annually. About 90% of taxpayers claim it post-2017 Tax Cuts and Jobs Act, which doubled it, rather than itemizing mortgage interest, taxes, or donations. For 2023, it rises $900 to $13,850 for singles, $1,800 to $27,700 for joint filers, and $1,400 to $20,800 for heads of household. Those 65+ or blind qualify for extras based on status.
Higher Retirement Account Contribution Limits
Retirement account caps rise for 2023. Employer plans like 401(k), 403(b), 457, and Thrift Savings Plan allow $22,500 employee contributions, up $2,000; catch-up for 50+ reaches $7,500. IRAs cap at $6,500, up $500, covering traditional and Roth combined. Traditional IRA deduction phase-out shifts to $68,000-$78,000 for singles, $116,000-$136,000 for joint filers.
Earned Income Tax Credit Expansion
The EITC aids low- to moderate-income workers and families in reducing tax liability or boosting refunds. For 2023, no-child maximum is $600; one child $3,995; two $6,604; three+ $7,430, up from 2022's $6,935 top. The IRS offers an app to check eligibility and amounts.
Saver's Credit Adjustments
The Retirement Savings Contribution Credit, or Saver's Credit, provides up to 50% of contributions for qualifying retirement savers, favoring lower incomes. It phases out at $36,500 for singles (up $2,500) and $73,000 for joint filers (up $5,000). Those under $21,750 single or $43,500 joint get the full 50% credit.
