It’s common for the IRS to make minor adjustments to tax laws, contribution amounts, and deduction limits each year to keep up with inflation. But the upcoming changes in 2023— triggered by historic inflation levels— are even larger than usual. As a result, high earners and retirees in particular may see a smaller tax bill than they would expect, and find greater opportunities to maximize their earnings.
Here are the biggest contribution and deduction increases in place for 2023— and how they can benefit you:
1. The standard deduction will be higher than ever
As a quick refresher, your standard deduction is the amount of income that isn’t taxed. Every person is allowed to subtract the standard deduction amount from their annual earnings, and they’re only required to pay income tax on earnings above that amount.
In 2021, the standard deduction amount for married couples was $25,100. In 2022, that number increased to $25,900. That’s a modest increase, but still beneficial.
In 2023, persistent inflation has prompted the IRS to increase the standard deduction amount to a full $27,700 for married couples. And for singles, the standard deduction amount is increasing from $12,950 to $13,850. These are significant increases!
If you’re over 65, the standard deduction adjustment is even more significant because you’re allowed to deduct an additional $1,850 from your taxable income. When you add it all up, that means couples over 65 will owe $0 in taxes on their first $31,400 of income. That’s huge!
At Cook Wealth, our advisors can help you create a personalized plan for retirement that maximizes these deductions while allowing you to maintain the same or similar lifestyle you had while working. In fact, some individuals may find they can retire sooner than expected by maximizing these tax changes and customizing their investment plan.
2. The gift tax exclusion is going up
The gift tax exclusion is increasing from $16,000 per individual to $17,000. That means every person is now able to give up to $17,000 in gifts— including cash, property, and material goods— to someone else without having to file a gift tax form. For couples with large estates to pass down, this change is significant because each spouse can gift each of their children up to $17,000 per year, reducing the amount of inheritance they’ll have to pay tax on in the future.
This is another situation where having a dedicated financial planning and tax team is a major benefit. Your advisor can help you determine how much you should be giving away each year and in what forms, to maximize your wealth, minimize your tax burden, and set your children up for success.
3. You can contribute even more to your HSA
Healthcare gets more expensive every single year. Luckily, an increasing number of individuals— especially young, healthy people— are taking advantage of high-deductible health insurance plans that come with an HSA option.
With the recent tax changes, the annual HSA contribution limit is increasing to $7750 per year for families, or $3850 for singles. This allows you to contribute even more pre-tax dollars to this account, where your money can grow and be withdrawn from without additional taxes.
At Cook Wealth, we believe HSAs are one of the best ways to save your hard-earned money. Anyone at any income level, as long as they’re eligible for an HSA account, can contribute the maximum yearly amount to this account, lowering their tax liability. The funding rolls over from year to year, so even if you don’t need it right away, it’s there for you when you do. And because you can choose to invest your HSA dollars, and the money grows tax-free, it’s a great way to stash money now for future medical expenses. For high earners, the tax benefits that come with an HSA are especially valuable.
4. The withholding limits are increasing for 401(k), IRA, and Roth IRA accounts
The last significant tax changes coming up in 2023 are increases to how much you can contribute to your retirement accounts.
- The limit on how much you can contribute to your Roth IRA and IRA accounts is increasing from $6,000 to $6,500 per individual, plus an additional $1,000 for individuals over 50 years old
- For 401(k) accounts, the limit is increasing from $20,500 to $22,500— a record-breaking jump
In total, individuals over 50 can now contribute a full $30,000 to their IRA, Roth IRA, and 401(k) accounts, giving you a great opportunity to catch-up on your retirement savings plan while really shrinking your tax burden.
Don’t forget to reset your payroll to take advantage of these higher contribution limits! Most companies don’t automatically adjust your earnings to max out this benefit, but when you meet with a Cook Wealth advisor, we’ll help you take the first step towards meeting your retirement goals.
Got more 401(k) questions? Read our recent article: Your 7 Biggest 401(k) Questions, Answered!
At Cook Wealth, our joint financial and tax advising team helps clients maximize their earnings while minimizing their tax liability
Throughout the year, not just during our annual reviews, we’re thinking about ways to help you maximize your earnings, minimize your taxes, protect your legacy, and prepare for the future. We look for ways to reduce your tax liability in your high earning years, particularly right before retirement, so you can retire when you’re ready and enjoy your next season of life.
Our proactive approach is unique in this industry. But it’s just another way we help our clients live life empowered.
When it comes to managing your taxes, you need an expert team you can trust. That’s why the experienced tax and wealth advising team here at Cook Wealth offers comprehensive services for one competitive fee. See our full list of included services here.