Less exciting than a rare Portland snowstorm, yet more rewarding than shoveling a walkway, IRS tax and limit adjustments arrive in their own kind of flurry each year.
This year, amid the country’s highest inflation in a decade,* the IRS has bestowed an end-of-year gift of sorts upon taxpayers in the form of higher income tax bracket thresholds, retirement plan contribution limits, and gifting amounts.
While these increases may seem to reduce taxes, they don’t necessarily mean it’s time to break out the bubbly. For the most part, these changes are intended to counter inflation—but ‘tis better to keep up than fall behind.
Here’s what’s blowing in on the IRS financial front for tax year 2023.
Favorable Conditions for Gifting
If you plan to transfer wealth to family and friends next year, $17,000 (or $34,000 for married couples filing jointly) will be your limit for any number of recipients.
This is up $1,000 from 2022, and these gifts do not count toward your lifetime gift and estate tax exclusion, which is also increasing in 2023 from about $12 million to $12.92 million.
Keep in mind this exclusion is not guaranteed to last. Under the 2017 Tax Cuts and Jobs Act, the lifetime exemption will fall by more than half at the start of 2026, depending on future legislation.
Sunny Skies for Retirement Savings
As always, you can save on taxes by maxing out your 401k contributions—and these limits will increase in 2023.
If you’re still working and are under 50, you will be able to contribute $22,500 to your 401k in 2023. That’s a $2,000 jump from this year. Those 50 and older will be able to contribute $30,000 in 2023—a $3,000 jump over this year.
The overall limit for 401k contributions, which includes employer contributions, will increase in 2023 to $66,000 for workers under age 50 and $73,500 for workers 50 and over. These limits are up $5,000 from this year, with an extra $1,000 catch-up for older workers.
As we approach the end of 2022, now is a great time to make a plan to max out your 401k contributions for 2023 and also double-check you’ve contributed the maximum for this year, too.
Partly Sunny for Income Tax Brackets and Standard Deductions
As we mentioned earlier, income tax brackets will be adjusted for inflation in 2023, which may relieve the tax burden for some taxpayers.
But remember these increases do not translate to tax savings per se—the adjustments are essentially intended to take the edge off inflation’s bite.
Standard deductions will also be adjusted for 2023 tax returns. Single filers will see an increase of $900, bringing the standard deduction to $13,850. The Head of Household standard deduction increases by $1,400 to $20,800, and Married Filing Jointly increases by $1,800 to $27,700.
Keep in mind these changes do not apply to your 2022 tax return but rather come into play when you prepare your 2023 return.
Sun Breaks for Social Security
The 2023 cost of living adjustment for social security benefits reflects an increase of 8.7%, the largest increase since 1981. This increase will go into effect beginning January 2023.
Don’t Let the Sun Go Down on FSA Funds
In 2023, your flexible spending account (FSA) contribution limit goes up to $3,050, a relatively large $200 increase over this year.
The maximum FSA carryover amount also increases next year to $610 (from $570 in 2022). Because employers are not required to allow carryovers, be sure to double-check your company’s policy to avoid losing money at year’s end.
If you have excess funds in your 2022 FSA account, now is the time to purchase qualified out-of-pocket items such as contact lenses or prescription refills to get the most from this benefit.
Fair Skies for IRAs, 529 plans, and HSAs
While the April 15 deadline to maximize IRAs, 529 plans, and health savings accounts (HSAs) is months away, it’s not too early to plan ahead.
IRAs. In 2023, IRA contribution limits will increase to $6,500 for those under age 50 and $7,500 for those 50 and older. These are up $500 from 2022.
If you meet certain conditions, you may be able to deduct contributions to a traditional IRA—a boon to retirement savers.
If you or your spouse are covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on your filing status and income. Talk with your advisor or tax professional to assess your situation.
HSAs. In 2023, maximum contribution limits will be $3,850 for individuals and $7,750 for families, plus a $1,000 catch-up for those 50 and older.
Little Moves Add Up
Annual tax bracket and contribution limit changes may be measured like Portland snowfall—in inches, not feet. But keeping up with IRS adjustments can help you maximize your retirement savings, gift more to loved ones, and tamp down taxes.
Be sure to consult with your advisor or tax professional to make your 2023 financial forecast as bright as possible.
* The U.S. annual inflation rate was 7.1% for the 12 months ended November 2022. Current US Inflation Rates: 2000-2022 | US Inflation Calculator