2023 Tax Trifecta

As we head into 2023, smart tax strategies will keep more money in your pocket now and down the road.  Here are three changes taking place and some ideas on how to optimize these new IRS rulings.

Tax Brackets

The amount of taxable income you can receive is going up in each tax bracket.  The IRS has adjusted them to address inflation.  With our graduated tax system, you pay different rates on taxable income.  For example, as married taxpayers, you start with paying 10% on your taxable income up to $22,000, then 12% for income up to $89,450 and on up the ladder. Here’s the skinny on the three middle brackets:

An additional $15,300 as a single person and $30,600 as a couple in the 35% bracket.

An additional $12,050 as a single person and $24,100 as a couple in the 32% bracket

An additional $6,300 as a single person and $12,600 as a couple in the 24% bracket

Planning strategies:  If you are in the “distribution season” of life, you may want to take more out of your IRA and fund a ROTH conversion if you have cash to pay the taxes and don’t need the cash flow. If you are in the “accumulation season”, consider contributing to ROTH IRA’s.  They are made in after tax dollars, but down the road, you will receive income tax free.

Standard Deductions

An estimated 90% of Americans choose taking the standard deduction versus itemizing on their tax return.  In 2023, we will see an increase.  Standard deductions are going up to $13,850 for a single person – a $900 increase with couple filing jointly increasing to $27,700 – a $1,800 increase.  If you are over 65, tack on another $1,500 per person.  If you are married and over 65, you will have $30,000 in your pocket before paying any taxes.

Planning strategy:  If you are charitably inclined, take advantage of “lump and clump”.  You can give either appreciated assets or cash to a Donor Advised Fund that exceeds your normal annual giving.  This would allow you, along with other deductible items (subject to IRS caveats) such as home mortgage, medical and dental expenses, certain taxes and more, to take a large itemized deduction in one year and then go back to standard deduction the following year.  The Donor Advised Fund is a 501C3 in itself that allows you to spread out your giving over time as you “advise” where you want it to go.

Contributions to Retirement plans.  If you are participating in an employer sponsored plan or an Individual Retirement Account, 2023 opens the door to additional contributions. These are pre-tax and then grow tax deferred for the period inside the account.  You will be able to get an additional 2,000 into your plan if you are maxing out your 401(k), 403(b) and most 457 plans.   For Traditional and Roth IRA’s you will be able to get $500 more dollars into them.  The income ranges for determining eligibility to make deductible contributions into the traditional or Roth IRA are all increasing in 2023.  Check with your financial and tax adviser to determine what is best for your situation.

Planning Strategy:  If your spouse is not working, you can still open a “Spousal IRA” as long as one of you has W-2 income.  Make sure you are setting money aside for both partners.  Discern whether a traditional or ROTH makes more sense given your particular planning needs.

The good, the bad, and the ugly –

We are in historically low tax brackets and how you manage your needs today and what is warranted down the road must take potential increases in taxes into consideration.  It is nice to get tax breaks today. You also want to build tax efficient buckets for distribution down the road.  If you think taxes are going to increase over time, you need to consider how your assets are positioned to serve you as you look at lifestyle, longevity, liquidity and legacy decisions.  Your financial life is as unique as you are and calibrating your financial tools with the current economic, political and legislative landscape will keep you headed toward accomplishing what is truly important to you.

Taxes aren’t ugly, they are indicative of financial success.  They can be managed wisely and legally to provide you with more freedom to use the money you have as an expression of your values.  Discuss your situation with your planning professionals.