Top tax changes for 2023

Amy Fontinelle

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Dec 28, 2022

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Tell you how much you can save for retirement and claim as a standard deduction in 2023.

Illustrate how marginal tax bracket changes might affect your take-home pay.

Highlight the importance of doing some tax planning early in the year.
 
     

Each year, the IRS reevaluates various dollar amounts in the tax code and considers adjusting them for inflation. While higher prices may continue to sting when you pay your electric bill or check out at the grocery store, at least the IRS isn’t piling on by keeping retirement account contribution limits and standard deductions the same.

You’ll be able to contribute about 7 percent more to your retirement accounts in 2023. You’ll also see a bump in your standard deduction and higher income limits for each tax bracket.

“The increases are not enormous, but anything helps during these tough financial times,” said Abby Eisenkraft, an IRS enrolled agent and the CEO of Choice Tax Solutions in New York City.

Here are the details you’ll want to know as you think about your financial plan for the coming year.

Standard deductions

Everyone gets a higher standard deduction in 2023 than in 2022. Your standard deduction is the amount of income you don’t owe any federal income tax on. With a higher standard deduction, you may owe less tax in 2023 if your income doesn’t increase by 7 percent or more.

  • For single people and married couples filing separate returns, it increases from $12,950 to $13,850.
  • For heads of household, it increases from $19,400 to $20,800.
  • For married people filing jointly, it increases from $25,900 to $27,700.

If you’re 65 or older, your additional standard deduction increases from $1,400 to $1,500 if you’re married and from $1,750 to $1,850 if you’re single or the head of household.

Tax brackets

Marginal tax rates are the same in 2023 as in 2022. The lowest rate is still 10 percent and the highest is still 37 percent. However, you’ll be able to earn more in 2023 before getting bumped into the next bracket.

Let’s say you were a single filer in 2022 and you earned $89,000, which put you near the top of the 22 percent federal tax bracket. In 2023, that bracket tops out at $95,375. None of your income will fall into the next tax bracket in 2023 unless you get a raise of $6,376 (about 7.2 percent) or more. This simplified example assumes you have no investment or other income.

Remember that your marginal rate only applies to the last dollars you earn, not to your entire income. (Related: How to reduce taxable income and avoid a higher tax bracket)

IRA contribution limits

Most people do not have enough saved for retirement, so increasing the retirement account contribution limits will help, Eisenkraft said.

Of course, you’ll need to max out your contributions to take full advantage of the higher limits.

In 2023, the most you can contribute to a Roth or traditional IRA (or a combination of the two) is 100 percent of your taxable compensation or $6,500 — whichever is lower. That’s an increase of $500 from 2022.

Consider setting up automatic contributions from your checking account to your IRA to save as much as possible for your future. If you get paid every two weeks, you’d want to transfer $250 per pay period to contribute $6,500 by year-end.

If you’re 50 or older, you can save even more by making an annual catch-up contribution of up to $1,000. Doing so would increase your biweekly automatic contributions to $288.46.

Roth IRA eligibility income limits

The IRS makes it easier to contribute the full amount to a Roth if your income isn’t too high.

  • If you file as single or head of household, you can’t contribute directly to a Roth IRA if your modified adjusted gross income exceeds $153,000 in 2023 (up from $144,000 in 2022). You’ll only be allowed to directly contribute a reduced amount (less than the maximum) once your income hits $138,000 (up from $129,000).
  • If you’re married and file jointly, the phaseout range is $218,000 to $228,000 in 2023 (up from $204,000 to $214,000).
  • If you’re married and file separately and you lived with your spouse at any time during the year, the phaseout range doesn’t adjust for inflation. It remains unchanged at $0 to $10,000. If you did not live with your spouse, the phaseout range is the same as if you filed as single or head of household.

You can still contribute indirectly to a Roth once your income exceeds the phaseout limit, however. You’ll just need to follow a few extra steps to take advantage of a technique colloquially called the backdoor Roth IRA. It’s actually a Roth IRA conversion using after-tax contributions to a traditional IRA.

Many people aren’t aware of strategies like this or don’t feel confident about executing them.

“Even if you prepare your own taxes, it’s a good idea to invest in an hour or two with a tax pro to discuss what financial moves you can make to hang on to more of your money and legally reduce your taxes,” Eisenkraft said. (Related: How a 401(k), Roth combo can help younger savers)

Traditional IRA deductible contribution income limits

If you or your spouse can contribute to a workplace retirement plan, the IRS limits how much pretax money you can put in a traditional IRA.

  • If you’re a single filer, the phaseout range in 2023 is $73,000 to $83,000 (up from $68,000 to $78,000 in 2022).
  • If you’re married and file jointly, the range is $116,000 to $136,000 (up from $109,000 to $129,000) if you can contribute to a workplace retirement plan.
  • If you’re married to someone who can contribute to a workplace retirement plan but you can’t contribute yourself, the phaseout range is $218,000 to $228,000 (up from $204,000 to $214,000 in 2022).
  • If you’re married filing separately and covered by a workplace retirement plan, the phaseout range remains at $0 to $10,000.

Related: 8 FAQs on traditional vs. Roth IRAs

401(k), 403(b), most 457 and Thrift Savings Plan contribution limits

In 2023, you’ll be able to contribute as much as $22,500 to whichever of these workplace retirement accounts (if any) you have access to. That’s $2,000 more than you could save in 2022.

If you get paid every two weeks and want to max out your contributions, you’ll want to have an additional $76.92 withheld from each paycheck, for a total of $865.38 per pay period.

As with IRAs, workers 50 and older can make catch-up contributions. For 2023, that amount increases to $7,500, up from $6,500 in 2022.

If you’re in this age group, can you set aside $1,153.84 from each paycheck to max out your retirement savings? It may require some sacrifice now, but with 10-plus years of investing those contributions in the stock market, you could see a significant return and enjoy a higher standard of living when you’re done working.

Solo 401(k) contribution limits

If you earn money as an independent contractor, a solo 401(k) can help you sock away a fortune for retirement — if your business income is high enough.

Not only can you contribute up to $22,500 as an employee — even though you’re the only one your business has — your company can also make a profit-sharing contribution of up to $43,500. That’s a maximum annual contribution of as much as $66,000 (up from $61,000 in 2022) — plus a $7,500 catch-up contribution if you’re 50 or older. However, you can't contribute more than you earn. These limits also apply if you’re employed by someone else.

Long-term capital gains taxes

When you sell an investment that you’ve held longer than one year and it’s gone up in value since you bought it, you have a long-term capital gain. The tax rate you’ll pay on these gains depends on your income.

For 2023, you’ll pay a 15 percent tax on long-term capital gains once your income hits $44,625 if you’re single, $59,750 if you’re head of household, and $89,250 if you’re married and file jointly. The respective income thresholds in 2022 were $41,675, $55,800, and $83,350.

If your income falls below those limits, you don’t owe any long-term capital gains tax. When your income gets into the mid-six figures, the tax rate hits 20 percent.

Conclusion

Finally, as you get ready to file your 2022 income tax return, keep in mind that many pandemic-related tax benefits have ended. As a result, you may owe more or have a smaller refund.

Taxes are just one component of a solid financial plan. For investment, retirement, and insurance planning that can help you enjoy a comfortable future, connect with a MassMutual financial professional for personalized guidance.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.