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The IRS has adjusted more than 60 tax provisions for inflation for the 2023 tax year, including retirement plan contributions, estate taxes, earned income tax credits and tax brackets. These adjustments could affect how much you save toward retirement and how to plan for your 2023 taxes, starting now—even though the changes won't affect your tax return until you prepare your 2023 taxes in the spring of 2024.
Retirement Plan Contribution Limits
Whether you contribute to an employer-sponsored 401(k) plan through work or fund your own individual retirement account (IRA) or Roth IRA (or both), increased contribution limits in 2023 will help you set aside more of your income in tax-advantaged retirement accounts.
401(k) and Employer-Based Retirement Funds
Employees who participate in a 401(k), 403(b) or other eligible employer-based retirement plan can contribute an additional $2,000 in 2023. The 2023 contribution limit is $22,500—up from $20,500 for 2022. The catch-up contribution for employees age 50 and over is also increasing from $6,500 to $7,500.
IRA and Roth IRA Contributions
The limit on annual contributions to IRAs and Roth IRAs will increase to $6,500, compared to $6,000 for 2022. The IRA catch‑up contribution limit for taxpayers 50 and older remains at $1,000.
Estate Tax Threshold
A person's estate is taxable when the assets left behind are worth more than a certain threshold amount. The 2023 IRS estate tax threshold, or basic exclusion amount, is $12.92 million, up from $12.06 million in 2022. Although most estates don't exceed the basic exclusion amount and aren't required to file taxes, estate planning strategies may help lower or eliminate tax liability when a deceased person's estate approaches the threshold amount.
Earned Income Tax Credit
In 2022, 31 million eligible taxpayers received earned income tax credits (EITC) totaling $64 billion. This refundable tax credit provides a bit of tax relief to qualifying low- to middle-income taxpayers. The average amount of EITC received in 2022 was $2,043.
EITC income limits and credit amounts are increasing in 2023. Maximum credits go to taxpayers with the lowest adjusted gross incomes and phase out as incomes increase. For the 2023 tax year, here is the maximum adjusted gross income you can have to qualify for any EITC, broken down by filing status and number of children or relatives you claim.
|2023 Earned Income Tax Credit Income Limits|
|Children or Relatives Claimed||Single, Head of Household or Widowed||Married Filing Jointly|
|3 or more||$56,838||$63,398|
Maximum EITC amounts are also increasing. Here's how 2023 maximums compare to maximum credits for 2022.
|2023 Maximum Earned Income Tax Credit Amounts|
|Children or Relatives Claimed||0||1||2||3 or more|
Tax Bracket Changes
The IRS uses marginal tax rates to calculate your income taxes. These marginal rates increase as your income rises, with progressively higher rates assigned to higher tax brackets. Marginal tax rates are consistent from 2022 to 2023: They range from 10% to 37%. However, tax brackets are being adjusted in 2023 to account for higher incomes. Below is a chart showing marginal tax rates and tax brackets for the 2023 tax year.
|2023 Marginal Tax Rates and Tax Brackets|
|Single||Head of Household||Married Filing Jointly||Married Filing Separately|
|10%||$0 - $11,000||$0 - $15,700||$0 - $22,000||$0 - $11,000|
|12%||$11,001 - $44,725||$15,701 - $59,850||$22,001 - $89,450||$11,001 - $44,725|
|22%||$44,726 - $95,375||$59,851 - $95,350||$89,451 - $190,750||$44,726 - $95,375|
|24%||$95,376 - $182,100||$95,351 - $182,100||$190,751 - $364,200||$95,376 - $182,100|
|32%||$182,101 - $231,250||$182,101 - $231,250||$364,201 - $462,500||$182,101 - $231,250|
|35%||$231,251 - $578,125||$231,251 - $578,100||$462,501 - $693,750||$231,251 - $346,875|
|37%||$578,126 or more||$578,100 or more||$693,751 or more||$346,876 or more|
Adjusted tax brackets could mean a slightly lower tax bill. For a single taxpayer with $70,000 in taxable income in both 2022 and 2023, adjusted tax brackets would provide tax savings of about $300.
The Bottom Line
These 2023 adjustments to the tax code won't affect you much until you're ready to do your 2023 taxes in early 2024. Even then, adjustments for inflation aren't meant to be revolutionary; they simply help you adjust your finances based on the cost of living.
If tax planning is part of an overall financial tune-up for you, you may want to consider the benefits of structuring your savings by goals, resetting your finances for inflation or checking up on your credit to help get your finances into optimal shape for the year to come.