Tax Planning in 2023: Tax Rates and Inflation Adjusted Figures

Tax Planning in 2023: Tax Rates and Inflation Adjusted Figures

The IRS and the Social Security Administration have released 2023 inflation-adjusted figures for more than 50 tax provisions. In addition to a 8.7% cost-of-living adjustment (COLA) for Social Security beneficiaries, details about adjustments to tax rate schedules, exemptions and various thresholds for deductions and credits were announced. The tax year 2023 adjustments generally are used on tax returns filed in 2024.

Tax Rate Tables

The highest marginal tax rate for individuals of 37% applies in 2023 to taxable income over $693,750 for married couples filing jointly (up $45,900 from 2022) and $578,125 for single taxpayers (up $38,225 from 2022). See the end of this article for all of the individual, and the estate and trust income tax rate tables for 2023.

The thresholds related to the 3.8% Medicare tax on unearned income and the 0.9% Medicare tax on wages and self-employment income remain at $250,000 for married couples filing jointly and $200,000 for single filers (these thresholds are not subject to annual inflation adjustments). Estates and trusts enjoy a slight increase in the 3.8% Medicare tax threshold, however, because that threshold is equal to the dollar amount at which the highest income tax bracket begins ($14,450 for 2023).

The 0% long-term capital gains rate for individuals applies in 2023 to taxable income not exceeding $89,250 for married couples filing jointly (up $5,900 from 2022) and $44,625 for single taxpayers (up $2,950 from 2022). The 15% long-term capital gains rate applies to taxable income between $89,251 and $553,850 (married taxpayers filing jointly), or to taxable income between $44,626 and $492,300 (single taxpayers). The 20% maximum long-term capital gains rate applies to taxable income over $553,850 for married couples filing jointly (up $36,650 from 2022) and $492,300 for single taxpayers (up $32,550 from 2022). As always, “ordinary income” represents the first layer of income; the long-term capital gains rate is based on the next layer of income that consists of long-term capital gains.

Alternative Minimum Tax (AMT)

For 2023, the AMT exemption increases from $118,100 to $126,500 for married couples filing jointly and from $75,900 to $81,300 for single filers. The AMT exemption is reduced by 25% of the amount by which alternative minimum taxable income in 2023 exceeds $1,156,300 for married couples filing jointly ($578,150 for single taxpayers).

For 2023, the 28% AMT rate applies to excess alternative minimum taxable income above $220,700 for married couples filing jointly and for single filers ($110,350 for married taxpayers filing separately).

Itemized Deductions and Standard Deduction

The 2023 standard deduction for married couples filing a joint return is $27,700 (up $1,800 from 2022). For single individuals and married couples filing separate returns, the standard deduction is $13,850 for 2023 (up $900). The 2023 standard deduction for heads of household increases to $20,800 (up $1,400).

Child Tax Credit

The amount of the child tax credit that may be claimed in 2023 for each qualifying child is $2,000. The child tax credit begins to phase out for married couples filing a joint return with modified adjusted gross income in excess of $400,000, or $200,000 for all other taxpayers. The child tax credit and the phase-out levels are not indexed for inflation. For lower-income taxpayers, a portion of the child tax credit for each qualifying child is refundable, and the refundable portion in 2023 is $1,600.

Estate and Gift Tax

For 2023, the lifetime exclusion from estate and gift tax has increased from $12,060,000 to $12,920,000. The annual gift tax exclusion in 2023 has increased from $16,000 to $17,000. Gift splitting allows married couples to give up to $34,000 to a person in 2023 without making a taxable gift. The exclusion for gifts to a spouse who is not a citizen of the United States increases $11,000 to $175,000 for 2023.

Education

The Hope Scholarship credit (American Opportunity Tax Credit) is equal to 100% of the amount of qualified tuition and related expenses not in excess of $2,000, plus 25% of those expenses that exceed $2,000 but do not exceed $4,000. Because the eligible expenses are not indexed for inflation, the maximum credit remains $2,500. This credit begins to phase out for single individuals whose modified adjusted gross income (MAGI) exceeds $80,000 and at $160,000 for married couples filing joint returns (these amounts also are not adjusted for inflation).

For tax years beginning in 2023, the Lifetime Learning Credit also phases out at these same MAGI levels, which are no longer adjusted for inflation.

The $2,500 maximum deduction for interest paid on qualified education loans begins to phase out for single individuals with MAGI in excess of $75,000 and for married couples filing joint returns with MAGI in excess of $155,000 in 2023. The deduction is completely phased out for taxpayers at 2023 MAGI of $90,000 for single individuals and $185,000 for married couples filing joint returns.

Kiddie Tax

For children under the age of 18 at the end of the tax year (or full-time students younger than 24), the first $1,250 of unearned income in 2023 is not taxed (an increase of $100 over 2022). The next $1,250 is taxed at the child’s marginal tax rate, with anything above $2,500 taxed to the child using the marginal tax rate of the parents.

Alternatively, a parent may elect to include a child’s unearned income in the parent’s income and to calculate the kiddie tax on the parent’s tax return.

Foreign Earned Income

For individual taxpayers who work overseas, the amount of foreign earned income that may excluded from taxation increases from $112,000 to $120,000 in 2023.

Limits for Qualified Retirement Plans

Several types of qualified retirement plans, including defined benefit accounts, 401(k)s, and other defined contribution plans, are subject to contribution or distribution limitations.

Defined Contribution Plans

The limits on elective deferrals to 401(k), 403(b), certain 457 plans, and the federal government’s Thrift Savings Plan is increased to $22,500 for 2023 (up $2,000 from 2022). The limit on annual additions to other types of defined contribution plans is increased in 2023 to $66,000 (up $5,000).

Defined Benefit Plans

The maximum amount a defined benefit plan may credit to a participant each year is increased in 2023 to $265,000 (up $20,000 from 2022).

Compensation Related Limits / Definitions

The annual compensation limit relating to the maximum compensation counted for an eligible employee in a qualifying plan is increased by $25,000 to $330,000 for 2023. The limitation used in the definition of a highly compensated employee is increased by $15,000 to $150,000. The dollar limitation concerning the definition of key employee “officers” in a top heavy plan is increased by $15,000 to $215,000 for 2023. The compensation amount relevant to the definition of control employee for fringe benefit valuation purposes in 2023 increases to $130,000 for officers and increases to $265,000 for other employees.

Individual Retirement Accounts (IRAs)

Eligible taxpayers can contribute up to $6,500 to an IRA (excluding catch-up contributions discussed below), which is a $500 increase for 2023. For taxpayers who are active participants in an employer-sponsored retirement plan, the deduction for making contributions to a traditional IRA is phased out for single taxpayers who have MAGI in 2023 between $73,000 and $83,000, up $5,000 from the 2022 amounts. For married couples filing a joint return, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $116,000 to $136,000 in 2023, up $7,000 from the 2022 amounts. For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple’s 2023 income is between $218,000 and $238,000, up $14,000 from 2022 levels.

The MAGI phase-out range for taxpayers making contributions to a Roth IRA in 2023 is $218,000 to $228,000 for married couples filing jointly, up $14,000 from the 2022 amounts. For single taxpayers, the income phase-out range in 2023 is $138,000 to $153,000, up $9,000 from 2022 levels.

SIMPLE Retirement Accounts

The elective deferral limit for a SIMPLE plan is increased by $1,500 to $15,500 in 2023. The $3,500 catch-up amount for SIMPLE plans represents a $500 increase for 2023.

Social Security Wage Base Increases for 2022

The maximum amount of earnings subject to Social Security increased from $147,000 to $160,200 (up $13,200) in 2023. The Social Security Administration also reported that Social Security and Supplemental Security Income benefits will increase by 8.7% for 2023.

Inflation Adjustments

We have summarized the most common inflation adjustments here. For more information:

2023 Tax Rate Tables

Married Individuals Filing Joint Returns and Surviving Spouses

If Taxable Income Is:

The Tax Is:

Not over $22,000

10% of the taxable income

Over $22,000 but not over $89,450

$2,200 plus 12% of the excess over $22,000

Over $89,450 but not over $190,750

$10,294 plus 22% of the excess over $89,450

Over $190,750 but not over $364,200

$32,580 plus 24% of the excess over $190,750

Over $364,200 but not over $462,500

$74,208 plus 32% of the excess over $364,200

Over $462,500 but not over $693,750

$105,664 plus 35% of the excess over $462,500

Over $693,750

$186,601.50 plus 37% of the excess over $693,750



Unmarried Individuals (other than Surviving Spouses and Heads of Households)

If Taxable Income Is::

The Tax Is:

Not over $11,000

10% of the taxable income

Over $11,000 but not over $44,725

$1,100 plus 12% of the excess over $11,000

Over $44,725 but not over $95,375

$5,147 plus 22% of the excess over $44,725

Over $95,375 but not over $182,100

$16,290 plus 24% of the excess over $95,375

Over $182,100 but not over $231,250

$37,104 plus 32% of the excess over $182,100

Over $231,250 but not over $578,125

$52,832 plus 35% of the excess over $231,250

Over $578,125

$174,238.25 plus 37% of the excess over $578,125



Married Individuals Filing Separate Returns

If Taxable Income Is:

The Tax Is:

Not over $11,000

10% of the taxable income

Over $11,000 but not over $44,725

$1,100 plus 12% of the excess over $11,000

Over $44,725 but not over $95,375

$5,147 plus 22% of the excess over $44,725

Over $95,375 but not over $182,100

$16,290 plus 24% of the excess over $95,375

Over 182,100 but not over $231,250

$37,104 plus 32% of the excess over $182,100

Over $231,250 but not over $346,875

$52,832 plus 35% of the excess over $231,250

Over $346,875

$93,300.75 plus 37% of the excess over $346,875



Heads of Households

If Taxable Income Is:

The Tax Is:

Not over $15,700

10% of the taxable income

Over $15,700 but not over $59,850

$1,570 plus 12% of the excess over $15,700

Over $59,850 but not over $95,350

$6,868 plus 22% of the excess over $59,850

Over $95,350 but not over $182,100

$14,678 plus 24% of the excess over $95,350

Over $182,100 but not over 231,250

$35,498 plus 32% of the excess over $182,100

Over $231,250 but not over $578,100

$51,226 plus 35% of the excess over $231,250

Over $578,100

$172,623.50 plus 37% of the excess over $578,100



Estates and Trusts

If Taxable Income Is:

The Tax Is:

Not over $2,900

10% of the taxable income

Over $2,900 but not over $10,550

$290 plus 24% of the excess over $2,900

Over $10,550 but not over $14,450

$2,126 plus 35% of the excess over $10,550

Over $14,450

$3,491 plus 37% of the excess over $14,450



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Tax Planning in 2023: Tax Rates and Inflation Adjusted Figureshttps://www.cbiz.com/Portals/0/Images/Hero-TaxPlanningIn2023.jpg?ver=y-w25NStd7jX_LY8M-NbJA%3d%3dhttps://www.cbiz.com/Portals/0/Images/Thumbnail-TaxPlanningIn2023.jpg?ver=J78dfar8idtqIr0fx24qDw%3d%3dThe IRS and the Social Security Administration have released 2023 inflation-adjusted figures for more than 50 tax provisions. 2022-11-08T18:00:00-05:00

The IRS and the Social Security Administration have released 2023 inflation-adjusted figures for more than 50 tax provisions.

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