2023 Tax Changes Every Taxpayer Needs to Know
Every year, the IRS updates tax brackets, deductions, income limits, and more. This is typically done to help keep pace with inflation.
While you may feel tempted to set aside these changes until tax season, they can impact decisions made throughout the year, such as your charitable giving strategies, withdrawal rate, and more.
Following a year of record-high inflation, the IRS has made some sizable tax changes. Here’s a look at the biggest changes that could impact your financial planning for 2023.
2023 Tax Brackets
To account for inflation and help taxpayers avoid “bracket creep,” the IRS has adjusted its tax brackets for 2023.
For single filers, the 2023 tax brackets are:[1]
10%: $0 to $11,000
12%: $11,000 to $44,725
22%: $44,725 to $95,375
24%: $95,375 to $182,100
32%: $182,100 to $231,250
35%: $231,250 to $578,125
37%: $578,125 and up
For joint filers, the brackets are:
10%: $0 to $22,000
12%: $22,000 to $89,450
22%: $89,450 to $190,750
24%: $190,750 to $364,200
32%: $364,200 to $462,500
35%: $462,500 to $693,750
37%: $693,750 and up
Should You Itemize or Take the Standard Deduction?
The 2017 Tax Cuts and Jobs Act significantly changed tax laws, including nearly doubling the standard deduction. As a result, around 90% of taxpayers choose to take the standard deduction since it can provide a greater tax benefit than itemizing.[2]
When determining which course of action is right for you, you’ll likely want to work with your financial advisor and accountant to determine if your deductions add up to an amount that exceeds the standard.
For 2023, the standard deductions are:[1]
Single and married filing separately: $13,850 (up $900 from 2022)
Married filing jointly: $27,700 (up $1,800 from 2022)
Head of household: $20,800 (up $1,400 from 2022)
Alternative Minimum Tax
The alternative minimum tax (AMT) is a tax system that runs parallel to the standard one. It has fewer deductions and exemptions than the standard system and is designed specifically for ultra-high earners. In fact, only around 200,000 taxpayers are required to use the AMT system.[3]
Those who may qualify for the AMT need to calculate their taxes twice, once using the standard system and again using the AMT system. They must pay the higher of the two.
When determining their alternative minimum taxable income (AMTI), taxpayers need to know their AMT exemption limit. This will help determine whether the AMT applies to them.
For 2023, the AMT exemption amount begins at $81,300 for single filers and $126,500 for joint filers. The phase-out range starts at $578,150, or $1,156,300 for married filers.[1]
If you think you may be subject to the AMT, your accountant and financial professional can help determine the next steps for calculating your potential 2023 tax obligation.
Earned Income Tax Credit
The Earned Income Tax Credit is designed to help low- to moderate-earners reduce their tax bill.
For the 2023 tax year, the IRS has raised the credit amount for qualifying taxpayers. This amount is based on the number of qualifying children a taxpayer includes on their return:[4]
Three children or more: $7,430
Two children: $6,604
One child: $3,995
No children: $600
Estate Tax Limit
The 2017 Tax Cuts and Jobs Act supersized the estate tax exemption limit, with an increase from $11 million to $22 million per couple.
In 2023, the exemption limit rises again, from $12.06 million to $12.92 million per individual, or $25.84 million per couple.[1]
As a reminder, the federal estate tax is at 40%—meaning any part of an estate above the exemption limit would be subject to up to 40% in estate tax.
Like standard income tax rates, the estate tax follows a progressive system. Rates range from 18% (on the first $0 to $10,000 over the exemption limit) to 40% (anything $1 million and above the exemption limit).[5]
Estate taxes at the federal and state levels can be complex, especially for those leaving behind sizable inheritances. Our fiduciary financial advisory firm helps clients manage their estate and taxes as part of their ongoing planning. You will want to work with your financial advisor and estate planning attorney to address potential tax obligations and develop an estate plan that best serves you and your heirs.
Stay Up to Date with Ongoing Tax Changes
Taxes have the potential to be one of your biggest expenses, but there are things you can do year-round to help reduce your obligations. Reviewing changes for the new tax year is a great place to start and is something you can do alongside your financial professional. Ideally, your advisor will provide proactive planning, as our firm does, to help minimize your tax burden and achieve your goals.
We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.
Sources:
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice. This commentary reflects the personal opinions, viewpoints and analyses of the Stordahl Capital Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management, Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.