Your Guide to 2023 Tax Changes

The beginning of 2023 is the perfect time to learn about the updates the IRS have implemented relating to 2023 tax brackets, deductions, and credits. 

The IRS makes adjustments to tax thresholds and other changes every year, however this year's adjustments have been more noticeable than other years. 

Most of the changes are intended to help ease the financial burden felt across different income brackets caused by high rates of inflation.

By reading up on these changes now, you can identify opportunities to make your money work harder throughout the year. This will give you a better chance of reaching your financial goals and minimizing your tax liability when you file in 2024.

7 Changes To Tax Brackets, Deductions, and Credits in 2023

Below you’ll find a concise overview which highlights the key changes and shows you where you should be focusing your energy. 

The 7 main 2023 tax changes to be aware of are as follows: 

1. Changes to 401(k) contributions 

2. Changes to IRA contributions 

3. Changes to HSA contributions 

4. Standard deductions will be higher

5. Marginal tax rate thresholds will change

6. The earned income tax credit will increase

7. Capital gains tax thresholds will shift

1. Changes to 401(K) Contributions

The amount that employees can contribute to their 401(k) is increasing for 2023. You’ll now be able to contribute $22,500, this is a $2,000 boost from the $20,500 limit set for 2022. These changes also apply to 403(b)s, Thrift Savings Plan, and some 457 plans.

The “catch-up contribution” limit for workers 50 and older also will increase to $7,500. That means employees in this age bracket can contribute a total of $30,000 to their 401(k) next year.

Contributing more to your 401(k) can help bring down your overall taxable income, therefore it's a good strategy for reducing your tax bill. The added benefit is that you’re saving more for your retirement in the process.

If your plan is to make the most of the contributions this year and max out, you should consider starting now and spreading your contributions out. 

2. Changes to IRA Contributions

The IRA contribution limit is increasing for both traditional IRAs and Roth IRAs to $6,500 next year. This is a $500 increase from 2022.

The catch-up contribution for those who are 50 or older remains at $1,000. So, if you’re in this age bracket, you can contribute a total of $7,500 to your IRA in 2023.

Contributing to your IRA can also have the same benefits as contributing to a 401(k) in that it brings down your overall taxable income. It also compounds interest at a tax deferred rate overtime, making your contributions worth more in the future. 

3. Changes to HSA Contributions 

In 2023 you can contribute more to your health savings account (HSA) with limits being raised here too. 

If your HSA covers only you as an individual, the new contribution limit is $3,850, which is a $200 increase from 2022. For HSAs that cover a family, the contribution limit is increasing to $7,750, a $450 increase from 2022. Individuals over 55 can also contribute an extra “catch-up” contribution of up to $1,000.

To qualify to contribute to an HSA plan in 2023 your plan must have a deductible of at least $1,500 for individual coverage, or $3,000 for family coverage. Annual out-of-pocket expense maximums cannot exceed $7,500 for self-only coverage and $15,000 for family coverage.

4. Standard Deductions Will Be Higher

You should also be aware that standard deductions are being raised in 2023. This is good news, if you take the standard deduction rather than an itemized deduction, as it will lower the amount of income you can be taxed on, making for a lower tax bill. 

The new deductions are now as follows: 

• $27,700 for married couples filing jointly, this has gone up from $25,900 in 2022. 
• $13,850 for single filers and married individuals filing separately, this has gone up from $12,950 in 2022. 
• $20,800 for heads of households, this has gone up from $19,400 in 2022.

5. Marginal Tax Rate Thresholds Will Change

Marginal tax rates have been adjusted for 2023 to combat the effects of inflation on individuals' take home pay.  

The rates themselves — 10%, 12%, 22%, 24%, 32%, 35%, and 37% —will remain the same, but the thresholds have changed. This means that to move toward a higher tax bracket, and pay more tax, you’ll have to earn more than you did last year. 

The new marginal tax rate - the rate of tax you pay on your income - thresholds are as follows:

These new rates are especially helpful if you found yourself at the top of one tax bracket last year, as you now have less chance of being pushed into a higher tax bracket. 

You’ll also benefit if you received a pay increase which pushed you towards a higher tax bracket yet, because of inflation, you didn’t see any increase to your take home income. 

6. The Earned Income Tax Credit Is Increasing

The earned income tax credit is designed to help low- and moderate-income workers with their taxes by reducing the amount they owe.

This credit will increase in 2023 to counter the impact of inflation. The amount will rise to $7,430 for taxpayers who have three or more qualifying children. That is $495 more than in 2022. 

To find out whether you qualify for this tax credit, you can take a look at the IRS’ online tool here. 

7. Capital Gains Tax Thresholds Will Shift

The IRS has increased the threshold for how long-term capital gains are taxed in 2023. If you are planning to sell any assets or investments that you’ve held for longer than a year, you’ll potentially pay less tax that you would have last year on your realized gains. 

On the following sums you’ll pay a zero-rate amount:

• $0 and $89,250 for married couples filing jointly
• $0 to $59,750 for heads of households
• $0 to $44,625 for married couples filing separately and single filers

The maximum 15% amount applies to gains between:

• $89,251 to $553,850 for married couples filing jointly
• $59,751 to $523,050 for heads of households
• $44,626 to $276,900 for married couples filing separately
• $44,626 to $492,300 for single filers

Anything above those upper limits is taxed at 20%. There has been no change to short-term capital gains and these will still be taxed as ordinary income.

Final Thoughts 

Tax regulations are constantly changing, and this year the changes have been more significant due to rising rates of inflation. In order to make the most of these changes and minimize your 2024 tax bill, you need to start preparing sooner rather than later. 

That preparation starts with knowing what is changing in 2023 and thinking about how taxes fit into your wider wealth management plan.

Contact your Entrust Wealth Partners advisor or contact our Entrust Wealth Partners office at (860) 838-3730 to start planning toward your financial goals for 2024 and beyond. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This material was prepared by Courtney Henry Consulting.