The IRS Announces New Tax Numbers for 2023
Each year, the IRS updates the existing tax code numbers for items that are indexed for inflation. This includes the tax rate tables, many deduction limits, and exemption amounts. The following are the tax numbers impacting most taxpayers which will be in effect beginning January 1, 2023.
Understanding your potential tax liability for next year will help you make decisions in 2021 to lower the taxes you pay. You can also Schedule a Meeting with Purposeful Strategic Partners to discuss multi-decade tax planning, including advice on managing lifetime taxes related to Required Minimum Distributions, Roth conversions, sales of significant assets, and more.
Looking for the 2022 Tax Tables?
If you are looking for the tax tables for filing your 2022 taxes by April of 2023, click the button below. This article references the 2023 tax tables for the tax forms to be filed in April 2024.
2023 Income Tax Brackets
The most important updates for many Americans are the tax brackets; the changes to the income ranges for the marginal tax rates. Each bracket was adjusted slightly upward based on inflation.
The most common tax filing statuses are shown in the image for the 2023 tax brackets which you will use to calculate your taxes to be filed in 2024. (Numbers are rounded to the nearest dollar where needed.) Every tax bracket got a little bump up in size, allowing more of your money to be taxed at lower rates.
Understanding the tax brackets will help you to estimate your potential tax liability next year. Armed with your estimated taxes, you then have until December 2023 to make charitable contributions, invest for retirement, or do other things which can help manage and lower your tax liability.
Also included in the table is the actual income taxes you will owe based on your income level. The table provides the two most common filing statuses: Married Filing Jointly, and Single Individuals.
For those who file either Married Filing Separate or Head of Household, your tables are at the bottom of the article.
Deductions & Exemptions
In addition to the tax rates, the IRS upped many of the deductions and exemptions Americans use to lower their taxable income calculation, and therefore their taxes. Below are some of the most common deductions and exemptions Americans can take.
Standard Deduction for 2023
$27,700 – Married filing jointly and surviving spouses
$20,800 – Head of Household
$13,850 – Unmarried individuals
$13,850 – Married filing separately
The Standard Deduction is an amount every taxpayer is allowed to take as a deduction from their income to reduce their taxable income. The Standard Deduction is used by individuals and families who do not itemize or who have itemized deductions less than or near the Standard Deduction. Under the 2018 tax law, many itemized deductions were eliminated or greatly limited while the Standard Deduction was increased. As a result, the vast majority of people will be filing using the Standard Deduction, even if those who itemized in the past.
Addition for Blind & Aged
The additional standard deduction for those age 65 and over or the blind is $1,500 for 2023 or $1,850 if the taxpayer is also unmarried and not a surviving spouse. Individuals who are both aged and blind may receive both standard deductions increases.
Personal Exemption
$0 – Personal Exemption, one for each qualifying household member
The current tax code sets a $0 Personal Exemption amount for the purposes of calculating taxable income, effectively removing the Personal Exemption for tax filers. The Personal Exemption is still used in other areas of the tax code, i.e. for setting the gross income limitation for a qualifying relative.
Estate Tax Exemption
$12,920,000 – The amount a person can pass on to their heirs which is exempt from estate taxes.
The estate tax is effectively a tax on dying, where the Federal Government takes up to 37% of the value of the estate (everything owned by the deceased). Fortunately, the estate tax credit creates an amount you can pass on to your heirs without being taxed.
Annual Exclusion for Gifts
$17,000 per person, per person
You can also avoid the estate tax by gifting small amounts each year to your heirs. The Gift Tax Annual Exclusion increased by $1,000 in 2023. Gifts of less than the annual gift exclusion are passed on tax-free, while gifts over the exemption amount could be subject to the unified gift and estate tax.
What per person, per person means: The gift exclusion applies to each person an individual gives a gift to. So a married couple with a son and daughter could gift a total of $68,000 per year to their children. $17,000 from father to son; $17,000 from father to daughter; $17,000 from mother to son; and $17,000 from mother to daughter. If the children were married, an additional $68,000 could be gifted to their spouses.
Alternative Minimum Tax (AMT)
Until recently, the Alternative Minimum Tax had, unfortunately, become the bane of the middle class because the exemption amount was not indexed for inflation. Middle-class households had ended up being the majority of the AMT taxpayers. The exemptions were indexed for inflation by the Obama Administration and increased by the Trump Administration, both of which greatly reduced the impact of the AMT on the middle class. It remains to be seen if the Biden Administration’s desired tax changes will impact the Alternative Minimum Tax.
The AMT offers fewer deductions, increasing the taxes owed by individuals. The AMT offers a much higher exemption than the traditional tax code, which is designed to avoid middle-class taxpayers from being hit by the AMT.
Exemption Amounts
$126,500 – Married or Surviving Spouses
$81,300 – Unmarried Individuals
$63,250 – Married Filing Separately
$28,400 – Estates and Trusts
Exemption Phaseouts Begin
Another change to the AMT designed to help avoid it hitting the middle class is the change to the exemption phase-out. The phase-outs are now significantly higher, reducing the chances middle-class individuals will be hit by the AMT. If your income is over the above amounts, you'll begin losing your exemption which will increase your AMT tax faster.
$1,156,300 – Married or Surviving Spouses
$578,150 – Unmarried Individuals
$578,150 – Married Filing Separately
$94,600 - Estates and Trusts
28% AMT Tax Bracket
Normally, AMT is taxed at a flat rate of 26%. For “high-income” taxpayers, however, a 28% tax is applied to income in excess of the following amounts.
Income over $220,700 – Joint Returns, individual returns, estates, and trusts.
Income over $110,350 – Married filing separately
Article Source: IRS.gov
https://www.irs.gov/pub/irs-drop/rp-22-38.pdf
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Joshua Escalante Troesh, CFP, is a Tenured Professor of Business and the founder of Purposeful Finance. He works with people across the country on their financial planning needs through Purposeful Strategic Partners, a fiduciary and fee-only financial advisor and a Registered Investment Advisor. He can be reached for comment at info@purposefulfinance.org