Internal Revenue Service releases list of cost-of-living adjustments for 2023

Jeff Witz, CFP, writes, "For individuals who file their taxes as single or head of household, the Roth IRA MAGI phaseout increased to between $138,000 and $153,000."

The Internal Revenue Service recently announced some of the largest cost-of-living adjustments in US history. High inflation numbers for much of 2022 led to a historic increase in Social Security benefits, retirement plan maximum contributions, and other items such as gifting and health savings account contributions.

The significant changes in these areas may require you to adjust how much you contribute to certain accounts and how you may approach your budget and tax strategies. To assist with this, here are the notable cost-of-living adjustments beginning in 2023.

Social Security. Beneficiaries will receive an 8.7% increase in their benefits.

Social Security wage base. The maximum amount of earned income on which employees must pay Social Security taxes was increased from $147,000 in 2022 to $160,200 in 2023.

Tax brackets. The tax rates remain the same, but the income brackets were increased.

Capital gains rates and income brackets. The capital gains rates remain the same, but the income bracket that determines the rate increased.

Maximum contribution amounts for 401(k), 403(b), 457(b), and thrift savings plans. The maximum amount thatcan be contributed to these accounts was increased to $22,500, up from $20,500 in 2022. The “catch-up” contribution amount for employees 50 years and older during 2023 increased from $6500 in 2022 to $7500 in 2023.

Traditional and Roth individual retirement account (IRA) maximum contribution amounts. The maximum amount that can be contributed to these accounts was increased to $6500, up from $6000 in 2022. The “catch-up” contribution remained $1000, so the maximum contribution amount for those 50 years and older is $7500.

Traditional IRA deduction income limits. For those covered by a workplace retirement plan (like a 401[k]), the phaseout range for being able to deduct traditional IRA contributions begins at a modified adjusted gross income (MAGI) of $73,000 and ends at $83,000 for single individuals. For married filing jointly, the phaseout range increased to between $116,000 and $136,000. If an IRA contributor is not covered by a workplace retirement plan but their spouse is, the MAGI phaseout range climbs to between $218,000 and $228,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phaseout range remains between $0 and $10,000.

Roth IRA contribution income limits. For individuals who file their taxes as single or head of household, the Roth IRA MAGI phaseout increased to between $138,000 and $153,000. For married couples filing their taxes jointly, the phaseout range begins at $218,000 and ends at $228,000. For married couples filing their taxes separately, the phaseout range remains at between $0 and $10,000.

Savings Incentive Match Plan for Employees (SIMPLE) IRA maximum contribution amount. The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $15,500 in 2023, up from $14,000 in 2022.

Simplified Employee Pension Plan IRA maximum contribution amount. The maximum Simplified Employee Pension PlanIRA contribution amount was increased to $66,000 with maximum countable compensation increased to $330,000.

Standard deduction. The 2023 standard deduction for single taxpayers and married filing separately increased $900 to $13,850. The new 2023 standard deduction for a married couple filing jointly will be $27,700. Taxpayers 65 years or older and married can add an additional $1500 to their standard deduction for 2023. This increases to $1850 if you are unmarried or a surviving spouse.

Alternative minimum tax exemptions and phaseout ranges. The exemption amounts for 2023 increased to $81,300 for singles and $126,500 for joint filers. The inflation-adjusted phaseout ranges for 2023 increased to $578,150 to $903,350 for single filers and $1,156,300 to $1,662,300 married joint filers. The amounts for joint filers are double those for married couples filing separately.

Gift tax exclusion amount. The annual exclusion for gifts increases from $16,000 in 2022 to $17,000 in 2023.

Estate tax exclusion. The basic estate tax exclusion for inheritances increased from $12,060,000 in 2022 to $12,920,000 in 2023.

As you plan for tax year 2023, we encourage you to speak with your certified public accountant. Beyond typical tax planning, they may offer additional strategies to minimize your tax impact throughout the year.