Financial Fact: Retirement and Tax Numbers for 2023

While inflation may have hurt the grocery budget, it has advantages when it comes to paying your 2023 taxes. This is due to the IRS using the consumer price index to measure inflation and define tax brackets, a practice that began in 2017. Across the board there have been increases in deductions, but especially for those over 65.

The standard minimum deduction has risen for all taxpayers. See the chart below for details.¹

Standard Minimum Deductions for 2023

Tax brackets have been expanded which allows people to earn more money in 2023 and stay in a lower bracket.

The allowable contribution amount to tax-free retirement plans also increased. If over 65, IRA contributions in 2023 can be as much as $6,500 and if over age 50, $7,500. This is a $500 increase from last year. However, there are income limits for Roth IRAs. There are no income limits to traditional or other kind of IRAs.²

There is also a $2,000 increase in the allowed amount contributed to a 401k or 403b. This is the highest increase since the mid-1980s.³ Pre-tax contributions can now be as high as $22,500 and employee and employer combined contributions have increased $5,000 to a max amount of $66,000. If over 50 the annual catch-up amount increased $1,000 to a max of $7,500.⁴

The estate and gift exemptions are another area often under-utilized, to save on taxes. In 2023, the amount that can be given away has increased almost $900,000 and is now $12.92 million. Double this amount if married. The numbers may revert to $5 million in 2026 so now is the time to take advantage of this increase for these exemptions.

There are three tiers of gifting:

• The first tier is annually giving up to $17,000 to any 10 people, an increase of $1,000 over 2022. This is best done with a check to avoid any IRS issues.⁵ Remember your spouse can also gift $17,000 to 10 people annually.
• The second tier is paying tuition or medical bills. It can be any school tuition from kindergarten to universities. The same applies with medical bills, for any provider including individual doctors as well as hospitals. In both cases, the stipulation is the monies must be paid directly to the institution and not the person benefiting.
• The third tier, and the only tier that cuts into the $12.92 million exemption amount, is any gift not falling into the first two categories.

Gifting has several other perks. Giving money to others removes assets from both your estate and annual income while also removing the appreciation the monies would have accrued in your accounts. The money is also tax free to the recipient.

The downside to the tax exemption changes is that it will be harder to itemize deductions, tax payments, mortgage interest and charitable contributions in 2023. Be sure to consult your tax professional to be sure about the changes that apply to you.

1. https://www.bairdwealth.com/insights/wealth-management-perspectives/2022/11/ratcheting-up-inflation-adjustments-to-your-2023-taxes/

2. fool.com/retirement/plans/ira/income-limits/#:~:text=If%20you%20exceed%20the%20income,benefit%20from%20tax-free%20growth.

3. https://www.bairdwealth.com/insights/wealth-management-perspectives/2022/11/ratcheting-up-inflation-adjustments-to-your-2023-taxes/

4. https://www.fidelity.com/learning-center/smart-money/401k-contribution-limits

5.https://www.forbes.com/sites/christinefletcher/2023/02/01/8-tips-for-tax-free-gifting-in-2023/?sh=1540227a4a99