Barbara O’Neill, Ph.D., CFP®, AFC®
Martie Gillen, Ph.D., MBA, AFC®, CFLE
Income tax season for tax year 2022 (1/1/22-12/31/22) ends April 18, 2023. Whether taxpayers have already prepared their 2022 tax return, or it is still a work in progress, it is not too early to begin tax planning for 2023.
Below is a summary of four 2023 tax law changes for Personal Financial Managers to share with military families:
1. Higher Standard Deduction
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- The largest ever automatic adjustment to the standard deduction since inflation indexing began in 1985 took effect in 2023. The standard deduction is $13,850 for singles and married filing separately, $20,800 for heads of households, and $27,700 for married couples filing jointly. Blind taxpayers and those age 65+ receive an additional $1,850 (single) and $1,500 (married; $3,000 if both spouses qualify).
- Tax Planning Implication: A higher standard deduction shelters more income from taxes but makes it more difficult to itemize deductions, especially for married couples.
2. Tax Bracket Income Ranges
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- Thanks to high inflation in 2022, the income ranges for the seven 2023 federal income tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) increased by 7%. Taxpayers’ marginal tax rate is the tax rate paid on their last dollar of income; i.e., the highest tax bracket that their income falls into.
- Tax Planning Implication: A higher income range for tax brackets means that taxpayers may be taxed at a lower tax rate than they were previously or, at least, not move up into a higher tax rate income bracket.
3. Retirement Savings Contribution
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- Again, as a result of 2022 inflation rates, the largest ever increase in retirement savings plan contribution limits took effect in 2023. The maximum contribution limit for tax-deferred employer retirement savings plans, including the Thrift Savings Plan for service members, is $22,500 with a $7,500 catch-up contribution ($30,000) for workers age 50+.
- Tax Planning Implication: Workers who can afford it can save $2,000 (under age 50) or $3,000 (age 50+) more than they could in 2022. “Supersavers” will welcome this opportunity but should be mindful of the need for tax diversification (i.e., tax-deferred, taxable, and tax-free retirement savings).
4. Saver’s Credit
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- Income limits for this tax credit to encourage retirement savings by low- and moderate-income households were also adjusted for inflation. Tax credits are 10%, 20%, or 50% of a worker’s contribution, depending on adjusted gross income (AGI). The maximum incomes that qualify are $36,500 for singles and married filing separately, $54,750 for heads of households, and $73,000 for married couples filing separately.
- Tax Planning Implication: The credit provides a valuable $1 for $1 reduction of tax liability. Workers who qualify and plan to contribute to a retirement plan should adjust their tax withholding accordingly.
For additional information, review the IRS Tax Season Alerts webpage.
Join us for our 2023 Tax Updates webinar where you can earn free continuing education credits and discover what service providers need to know to support military families this tax season.
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