Everyone is talking about the big increase to military retirement pay and Social Security. That's not the only thing (besides your bills) that is changing due to inflation. A lot of things related to your taxes have changed too. Some help. Some hurt. Here is a summary.
Changes that Help
In most cases inflation increases things that help you. The following should help you out:
- The limits for deferrals to qualified retirement accounts (401(k), 403(b) and TSP) have increased significantly. If you are younger than 50, you'll be able to contribute up to $22,500 (a $2,000 increase). If you're 50 or older, you can contribute an additional $7,500 (an increase of $1,000) for a total of $30,000. Combined employer and employee contributions cannot exceed $66,000
- You can now contribute up to $6,500 to an IRA (an increase of $500). Catch-up contributions for those 50 and older remain at $1,000.
- The income limits for contributions to IRAs also increased. The phase out for contributions to a Roth IRA increased to $218,000 - $228,000 of Adjusted Gross Income (AGI) for those Married Filing Jointly (MFJ). For single taxpayers the phase-out range is $138,000 - $153,000 AGI. If you are covered by a retirement plan at work, your spouse can make deductible contributions to a Traditional IRA subject to the same income limits as for Roth contributions. If you're covered by a retirement plan at work, you're likely above the income limit to make deductible contributions to a Traditional IRA (and if you are below the limit, Roth contributions are probably a better idea)
- Tax brackets are increasing. So, more of your income will be taxed at a lower rate
- For MFJ the standard deduction will increase to $27,700 and for Single taxpayers the standard deduction will be $13,850. This one is actually a toss-up. If you don't itemize, it helps you out. If you do itemize, less of your mortgage interest (or other deductions) do you any good.
- The Gift Tax annual exclusion increases to $17,000
Changes that don't Necessarily Help
- Income subject to Social Security tax will increase to $160,200, a $13,200 jump. That means that if you earn at or over the limit, you'll pay an additional $818.40 in Social Security taxes in 2023.
Things that Won't Change
There are a few things that won't change and more likely than not, they are a stealth tax increase.
- The phase out for the American Opportunity Credit and the Lifetime Learning Credit remains at $160,000 - $180,000 AGI for MFJ and 1/2 of that for those filing Single. That means fewer Americans will qualify for the credit
- The phase-out for deducting rental real estate losses remains at $100,000 - $150,000 AGI. This one has been the same since I started renting real estate (1996).
- The threshold for the additional Medicare Tax remains at $250,000 of wages for MFJ and $200,000 of wages for Single taxpayers.
- The threshold for the Net Investment Income Tax is unchanged at $250,000 AGI for MFJ and $200,000 AGI for Single
Military Finances are Different
As we used to say, "you write your own OPR". In the same vein, "you write your tax return in 2023, not when you file it", so make sure you take advantage of the things you can and be aware of the things you can't. Or if you'd like to chat with us about how we can help you with your finances and/or taxes, use the button below to schedule a free initial consultation.
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