Every year the IRS and similar agencies make adjustments to important figures based on inflation. Given the high level of inflation at the moment, these updates may be larger than normal in 2023.

It is important to stay apprised of these ever-changing dynamics because these adjustments affect your ability to preserve your wealth, plan for retirement, and mitigate taxes. But individuals and non-professionals tend to lack the expertise (or time, for that matter) to do it on their own. To help you in this, I’ve compiled a quick guide to key retirement and tax planning updates for 2023.

Pro Tip: Remember, these adjustments are for tax year 2023, so they will generally apply to tax returns filed in 2024. Regardless, it’s good to know ahead of time so you can plan accordingly.

Adjustments Impacting Estate Planning in 2023

• Lifetime Gift and Estate Tax Exemption Increases to $12,920,000: The lifetime gift and estate tax exemptions are adjusted for inflation. For tax year 2023 the federal gift and estate tax exemption will increase from $12,060,000 to $12,920,000 (or $25,840,000 for a married couple). Be aware, however, that these amounts will decrease to $5M on January 1, 2026.
• Annual Gift Tax Exemption Increases to $17,000: As with the lifetime gift and estate tax exemption, the annual gift tax exemption (i.e. the amount one person can gift to another person annually without eating into the lifetime gift tax exemption) is scheduled to be adjusted for inflation. For 2023, the annual gift tax exemption will increase from $16,000 to $17,000 (or $34,000 for a married couple).

Adjustments Impacting Retirement Planning in 2023

A whole slew of numbers related to retirement benefits and contribution limits have been updated for 2023. For much of the population here in Florida perhaps the most important of these adjustments relates to Social Security and Supplemental Security Income (SSI) benefits, which will see an 8.7% cost-of-living adjustment (COLA), the highest adjustment since 1981.

This means that, on average, Social Security and SSI beneficiaries will receive an additional $140 or more per month. For a bit of perspective, the previous two years saw COLAs of 1.3% (2021) and 5.9% (2022), which increased average benefits by $20 and $92 respectively.

The new Social Security benefits will kick in starting in January 2023, and SSI beneficiaries will begin receiving higher payments in December 2022.

Pre-Retirement Planning

For non-retirees who are still building their retirement nest eggs, the contribution limits for qualified retirement plans and IRAs are also increasing, which provides you more opportunities to prepare financially for retirement.

• IRA Contribution Limit: The limit on annual contributions to an IRA increased from $6,000 to $6,500.
• 401(k), 403(b), and 457 Contribution Limits: For 2023, the contribution limits for employees enrolled in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will increase from $20,500 to $22,500.
• Catch-Up Contribution Limits: Employees aged 50+ who participate in most qualified retirement plans (e.g. 401(k)) will be able to make catch-up contributions of up to $7,500 in 2023, up from $6,500 in 2022. Combined with the increased annual contribution limits, qualified retirement plan participants can contribute up to $30,000 in 2023.

Also rising are the income ranges for determining one’s eligibility to make tax-deductible contributions to traditional and Roth IRA plans. The adjusted phase-out ranges for traditional IRA contributions will increase to:

• Between $73,000 and $83,000, for singles and heads of households covered by workplace retirement plans.
• Between $116,000 and $136,000, for married couples filing jointly, if the contributing spouse is an active plan participant.
• Between $218,000 and $228,000, for married couples filing jointly, if the contributing spouse is not an active plan participant.

The adjusted income phase-out ranges for Roth IRA contributions will increase to:

• Between $138,000 and $153,000, for singles and heads of household.
• Between $218,000 and $228,000, for married couples filing jointly.

Adjustments Impacting Income Tax Planning in 2023

Managing taxable income is also an important strategy for reducing one’s tax burden. For 2023, the following items will most notable:

Earned Income Tax Credit

The maximum amount for the earned income tax credit (EITC) will increase from $6,935 to $7,430 for qualifying taxpayers who have three or more qualifying children. For households with two children, this number reduces to $6,604, and for a single child to $3,995.

Standard Deduction

The Tax Cuts and Jobs Act nearly doubled the standard deduction. This number will increase even further for tax year 2023.

Income Tax Brackets

For tax year 2023, marginal income tax brackets will also change. Luckily, only the income ranges have raised; the rates themselves are staying put.

Time’s Almost Up

Your financial legacy is important, and we are here to help you plan for it. If you are concerned about the tax topics we covered above—or if you have questions about how or whether you may be impacted—don’t hesitate to schedule a complimentary Financial Legacy Review. Call me at 561-998-2362 or click the button below to request a consult.