Sometimes everything changes only to remain the same. The Taxman givith, yet so doth the Taxman taketh away. But there are some upcoming changes to tax rules that will impact many individual taxpayers in the financial detail.
If you’re looking for a New Year’s Resolution, maybe you’ll want to resolve to actively explore some of the tax rule changes effective for this new year.
- Especially, taxpayers should review the 401(k) and IRA limit revisions for 2023. The good news is that retirement savings investment limits are being increased.
- But at the same time, watch out that IRS has changed the rules for your FSA (flexible spending account), for the immediate present decreasing the allowed carryover amount.
If you are NOT enthusiastic about New Year’s Resolutions that are tax related, maybe just turn to the experts at Baum CPA by simply clicking here.
Changes to Contribution Limits to 401(k) and Other Tax-Deferred Retirement Plans
The Service (as we professional accountants fondly and respectfully refer to the IRS) has increased by $2,000 the amount that individuals can contribute to 401(k) plans — with a new cap of $22,500 for 2023 (up from $20,500 in 2022). The increase applies the same to 403(b) plans, most Sec. 457 plans, and the federal government’s Thrift Savings Plan.
The limit on 2023 contributions to an IRA will be $6,500 (up from $6,000 in 2022). The catch-up contribution limit on an IRA for individuals aged 50 and over remains at $1,000 — sorry, no annual cost-of-living (COLA) adjustment on this minor point.
However, for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan, the catch-up contribution limit is increasing to $7,500 for 2023 (up from $6,500 in 2022). This means that for 2023, this same group of participants can contribute up to $30,000 combined.
The amount individuals can contribute to their SIMPLE (Savings Incentive Match PLan for Employees) retirement accounts increases to $15,500 for 2023 (up from $14,000 in 2022). The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans will increase to $3,500 (up from $3,000).
Changes to the Phaseout Ranges for Tax-Deferred Eligibility
The income ranges that determine eligibility for making deductible contributions to traditional IRAs also will increase for 2023. These “phaseout” ranges incrementally limit permitted tax credits or deductions as income gets closer to a maximum amount. Understanding phaseout ranges is crucial for preparing an accurate tax return — and necessary for smart tax planning as you financially navigate into the current year.
Changes to phaseout ranges in 2023 will be as follows:
- For single taxpayers covered by a workplace retirement plan, the phaseout range will be between $73,000 and $83,000 for 2023 (up from between $68,000 and $78,000 in 2022).
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phaseout range will be between $116,000 and $136,000 for 2023 (up from between $109,000 and $129,000 in 2022).
- For an IRA contributor who is not covered by a workplace retirement plan but is married to someone who is covered, the phaseout range will be between $218,000 and $228,000 for 2023 (up from between $204,000 and $214,000 in 2022).
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phaseout range is not subject to annual COLA for 2023, and remains between $0 and $10,000.
Changes to Roth IRAs and Retirement Savings Contributions Credit (Saver’s Credit)
More increases abound for the new year, even in these arcane financial strongholds!
The income phaseout ranges for taxpayers contributing to a Roth IRA will increase as follows:
- For singles and heads of household, the income phaseout range increases to between $138,000 and $153,000 in 2023 (up from between $129,000 and $144,000 in 2022).
- For married couples filing jointly, the income phaseout range increases to between $218,000 and $228,000 in 2023 (up from between $204,000 and $214,000 in 2022).
- The phaseout range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to annual COLA but remains between $0 and $10,000.
The income limits for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers will change as follows:
- For married couples filing jointly, limit will be $73,000 in 2023 (up from $68,000 in 2022).
- For heads of household, limit will be $54,750 in 2023 (up from $51,000 in 2022).
- For singles and married individuals filing separately, limit will be $36,500 in 2023 (up from $34,000 in 2022).
It’s Not Just about Money — Age Matters Too
Other changes to rules for retirement plans are in store, too. The age for Required Minimum Distributions (RMDs) from retirement accounts (including 401ks and IRAs) increases from 72 to 73 beginning January 1, 2023.
The new-and-improved RMD age will remain at 73 for a full decade, and then jump to age 75 in 2033 (unless that rule gets changed differently during the interim decade!).
As of 2022, seniors were required to start taking RMDs from 401k accounts, traditional IRAs, and similar retirement savings accounts (other than Roth IRAs) in the year they turned 72. As of 2023, the RMD age is 73.
When It Comes to Tax Rules — Health Matters a Little Less
FSA (flexible spending account) contributions are pre-tax dollars that individuals can take advantage of during tax preparation season to reduce their taxable income by the amount they set aside for contribution.
Changes for the new year to IRS FSA rules will have an impact if you take advantage of an FSA plan. The recent CARES Act has allowed individuals to carry over unused funds year-to-year, but the IRS is now capping that amount to $570 for 2022. And employers have to agree to the carryover amount (with a March 15 deadline).
In 2022, individuals were allowed to set aside a maximum of $2,850 for their FSA. In 2023, that limit will increase to $3,000 and the carryover amount will boost back up to $700. Meanwhile, whatever unspent FSA funds you may have left from 2022 (out of $2,850), no more than $570 is allowed to carry over into 2023.
Money Matters, Age Matters, Health Matters — Are Tax Matters Wearing You Out?
There are so many tax rules, and lots of them get changed every year! If you are feeling daunted, or overwhelmed even, by all the tax rules, tax rule changes, tax filing paperwork, or the IRS in general — the accounting experts at Baum CPA are here to help!
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This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.