Income brackets and withholdings
You may already be benefitting from one of the IRS’s biggest changes. If you noticed a bump in your net pay after Jan. 1, there’s a good chance it’s connected to the package of adjustments made to federal income tax brackets and standard deductions by the tax agency.
The tax tables adjusted by the IRS establish how much employers should withhold for federal taxes. The increased brackets means withholdings should go down — which will result in workers getting a bump in their take-home pay.
The annual adjustments by the IRS — designed to thwart so-called “bracket creep” when taxpayers reach higher brackets even as inflation diminishes their purchasing power — is especially impactful this year. Though inflation has been easing, it’s still far above pre-pandemic levels, which means the roughly 7% rise in the brackets should be especially welcome.
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Tax deductions are going up
Standard deductions are going up. Though the effect may not be fully felt until you file your 2023 taxes early next year, taxpayers will get some relief.
Married couples filing jointly will see a standard deduction of $27,700, up $1,800 from the 2022 tax year deduction. The deduction for single taxpayers is also rising $900, to $13,850.
Higher contribution limits for retirement plans
Good news for retirement savers: Contribution limits are higher. Caps for employees participating in 401(k), 403(b), most 457 plans and the federal government's Thrift Savings Plan are up by $2,000 to $22,500.
Additionally, the annual contribution limit on IRAs has increased to $6,500, and catch-up contributions for savers 50 and over jumps to $7,500.
The raised limits are especially important, as an increasing number of Americans think they'll need to save more for retirement than previously thought.
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A seller’s market
Even though it’s been a rocky year for the market, there are still plenty of people coming out ahead when selling off assets.
But keep in mind that when you make a profit off of selling an asset, you’ll owe the IRS a share of your gains. Exactly what you’ll owe Uncle Sam depends on your overall income and how long you held onto that asset.
However, your tax liability may change this year. For 2023, the IRS has raised its income thresholds for its 0%, 15% and 20% for its long-term capital gains tax rates. That means, depending on your taxable income, you have a better chance of paying no tax on profitable assets you’ve held for more than a year.
Required minimum distributions can wait
Thanks to the Secure 2.0 act, investors with tax-deferred retirement accounts — IRAs and 401(k)s — can now hold off a little longer before taking required minimum distributions.
The age where RMDs become mandatory is now 73, up from 72 — which gives you more time for those accounts to grow. A decade from now, the mandatory RMD age goes to 75.
(Another future benefit: A 2024 change eliminates RMDs for Roth accounts in employer-sponsored retirement plans like Roth 401(k)s.)
And for RMD procrastinators, there’s even more relief: The penalty for failing to take a RMD drops from 50% to 25%.
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