As the New Year arrives, financial advisors should be looking ahead to 2023, understanding what tax changes will impact clients and what they can do to plan ahead.
For financial advisors, the 2023 tax year won’t be chock-full of major tax surprises. Still, advisors should update and maintain financial planning strategies to accommodate any tweaks and updates.
To understand what advisors should know about 2023 tax tweaks, SmartAsset spoke with Les Williams, wealth strategist and tax specialist with RBC Wealth Management, about five tax changes that financial advisors should know.
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Tax Bracket Adjustments
“The most significant tax changes for 2023 are what I would consider low-key changes,” Williams says.
In other words, he says, there is no major piece of legislation like the Tax Cuts and Jobs Act of 2017, the Setting Every Community Up for Retirement Enhancement (SECURE) Act or the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Instead, Williams says, for many taxpayers, the most important changes will be inflation adjustments to existing tax laws. First, financial advisors should prepare their clients for steep adjustments to each tax bracket.
“The bracket changes are significant,” Williams says. While tax brackets are adjusted every year, “the significant upward shift in the 2023 brackets is unusual. Those whose salaries have not kept pace with inflation may see unexpected tax benefits in 2023.”
Bottom line: Inflation-based adjustments may lead to significant benefits for some taxpayers.
Accelerated Retirement Savings
Preparing for retirement is an essential part of tax planning. And 2023’s inflation adjustments may play a role in tax-savvy retirement planning as well.
For clients who can afford to set aside extra money, inflation has led to particularly large increases in retirement and health savings account (HSA) plan contribution limits for 2023. The 401(k) contribution limit alone will increase by almost 10% from 2022 to 2023.
Calling it a “silver lining” to inflation, Williams says. “This represents an unprecedented opportunity for people to increase their retirement funding.”
Bottom line: Inflation-based adjustments have also significantly increased retirement and HSA limits.
Expanded and Reduced Tax Breaks
Williams calls out two issues in particular for tax year 2023.
First, he says, the standard deduction, which more people have claimed since the enactment of the Tax Cuts and Jobs Act, will see a significant increase in 2023.
The standard deduction for single filers will increase by $900 to $13,850 in 2023. For married couples filing jointly, it will increase by $1,800 to $27,700 in 2023.
On the other side, Williams flags decreases in the child tax credit and the child and dependent care credit as important.
Both of these family-oriented tax credits were temporarily increased during the coronavirus pandemic. But increases have since lapsed.
For both tax years 2022 and 2023, financial planners should make sure their clients are aware of these programs. But they should also help them plan around the return to pre-pandemic limits on these credits.
Bottom line: Taxpayers will get a significantly larger standard deduction but may see smaller write-offs related to child tax credits.
Individual Benefits in the Inflation Reduction Act
Speaking about 2023 tax changes that clients may miss, Williams notes that the Inflation Reduction Act of 2022 has “flown under the radar to a certain extent.”
“Many of the effects of this legislation will occur on the macro level, impacting large corporations to a great extent,” he says. “But there are also a number of benefits for individuals, such as the extension of Affordable Care Act subsidies and various residential clean energy tax credits.”
For financial advisors, a bill like the Inflation Reduction Act is a kind of policy grab bag. It affects individual taxpayers differently depending on their specific circumstances.
Here, in particular, the IRS has extended the tax credits available to clients who purchase individual health insurance through the Affordable Care Act’s marketplace. It also expanded the footprint of clean energy tax credits, which are now refundable and apply more broadly to households. This is an area where clients may need help from a tax professional. These credits are technical and in some cases quite complex.
Bottom line: Specific policies such as clean energy credits and ACA credits have been expanded, which may be valuable to the right clients.
Increased Deductions for Small Business Owners
Inflation may also have an outsized impact on small-business owners and the self-employed.
Small-business owners typically operate via pass-through entities like LLCs or S corporations, Williams says. Those that do may take advantage of the Section 199A deduction for pass-through income, which is known as qualified business income (QBI). The QBI deduction allows qualifying taxpayers to deduct 20% of their business income if they work as a pass-through business, sole proprietorship or other similarly situated tax entity
“Between 2022 and 2023, the QBI threshold will increase by almost 7%, meaning that small-business owners will have a greater opportunity to take advantage of Section 199A,” Williams says.
The limits on QBI deductions will increase significantly in 2023 to $182,100 for individuals (up from $170,050) and $364,200 for married couples (up from $340,100).
This can have a significant impact on some taxpayers whose business income falls in that margin, or who can structure their income over the course of the year to do so. By keeping their income below the new deduction limits, clients may potentially reap a much higher deduction.
In short: Small-business owners may have a significant increase in their qualified business income deduction.
Bottom Line
In 2023, financial advisors should prepare for a particularly aggressive version of business as usual. While Congress has passed no major new tax laws, changes to various tax credits, deduction amounts and contribution limits may impact a range of clients.
“The 2023 tax year will present clients with a broad range of potential opportunities to take advantage of beneficial tax changes,” Williams says. “Clients and their advisors, though, will have to be proactive in understanding these changes and fully analyzing the benefits and detriments of each.”
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