Tax season is well underway once again. For those who got an early jump and already filed their 2022 taxes, it’s never too soon to start thinking about your tax plan for 2023. While filers shouldn’t expect a whole lot of tax changes, the IRS has made some adjustments to the standard deduction, estate and gift tax exemption and alternative minimum tax exemption (AMT), as Morningstar recently noted. 401(k) and IRA contribution limits are also different. Below, we’ll take a look at some of the minor changes that you should keep in mind in 2023.
For more insight on how these changes will affect your tax bill, consider working with a financial advisor.
Important Changes in 2023
While the standard deduction changes year to year because it adjusts to inflation, the lifetime estate and gift tax exemption limit also typically increases on a yearly basis. Like the standard deduction, the AMT exemption is also indexed for inflation.
Here are the changes that the IRS is making to the standard deduction, estate and gift tax exemption limits and AMT exemption in 2023:
Standard Deduction
The standard deduction is the specific dollar amount that taxpayers who don’t itemize their deductions use to automatically reduce their taxable income in a given year.
The standard deduction for single filers, as well as those married filing separately in the 2023 tax year, is $13,850 (up from $12,950 in 2022). For married couples filing jointly, the standard deduction is $27,700 (up from $25,900 in 2022).
In 2023, a single filer making $75,000 would have a taxable income of $61,150 thanks to the standard deduction.
Estate and Gift Tax Exemption
The estate and gift tax lifetime exemption limit is the maximum amount of tax-free money the IRS lets you bequeath to beneficiaries when you die or give away while you’re still alive.
The estate and gift tax exemption for the 2023 tax year is $12.92 million (up from $12.06 million in 2022). As for the annual gift tax exclusion – the amount of tax-free money you can give to another person in 2023 – is $17,000 (up from $16,000 in 2022). If a gift exceeds $17,000 in 2023, the excess counts toward a person’s lifetime estate and gift tax exemption limit .
AMT Exemption
The alternative minimum tax or AMT is the minimum amount of tax a person must pay, regardless of deductions. AMT, which is distinct from standard taxes, was designed to make sure higher-income earners would pay their fair share. The AMT exemption is the amount of income that isn’t subject to AMT. Income above this threshold, however, may be subject to this tax.
The AMT exemption has increased to $81,300 for single filers in 2023 (up from $75,900 in 2022). For those who are married and filing jointly, the AMT is $126,500 in 2023 (up from $118,000 in 2022). The phase-out for those married filing jointly in 2023 begins at $1,156,300.
Investors or retirement savers may be subject to AMT if their adjusted gross income exceeds the exemption for their filing status. For example, a single person with incentive stock options and an AGI above $81,300 would have to calculate their AMT income and pay the higher tax.
Retirement Savings Limits
For retirement savers with a 401(k), 457 plan, self-employed 401(k) or a 403(b) plan, they will see their contribution limits increase in 2023. The contribution limit has increased to $22,500 for workers under the age of 50. And for those ages 50 and up, the contribution limit extends up to $30,000.
In addition, the total 401(k) contribution limit (including matching contributions) in 2023 is $66,000 (up from $61,000 in 2022).
If you have an individual retirement account (IRA) and are under the age of 50, the most you can contribute to a traditional or Roth IRA in 2023 is $6,500 (up from $6,000 in 2022). And for people ages 50 and up, you can contribute an extra $1,000 to an IRA.
Bottom Line
There aren’t a whole lot of major changes for filing 2023 tax returns in 2024. However, there are some adjustments that you may need to keep in mind. The standard deduction, estate and gift tax exemption and AMT all have parameters that have changed. Make sure to check that your AGI meets the AMT-exemption limit according to your filing status.
Tips for Tax-Conscious Investors
- Passive investing works well for long-term investors who want to buy and hold investments. Index funds and exchange-traded funds (ETFs) can be good options for tax-conscious investors.
- If own an investment property, a 1031 exchange can help you avoid capital gains. For example, if you’re able to sell your current property at a gain and use the proceeds to buy another investment property, you won’t own capital gains tax.
- Tax planning can be complicated, but you don’t have to go it alone. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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