What is your New Year’s resolution?

Perhaps it’s to start working on that new business idea you came up with years ago. Or it might be to be more adventurous and take that trip overseas with friends that you’ve been dreaming about.

Or maybe, just maybe, it’s to finally get ahead of your tax situation this year and start planning now.

The beginning of the near year is a perfect time to get your taxes in order. Every year, the Internal Revenue Service (IRS) announces inflation adjustments for a number of tax provisions. These adjustments impact tax brackets and even retirement contribution limits. With inflation rates being the highest we’ve seen in over forty years; these IRS increases for 2023 are significant.

Here are some things to consider for the upcoming year to help you plan and to maximize the benefits available to you.

Paycheck Checkup

The federal tax code operates on a pay-as-you-go basis. That means that taxes must be paid as income is earned or received.

In fact, the IRS requires that taxpayers have at least 90 percent of their taxes paid in by the time they file their tax return. While many employees would assume that their employer is adequately withholding for them, many will be surprised to find out that is not always the case.

Having sufficient withholding taken out is important to avoid potential penalties or interest on late tax payments. Sufficient withholding can even help avoid surprises when it comes time to file your tax return, such as a larger tax bill than year’s past. These types of surprises can arise when a major life event occurs, including:

• marriage,
• divorce,
• a birth or adoption,
• retirement,
• a new job, and
• even tax law changes!

Any one of these could impact your tax situation, which is why it is important to take these changes into consideration. Other life changes including larger than usual medical expenses, a new mortgage or even significant charitable donations can greatly impact your taxes. These types of items may be used as deductions, which may help reduce your tax liability. Reducing your overall tax liability can allow for less withholding to be taken out at the end of the day.

That is why it is important to do an annual paycheck ‘checkup’ and review your current withholding elections. W-2 employees can adjust their federal withholding by completing Federal Form W-4, “Employee’s Withholding Allowance Certificate.” However, it’s always best to check with your employer before making these changes to ensure all proper forms have been completed, as state withholding forms may be required as well.

These withholding forms allow you to change your filing status, as this determines the amount of withholding taken out of your pay each period. The form even allows you to adjust your withholding if you work multiple jobs or claim any dependents. Recently, the IRS modified the form to allow you to withhold on other income that may not typically have withholding taken out, such as interest, dividends and even retirement income, such as IRA or 401(k) withdrawals.

Revisiting your withholding elections early in the year can make sure that you are sufficiently covered and gives you a good idea of what to expect for the year ahead.

Revisit Retirement Contributions

Saving for retirement is important for everyone, regardless of your age. Whether you contribute to an employer-sponsored plan or an IRA, the inflation adjustments for 2023 allow taxpayers to save more than ever before.

401(k), 403(b) & 457 – Employer-Sponsored Retirement Plans

Employees covered under an employer-sponsored retirement plan will see the following contribution increases:

• Annual contributions to a qualified plan have increased to $22,500, up from $20,500 in 2022.
  • Additional catch-up contributions for individuals ages 50 or older increased to $7,500, up from $6,500 in 2022.

Retirement contributions can generally be adjusted through your payroll provider at any point during the year. Be sure to check your own elections to make sure they’re still suitable for your own personal needs and goals. Keep in mind that spreading out your contributions evenly throughout the year allows you to buy into the market at different times, helping reduce the impact of volatility.

One final consideration is to find out if your employer offers to match a percentage of your own contributions. If they offer this and you are not contributing enough to receive a full matching contribution from your employer, you may be losing out on free money!

Traditional & Roth IRAs

Individuals who contribute to retirement accounts outside of an employer will see the following increases:

• The limit on annual contributions to an IRA increased to $6,500, up from $6,000 in 2022.
  • The additional catch-up contribution for individuals ages 50 or older remains at $1,000

Don’t forget – 2022 IRA contributions can still be made up until April 18, 2023. However, just because the contribution is made in 2023, these contributions are subject to the prior 2022 limits.

In addition to these increased contribution limits, the IRS has also adjusted the income limits for those who are looking to make a Roth IRA contribution. A maximum Roth IRA contribution can be made if modified adjusted gross income is less than $138,001 for single filers & $218,001 for married couples filing jointly. When your income starts to exceed these amounts, the eligible Roth contribution starts to phase-out. Knowing these brackets can help you plan for the year by seeking out opportunities to keep your income below these thresholds.

Maximize Gifting

Starting in 2023, the IRS allows you to give away up to $17,000 per person, completely tax free. This means that married couples can give up to $34,000 a year, without any concern for gift taxes.

Any gifts made above these amounts may be subject to the federal gift tax. This tax applies to all gifts of property (including cash) made by an individual during the year that exceeds a person’s lifetime exemption. This lifetime exemption can also impact an individual’s taxable estate, so it’s important to be mindful of these amounts when gifting.

Beginning January 1, 2023, a married couple can transfer a combined $25.84 million of wealth, free of gift and estate tax, up from $24.12 million in 2022. A single taxpayer can transfer $12.92 million, up from $12.06 million in 2022. Be aware, these lifetime exemption amounts are currently set to revert to $5,000,000 per person, adjusted for inflation, beginning in 2026.

Gifting is a great estate planning strategy used to intentionally reduce the size of a person’s taxable estate. Gifting assets to loved ones not only removes the assets from a person’s estate, but also removes any future appreciation on those assets as well. This strategy can help limit or eliminate any potential estate tax that would be owed upon a person’s death.

Take Advantage of Increased Tax Deductions, Bracket Changes & More

There are several other tax provisions that get adjusted for inflation each year, including deductions, credits and even tax brackets. While many of these increases do not require any action by taxpayers, it is good to be aware of these changes as they may impact your overall tax situation. See below for a few of these key beneficial changes for 2023:

• The standard deduction will increase to $13,850 for single filers, up from $12,950 in 2022.
  • For married couples filing jointly, the standard deduction will increase to $27,700, up from $25,900 in 2022.
  • The additional standard deduction for individuals ages 65 or older will also increase to $1,500, up from $1,400 in 2022.

• Tax brackets for 2023 will increase by approximately 7% over the prior year.
  • For example, the top tax rate of 37% will now apply to single filers with incomes greater than $578,125, up from $539,901 in 2022. The 37% tax rate will apply to married filers with incomes greater than $693,750, up from $647,850 in 2022

• The Social Security Administration announced that Social Security & Supplemental Security Income benefits will increase by a historic 8.7%.
  • To help fund this increase, the maximum amount of earnings subject to Social Security taxes will now be $160,200, up from $147,000 in 2022.

New Retirement Rules Coming Soon

At the end of 2022, President Joe Biden signed the SECURE 2.0 Act into law, which established entirely new rules for retirement accounts. These changes become effective over the span of several years and will alter the way many Americans save for retirement.

Some of the key changes include:

• Increased catch-up contribution limits for those ages 60-63,
• Annual inflation adjustments for IRA catch-up contributions,
• Catch-up contributions for qualified plans must be made on an after-tax basis (ie: Roth contributions) for those earning more than $145,000,
• Allowable emergency withdrawals from retirement accounts for up to $1,000 per year,
• Employer matching contributions are now allowed to be made on an after-tax basis

Many of these changes are viewed to be favorable to taxpayers. However, with ninety plus provisions included in the bill, it may be best to speak to your wealth advisor to talk through how these changes may impact you.

In Conclusion

As you begin to gather your tax documents to prepare your tax return for last year, be sure to take a few minutes to also plan for the upcoming year. Now is a great time to make sure you are also taking advantage of these inflation adjustments provided by the IRS. Reviewing your situation now can help set yourself up to be well prepared for the rest of the year and avoid any surprises.

If you’d like to have a second opinion or to discuss your financial plans and make sure you are well aligned with your goals, Domani Wealth’s advisors are always ready to start a conversation. You can get in touch with any of our team members, or you can directly book an appointment today! If you prefer a phone call, you can reach us at 855-855-5455.