Archives for October 2022

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2023 Tax Brackets, Standard Deduction, and Other Changes

The IRS recently published the annual inflation updates for 2023. If you have questions about a particular amount that I do not mention here, you can likely find it in the official IRS announcements:

Single 2023 Tax Brackets

Taxable Income
Tax Bracket:
$0-$11,000 10%
$11,000-$44,725 12%
$44,725-$95,375 22%
$95,375-$182,100 24%
$182,100-$231,250 32%
$231,250-$578,125 35%
$578,125+ 37%

 

Married Filing Jointly 2023 Tax Brackets

Taxable Income
Tax Bracket:
$0-$22,000 10%
$22,000-$89,450 12%
$89,450-$190,750 22%
$190,750-$364,200 24%
$364,200-$462,500 32%
$462,500-$693,750 35%
$693,750+ 37%

 

Head of Household 2023 Tax Brackets

Taxable Income
Tax Bracket:
$0-$15,700 10%
$15,700-$59,850 12%
$59,850-$95,350 22%
$95,350-$182,100 24%
$182,100-$231,250 32%
$231,250-$578,100 35%
$578,100+ 37%

 

Married Filing Separately 2023 Tax Brackets

Taxable Income
Marginal Tax Rate:
$0-$11,000 10%
$11,000-$44,725 12%
$44,725-$95,375 22%
$95,375-$182,100 24%
$182,100-$231,250 32%
$231,250-$346,875 35%
$346,875+ 37%

 

Standard Deduction Amounts

The 2023 standard deduction amounts are as follows:

  • Single or married filing separately: $13,850
  • Married filing jointly: $27,700
  • Head of household: $20,800

The additional standard deduction for people who have reached age 65 (or who are blind) is $1,500 for each married taxpayer or $1,850 for unmarried taxpayers.

IRA Contribution Limits

The contribution limit for Roth IRA and traditional IRA accounts is increased to $6,500.

The catch-up contribution limit for people age 50 or over does not get inflation adjustments and therefore is still $1,000.

401(k), 403(b), 457(b) Contribution Limits

The salary deferral limit for 401(k) and other similar plans is increased to $22,500.

The catch-up contribution limit for 401(k) and other similar plans for people age 50 and over is increased to $7,500.

The maximum possible contribution for defined contribution plans (e.g., for a self-employed person with a sufficiently high income contributing to a solo 401(k)) is increased to $66,000.

Health Savings Account Contribution Limits

For 2023, the maximum HSA contribution for somebody with self-only coverage under a high deductible health plan is $3,850. The limit for somebody with family coverage under such a plan is $7,750.

The HSA catch-up contribution limit for people age 55 and over is not inflation adjusted, so it remains at $1,000.

Capital Gains and Qualified Dividends

For 2023, long-term capital gains and qualified dividends face the following tax rates:

  • 0% tax rate if they fall below $89,250 of taxable income if married filing jointly, $59,750 if head of household, or $44,625 if filing as single or married filing separately.
  • 15% tax rate if they fall above the 0% threshold but below $553,850 if married filing jointly, $523,050 if head of household, $492,300 if single, or $276,900 if married filing separately.
  • 20% tax rate if they fall above the 15% threshold.

Alternative Minimum Tax (AMT)

The AMT exemption amount is increased to:

  • $81,300 for single people and people filing as head of household,
  • $126,500 for married people filing jointly, and
  • $63,250 for married people filing separately.

Annual Gift Tax Exclusion

For 2023 the annual exclusion for gifts will be $17,000.

Estate Tax

The estate tax exclusion is increased to $12,920,000 per decedent.

Pass-Through Business Income

With respect to the 20% deduction for qualified pass-through income, for 2023, the threshold amount at which the “specified service trade or business” phaseout and the wage (or wage+property) limitations begin to kick in will be $364,200 for married taxpayers filing jointly and $182,100 for single taxpayers, people filing as head of household, and for married people filing separately.

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

New Book – After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

As of today, my latest book is available: After the Death of Your Spouse: Next Financial Steps for Surviving Spouses.

Many surviving spouses find themselves overwhelmed by all the administrative and financial to-do items that have to be handled in the months after their spouse’s death. There’s a lot to do, and they’re supposed to get it all done while grieving. And in many cases, the situation is made more difficult by the fact that the surviving spouse is not the one who regularly handled the household finances.

I wrote this book to walk people through it, in plain language. It’s the book I want my spouse to have, in case something happens to me.

Fortunately, some of these to-do items for surviving spouses are important but not urgent. And in fact, for some of these items, it’s best to wait. Many people report experiencing “brain fog” in the weeks or months following their spouse’s death. They find that they have difficulty concentrating and difficulty performing tasks that would normally be easy. Major, irrevocable decisions are best put off until this period is over, in cases in which it’s practical to do so.

That’s why the book is broken down into two parts: immediate next steps and intermediate next steps.

The book’s table of contents is as follows:

Part One: Immediate Next Steps

1. Learn the Terms (The Estate Administration Process)
2. Getting Organized
3. Notifying Necessary Parties
4. Initial Responsibilities as Personal Representative
5. Updating Your Own Estate Plan

Part Two: Intermediate Next Steps

6. Social Security Planning
7. Further Responsibilities as Personal Representative
8. Handling Inherited Retirement Accounts
9. Additional Options as a Beneficiary and Surviving Spouse
10. Tax Returns
11. Reassessing Your Own Finances
12. Reassess Your Portfolio
13. Finding Professional Assistance

Conclusion: What’s Next?

Appendix A: Does an Inheritance Create Taxable Income?

Appendix B: Social Security Widow(er) Benefit Math Details

Appendix C: Dealing with Trusts

My sincere gratitude goes to three attorneys who generously contributed their time and expertise: Lee Aronson of Shreveport, Louisiana; Randi Grassgreen of Boulder, Colorado; and Matthew Sullivan of Waltham, Massachusetts. Bogleheads forum members “LadyGeek” and “dodecahedron” also very kindly gave their time and shared their knowledge and experiences as surviving spouses.

If you think the book would be helpful to you or to a loved one, I would encourage you to pick up a copy. (Print version here, Kindle version here.)

Are you (or a loved one) a surviving spouse?

After the Death of Your Spouse: Next Financial Steps for Surviving Spouses

Topics Covered in the Book:
  • The estate administration process
  • Responsibilities as personal representative (executor)
  • Social Security planning
  • Handling inherited retirement accounts
  • Reassessing your own finances
  • Finding professional assistance
  • Click here to see the full list.

Investing Blog Roundup: Bogleheads Conference and 2023 Social Security COLA

It was a pleasure meeting many of you in person last week at the 2022 Bogleheads Conference. The sessions were all recorded and will eventually be made available on YouTube. I do not know the timing as far as when we should expect that, but I’ll share the link once they come out.

The SSA announced last week that the cost-of-living-adjustment (COLA) will be 8.7% for 2023.

To answer the question I receive every year: for anybody 62 and older, your primary insurance amount gets adjusted by the COLA each year regardless of whether you have filed for your benefit. In other words, a high (or low) COLA in a given year is not really a point in favor of filing earlier or later. (You can find a more thorough explanation for Social Security inflation adjustments here.)

Recommended Reading

Thanks for reading!

Use Cash for a Roth IRA Contribution or Roth Conversion?

A reader writes in, asking:

“I recently rolled over the balance (all in stocks) from my previous employer’s 403(b) into a rollover IRA. With the downdraft in the stock market, I am considering doing a Roth conversion with that balance, which would result in about a $7,000 tax liability. I have yet to contribute up to $7,000 to my Roth IRA for 2022. I would have funds for doing either one or the other this year. At first glance, there appears to be no advantage of doing one over the other choice (recognizing I have until the end of 2022 to do a conversion, 4/15/23 to do a contribution)… but I’m not so sure. Am I missing some angle that would help me lean one way or another?”

Let’s run through an example to illustrate the differences. If we assume, for example, a 25% combined federal/state marginal tax rate on the conversion, that would mean choosing between a conversion of $28,000 or a $7,000 Roth IRA contribution.

Option A: convert $28,000

Result:

  • You have taken $28,000 out of tax-deferred.
  • You have added $28,000 to Roth.
  • You have taken $7,000 out of taxable (i.e., $7,000 spent from checking to pay the tax).
  • As you noted, you still have the option (later) for a contribution for this year.

Option B: no conversion, contribute $7,000 to Roth IRA.

Result:

  • You have not changed the amount in tax-deferred.
  • You have added $7,000 to Roth.
  • You have taken $7,000 out of taxable (i.e., $7,000 moved from checking to Roth IRA as the contribution).
In other words, aside from Option A preserving the option to contribute to a Roth IRA for this year, the primary difference (in this scenario assuming a current 25% marginal tax rate) is that Option A leaves you with $21,000 more in a Roth IRA, whereas Option B leaves you with $28,000 more in tax-deferred. So of course a critical question is: would you rather have $21,000 in Roth, or $28,000 in tax-deferred?

And the primary factor in that decision would be: what tax rate would you expect to be paid on these tax-deferred dollars later (i.e., whenever they come out of the account later, if you don’t convert them now)? That tax rate might be your tax rate on RMDs in retirement. It might be a later tax rate at which you could convert them (e.g., after retiring but before Social Security and RMDs begin). It might be your heirs’ future tax rates. Or it might be 0%, if you would anticipate a high likelihood of these dollars ultimately going to charity as a qualified charitable distribution or as a bequest.

If that projected future tax rate is 25% or more, having $21,000 in a Roth IRA would be preferable to having $28,000 in a traditional IRA (i.e., the Roth conversion would be the better way to use the $7,000 of cash).

For More Information, See My Related Book:

Book3Cover

Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

Topics Covered in the Book:
  • The difference between deductions and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

"Very easy to read and is a perfect introduction for learning how to do your own taxes. Mike Piper does an excellent job of demystifying complex tax sections and he presents them in an enjoyable and easy to understand way. Highly recommended!"

Investing Blog Roundup: Can You Save Too Much in an HSA?

Health Savings Accounts are the most tax-efficient of all accounts, when the money is used for medical costs. You get a deduction on the way in, the account gets to grow tax-free, and the money comes out tax-free as well (again, assuming it’s used for qualified medical expenses). That’s the best tax treatment, at every step of the way.

This week, Christine Benz addressed the question of whether it’s possible to save too much in an HSA — and what to do about it, if you suspect that maybe you have done so.

Recommended Reading

Thanks for reading!

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