Archives for October 2022

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:

• Rev. Proc. 2022-38 contains most inflation adjustment figures,
• Notice 2022-55 contains figures relating to retirement accounts, and
• Rev. Proc. 2022-24 contains figures relating to health savings accounts (HSAs).

Single 2023 Tax Brackets

Married Filing Jointly 2023 Tax Brackets

Head of Household 2023 Tax Brackets

Married Filing Separately 2023 Tax Brackets

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. (Update: As a result of the SECURE Act 2.0, the IRA catch-up contribution limit will begin to get inflation adjustments starting in 2024.)

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.

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).