Every November the federal government comes out with new numbers relating to the standard deduction, retirement account contribution limits, tax bracket changes, tax deduction or tax credit changes, Social Security adjustments, Medicare premium increases or decreases, and maybe a change or two in the tax code. This month's newsletter will address those changes for 2023.
The standard deduction is going up to $13,850 for single people, 20,800 for head of household, and $27,700 for married folks filing a joint return. The numbers are slightly higher if you are over 65 ($1,500 or more per person). These are the amounts you can earn in 2023 without paying federal income tax. The tax brackets stayed the same. You can see how it works in this spreadsheet. Note the comments.
Iowa income tax rates will be going down for most folks in 2023 and beyond. The highest tax rate of 8.9% at $78,435 will be dropping to 6% at $75,000. Iowa residents will go from 9 brackets down to 4. The rates and the brackets will continue to drop over time until 2026. At that point, Iowa will have a flat 3.9% rate on all income. See a visual on the current and future rates here.
Social Security goes up by 8.7% for 2023 as it adjusts for inflation. If you are waiting on your benefit between age 62 and FRA, that equals a 15.7% return for 2022. If you are at FRA and waiting until 70, that equals a 16.7% return for 2022. $160,200 is the new amount where you stop paying into Social Security (still pay into Medicare). The actual FICA tax of 7.65% for the employee and employer has not changed.
Medicare has reduced some costs for 2023. The Part B premium will be $164.90, which is a reduction of $5.20 per month from 2022. The Part B deductible will be $226, which is a reduction of $7 from 2022. The average premium for Part D is around $31.50, which is a slight reduction from 2022. The Part A deductible increases by $44 to $1,600. That pretty much covers Medicare changes.
Contribution limits on IRAs go to $6,500 for 2023. Those over 50 see an increase to $7,500. The contribution limit on the 401(k), 457, 403(b), and TSP goes to $22,500 with those over 50 seeing an increase to $30,000. Here is a tip. The Roth IRA and Roth 401(k), 457, 403(b), TSP, tend to be the best option for many vs. the Traditional version unless your income is well into the 22% bracket.
Tax deductions and tax credits have not changed much. The child tax credit will be $2,000 for children under age 17 (there are income limits that reduce the size of this credit starting at $200,000). There is a $500 credit for those dependents 17 and older. The earned income credit maximum has been increased to $7,430 for those who qualify and have 3 children or more.
There are no real changes in the capital gains tax. As a reminder, a single person can make $250,000 and a married person filing a joint return $500,000, without paying any capital gains tax when selling a property they have owned and lived in for 2 years. Selling a rental property will incur a capital gains tax based on how long you have owned it and the size of the gain in relation to that year's other income.
Long term capital gains are still taxed at 0%, 15%, or 20% based on what bracket you are in after the capital gain. The goal is to receive long term capital gains (investment held more than 1 year) while staying inside the 10% or 12% federal tax brackets. If you can do this, the tax on the gain will be 0%! Always keep this in mind when looking to sell an investment with long term gains attached to it.
The state of Iowa will no longer tax retirement money in 2023! This would include Traditional accounts at work like 401(k)s, Traditional IRAs outside of work, and pensions like IPERS. This means no state tax withholding when withdrawing money going forward, which of course means more money in YOUR pocket. It also means avoiding paying any state tax on that money going in or out!
The IRS created a mess when it came to the new inherited IRA rules for non-spouses, but it appears the issue has been settled. This rule applies to receiving the IRA from someone who passed away after December 31, 2019. No RMD was required in 2020, 2021 or 2022. There will be an RMD requirement starting in 2023. If this applies to you, make sure you take that RMD on schedule as it relates to the 10-year rule.
There are no inflation adjusted numbers related to the taxability of your Social Security benefit because Congress has not deemed that necessary. What does this mean? More and more people will have some of their Social Security benefits taxed at the federal level based on other income (IRA, pension, job, etc.), which is used to supplement the benefit. Let's hope this is addressed in the future. Stay tuned!
Let's wrap this up. New numbers come out every November from the government, dictating limits on different kinds of tax breaks, tax deductions, tax credits, premium costs, etc. It is important that we pay attention and see if we can benefit from the changes when possible. This can help in putting more money in our pockets for our needs or others. Be aware!
Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.