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IRS Updates - Taxes and Retirement Contributions Thumbnail

IRS Updates - Taxes and Retirement Contributions

It’s that time of year when we start receiving updates from the IRS on what I think are important items. Taxes and Retirement Savings. With that exciting lead, let’s get to some of what they shared. I won’t bore you with all the details, just the highlights. 

First, I am going to share some of the direct tax-related updates. 

  • For those Married Individuals Filing Jointly (MFJ) and Surviving Spouses, you can now have close to $700,000 of taxable income before hitting the 37% tax rate. Exact number is excess above $693,750. 
  • The new Standard Deduction for MFJ will be $27,700. This is roughly 7% higher than 2022's deduction of $25,900. 
  • Bonus deduction for those 65+ of $1,500. 
  • Combined, many retirees will have deductions of just over $30,000. 
  • Estate Tax Exemptions are increasing dramatically to $12.92 million. This is nearly a $1 million increase from the current exemption of $12.06 million. So, a married couple has roughly $26 million exempted from estate taxes.  
  • The Gift Tax Exclusion has also bumped up to $17,000 from $16,000 in 2022. 

Now I want to talk about the more important of the two areas – Retirement Savings! I bet you hear the trumpets blaring as you read that. 

  • First, not too big of a change here with IRA contributions. It is now $6,500 a year (current is $6,000). 50-year-old catch-up stays at $1,000. 
  • Same amounts for Roth IRAs. 
  • Here is the one that may be of more interest. The new 401k contribution amounts. For 2023 it will be $22,500 a year, which is a $2,000 increase from this year. Also, the 50-year-old catch-up is up to $7,500 from $6,500. Combined you may be able to contribute $30,000 a year to your 401k. 
  • The total contribution amounts between Employee and Employer for Defined Contribution plans (401ks) have also increased significantly for 2023. The new numbers are $66,000 and $73,500 for 50 and above. These are up from $61,000 and $67,500 currently. 
  • I mention this new total as it comes into play if your employer offers the Mega Backdoor Roth option. I won’t get into it, but check with your benefits people on whether you can put more into your 401k if it isn’t being maxed out between standard Employee and Employer contribution amounts. 
  • Pay attention to these numbers if you happen to have an Individual 401k too. 
  • There are also lots of changes for income amounts and phaseouts for deductible IRA contributions and also direct Roth IRA contributions. I won’t bore you with the specifics, just know the income levels have also increased. 
  • There are also changes to Defined Benefit Plans, SIMPLES, SEPs, and things like Savers Credit. Again, not getting into the specifics but if they apply to you definitely check out the new numbers.

 A few final points. 

  • I am hopeful your employer will let you know of the new contribution amounts that go into place for 2023. However, I would encourage you to double-check and make sure you are maximizing your contributions. 
  • Next, a reminder of how the 50-year-old catch-up works. Once you hit the year in which you are turning 50 you qualify for these catch-up amounts. You do NOT have to wait until you turn 50 to take advantage of them. So, if you are not turning 50 until December 31, 2023, you can still do the catch-up for all of 2023. You do NOT have to wait until 2024. 
  • Finally, I know maxing out your 401k savings amounts is a big number. Many of my fellow members of GenX are at the crossroads between age 50 catch-ups, kids in college and caring for parents. Finding an extra $2,500 to sock away can be a challenge. However, we survived neon everything and bad hairstyles of the 80s, so I am confident we can achieve this too. Also, if you hung onto all your flannel from your grunge phase it is now back in style and will save you wardrobe expenses. Not that I have any of mine😉