What Are the 2023 Tax Rates and Contribution Limits?

Every year, the IRS adjusts tax rates and contribution limits to keep pace with inflation. In 2022, we experienced 40-year inflation highs, peaking at around 9.1% in June 2022.[1] 

While inflation impacted the price of everything from groceries to gas, it also paved the way for tax and retirement plan contribution changes in 2023. Here’s a look at the latest tax brackets, tax rates, and contribution limits.

Tax Changes for 2023

The IRS adjusts tax brackets to help taxpayers avoid “bracket creep,” which happens when inflation pushes taxpayers into higher brackets—even if their earned income hasn’t changed.

The 2023 tax brackets for single and joint filers (shown in parentheses) are:[2]

  • 10%: $0 to $11,000 ($0 to $22,000)

  • 12%: $11,000 to $44,725 ($22,000 to $89,450)

  • 22%: $44,725 to $95,375 ($89,450 to $190,750)

  • 24%: $95,375 to $182,100 ($190,750 to $364,200)

  • 32%: $182,100 to $231,250 ($364,200 to $462,500)

  • 35%: $231,250 to $578,125 ($462,500 to $693,750)

  • 37%: $578,125 and up ($693,750 and up)

As a reminder, the IRS operates a progressive tax system, which can make tax brackets misleading. Instead of having all income taxed at one rate, your earned income is taxed at the rate defined by the bracket it falls into.

For example, if you’re a single filer and earn $200,000 in 2023, you fall into the 32% tax bracket. However, only the last $17,900 of income for the year is taxed at 32%. 

Here’s how it would look:

  • Your first $11,000 taxed at 10%: $1,100

  • Your next $33,735 taxed at 12%: $4,048

  • Your next $50,650 taxed at 22%: $11,143

  • Your next $86,725 taxed at 24%: $20,814

  • And your final $17,900 taxed at 32%: $5,728

  • For a total tax obligation of $42,833, or about 21.4% 

Standard Deduction

The Tax Cuts and Jobs Act (TCJA) raised the standard deduction significantly starting in 2018. As a result, around 90% of taxpayers choose to take the standard instead of itemizing their deductions.[3] 

The standard deductions for 2023 are:[2] 

  • $13,850: single and married filing separately (up $900 from 2022)

  • $27,700: married filing jointly (up $1,800 from 2022)

  • $20,800: head of household (up $1,400 from 2022)

Alternative Minimum Tax Exemptions

If you’re a high earner, it’s possible your income may be subject to the alternative minimum tax (AMT). This is a separate tax system the IRS uses requiring high earners to calculate their tax return twice (using regular tax rates and AMT rates). They are then required to pay the higher of the two. 

There are income exemption amounts that help prevent lower-earning taxpayers from being subject to the AMT.

For 2023, the AMT exemption amounts are:[2]

  • Single filers: $81,300, with a phase-out beginning at $578,150

  • Joint filers: $126,500 with a phase-out beginning at $1,156,300

Contribution Changes for 2023

Contributing to retirement savings accounts is the cornerstone of most people’s retirement planning strategies. Changes to contribution limits and eligibility are important to note, especially since they may impact how much you can set aside for retirement each year in a tax-advantaged way.

401(k)s

Those eligible to contribute to a 401(k), 403(b), 457, or Thrift Savings Plan will be able to contribute up to $22,500 in 2023—up $2,000 from 2022.[4]   

Those over 50 can contribute an additional $7,500, up from last year’s $6,500.4 This means that plan participants who are 50 and over can contribute a total of $30,000 to their 401(k) or other eligible employer-sponsored plans.

IRAs

You can contribute up to $6,500 to an IRA or Roth IRA in 2023, or up to $7,500 if you’re 50 and older.

However, the IRS continues to place certain requirements on taxpayers looking to use these tax-advantaged accounts. For example, if you or your spouse are offered a retirement plan through the workplace, you may not be eligible to deduct traditional IRA contributions from your taxable income. 

How Parkshore Can Help

Knowing the current tax brackets and contribution limits can help you take a year-long approach to tax planning. As these change year to year, you may need to adjust your financial plan as well.

You may want to work with a fiduciary, fee-only financial advisor if you are unsure how to make the most of these changes. Our wealth management firm incorporates changes like these into our clients’ long-term planning.

Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.

Sources:

1. Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years

2. IRS provides tax inflation adjustments for tax year 2023

3. The IRS Is Supersizing Standard Deductions For 2023. Is That Good For Your Taxes?

4. 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500

This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Roseville and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.

Financial PlanningParkshore Wealth ManagementTax Planning, Retirement Planning, Tax Bracket, Standard Deduction, AMT, Alternative Minimum Tax, IRA, 401(k)