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03.17.23   |   Insights

Tax Law Changes for 2023 – Changes May Impact Estate and Retirement Planning

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The federal government has adjusted the laws governing estate planning and retirement planning accounts in 2023, which could impact many Americans in planning for their future.

Retirement Savings

2023 has seen a historic increase in the contribution limit for owners of Individual Retirement Accounts (IRAs). These plans allow individuals to contribute income each year to an investment account used for retirement planning, but the law places a limit on how much an individual can contribute in a given year. The standard contribution limit in 2022 was $6,000, but this has risen to $6,500 in 2023. Additionally, some individuals will also be able to make additional “catch-up contributions” as well. These catch-up contributions are an additional amount an account owner can contribute to their IRA if they are age 50 or older.  The catch-up contribution amount remains the same as last year, at $1,000, allowing older Americans to contribute up to $7,500 in 2023. While the federal government sometimes makes adjustments to this contribution limit based on economic circumstances, this increase is far more significant than previous adjustments in the wake of high inflation levels throughout the last year.

Other retirement savings plans, including 401(k), 457, and 403(b) plans, have seen increases in their employee contribution limits as well. Account owners can contribute $22,500 to these accounts in 2023, up from $20,500 last year. Similar to IRAs, these plans also allow for catch-up contributions.

Income Taxes and Tax Credits

The IRS also announced a roughly 7% increase to U.S. income tax brackets for 2023 for both single and married filers. While the marginal tax rates do not change this year, the tax brackets themselves have been raised to better reflect high inflation rates. Without these sorts of adjustments, workers could find themselves in a higher tax bracket due to increases in wages, without experiencing any meaningful increase in their income due to increases in costs and inflation each year. The IRS raises tax brackets each year to prevent workers from experiencing this “bracket creep,” but the 2023 increase is larger than normal, given the high inflation rates in recent times.

Additional adjustments to tax laws could benefit low and middle-income earners that take advantage of the retirement savings contribution tax credit. This credit allows taxpayers to claim a tax credit up to $1,000, or $2,000 for joint filers, for their contributions to a retirement account, such as an IRA. To be eligible for this credit, a taxpayer must be at least 18, not a full-time student, and not claimed as another’s dependent. Importantly, a taxpayer can only qualify for this credit if their annual income is below a certain dollar amount. That amount has been increased in 2023 to $36,500 for single filers and $73,000 for joint filers, which could allow more Americans to qualify for the credit.

Estate Planning and Gift Taxes

The federal government has also made additional changes to laws regarding gift taxes, estate taxes, and the generation-skipping transfer tax. The federal government may tax individuals on how much money they leave their heirs when they die, known as estate taxes, or how much individuals give to another person as a gift during life, known as gift taxes. The federal government takes the view that these two things are unified, meaning that the government sets a limit on how much a person can give as a gift or leave pass on after they die, and anything over that threshold will be taxed through either gift or estate taxes.

An individual can make combined lifetime gifts and gifts at death up to $12,920,000 without paying estate taxes.  A married couple, with proper planning, can double that amount of gifts without paying estate taxes. Fortunately, some types of gifts are not counted against this amount at all. These exceptions include gifts made to spouses, gifts spent on tuition, and gifts less in value than the annual exclusion amount. The value of the annual exclusion amount has increased to $17,000 in 2023. This means that if someone makes a gift to another person of less than $17,000 this year, it will not need to be reported to the IRS or taxed. The annual exclusion amount can be used for any number of people, meaning the $17,000 amount is applied on a per-person basis.

With so many changes to retirement and estate planning tax laws, it can be difficult for many to plan for their future. Please contact our offices at Critchfield, Critchfield & Johnston to discuss retirement or estate planning needs.

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