October is now behind us and it has delivered on its track record as a historically favorable month for stocks, offering some respite for investors as major equity indices rose for the month. The downside pressure on equities had gotten a bit overdone after investor pessimism during September reached lows not witnessed in quite a few years. From a contrarian perspective, extreme pessimism can often be followed by a market bounce. Such a reaction can serve as a reminder not to react too quickly to near-term market developments. Gains in October helped deliver that message again, though they have only slightly offset this year’s losses during what has been a very tough environment for capital markets.
Financial Tip of the Month – IRS Increases
We all know that the buying power of the dollar has dropped significantly this year resulting in higher prices for the things we buy every day. While this impacts each individual and family in different ways, there are some silver linings that we can focus on in this month’s “tip of the month”. Much of the silver lining can be found around the 8.33% Cost of Living Adjustment (COLA) that the IRS has implemented for 2023. This increase results in increased Social Security benefits but also adjusts various limits for IRS Tax purposes. Some of the details can be found at the IRS.gov website or in the IRS Notice 2022-55 (https://www.irs.gov/pub/irs-drop/n-22-55.pdf) but we will break down some of the more often used changes below.
Change Highlights (KEEP IN MIND THESE CHANGES APPLY TO TAX YEAR 2023 NOT THIS YEAR):
- IRA Contribution limit goes from $6,000 per year to $6,500 per year (catch up contributions remained at $1,000 extra if you are over 50).
- The max you can defer to your 401(k) or 403(b) as an employee, goes from $20,500 to $22,500 per year.
- Standard Deductions changed to the following:
- Married filing Jointly - $27,700
- Single or Married filing separately - $13,850
- Head of household - $20,800
- New Tax Brackets for Income Tax:
- 37% for incomes over $578,125 ($693,750 for married couples filing jointly);
- 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
- 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
- 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
- 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
- 12% for incomes over $11,000 ($22,000 for married couples filing jointly).
- 10% under the above amounts
- Annual exclusion for gifts (the amount you can give to an individual without reporting it on your tax return) increased from $16,000 to $17,000.
Business Owner highlights:
The following changes may have more relevance to small business owners.
- Compensation used for 401(k), 403(b), Profit-Sharing Plans, etc. will be increased from $305,000 to $330,000.
- Limitations for Defined Contribution Plans (think 401(k)) will be increased from $61,000 to $66,000 per year (25% of employee’s compensation still applies).
- SIMPLE Plan maximum contributions will go from $14,000 to $15,500 per year ($3500 catch up for over 50 years old).
There are obviously many other items that have changed for the 2023 tax year. For more information on specifics please be sure to talk to your CPA. If you want to talk about how these changes impact your ability to save for retirement or how we can tax advantage of the increase in the tax brackets to implement some tax saving strategies, give us a call and we can dive into the details for your situation.
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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest you discuss your specific situation with a qualified tax or legal advisor.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor on your specific situation. In no way does the advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.