The 2023 tax season began in January and covers income earned in 2022. This season, there are some changes in store, including changes to the amount that people can contribute to tax-advantaged retirement accounts, tax brackets, and tax rates.
When are 2022 Taxes Due?
Typically, federal taxes must be filed by April 15th. The 15th falls on a Saturday in 2023. For this reason, the filing deadline is Tuesday, April 18th, 2023. Those who can’t file by that date should file an extension with the IRS. Those with extensions have until Monday, October 16th, 2023.
2023 Tax Brackets
America has a progressive tax system in which higher levels of income are taxed at a progressively higher rate. However, just because someone falls into the tax bracket that is taxed at 37% it doesn’t mean that all income is taxed at 37%. It’s only the income over $578,125 that will be taxed at that rate. All other income will be taxed at the lower, appropriate rate.
The 2023 tax brackets have been adjusted:
- All income under $11,000 is taxed at 10%
- Income between $11,000 and $44,725 is taxed at 12%
- Income from $44,725-$95,375 will be taxed at 24%
- Income from $182,101 to $231,250 will be taxed at 32%
- From $231,251 to $578,125 will be taxed at 35%
2023 Standard Deductions and Personal Exemptions
Ready for some good news about taxes and inflation? Standard deductions are being raised for 2023. What is a standard deduction and how does it work? Deductions are expenses taxpayers are allowed to take out of their taxable income to reduce the amount of taxes they owe. The amount of the standard deduction is high enough that many people don’t have to pay income taxes at all because it reduces the amount of their taxable income to zero.
Single taxpayers and those who are married but filing separately will get an exemption of $13,850 in 2023. This represents an increase of $900 over 2022. Married people filing jointly will see a raise of $1,800 with a new exemption rate of $27,700. Married taxpayers over the age of 65 get to claim an extra $1,500 each as a deduction in 2023. Single taxpayers over 65, including those who are widows or widowers, can claim an additional $1,850.
How does this translate into real life? A single taxpayer making $35,000 will have the amount of income they owe taxes on reduced to $21,150. Assuming no other deductions, that means they would owe $2,368 in federal taxes when they file their taxes in 2023.
Other Types of Deductions
The standard tax deduction is the most popular of all tax deductions. Contributions to eligible retirement accounts are another popular deduction. Contributions made to employer-sponsored tax accounts like 401(k)s automatically reduce the amount of taxable income. Contributions to traditional IRAs are deduced during the filing process. Taxpayers with a health insurance plan that qualifies them to open a Health Savings Account (HAS) can deduct up to $3,650 for those filing singly, or $7,300 for joint filers or filers with families. Interest paid on student loans is deductible and taken by a lot of filers. These deductions can be taken by people who are taking the standard tax deduction. Some filers forgo the standard deduction and instead itemize their deductions. Itemized deductions include eligible medical expenses and mortgage interest. It’s suggested that taxpayers only itemize their deductions if those deductions are more than the standard tax deduction for which they are eligible.
How to File an Extension
Despite best intentions, it is easy for the April deadline to arrive and not be ready to file taxes. Maybe you’re still waiting on W2 from an employer, a 1099 from a freelance job, or some other type of needed document. Perhaps your taxes are unexpectedly complicated, and you need assistance you can’t access until after the deadline. Or maybe you just lost track of time.
No matter what the reason, the IRS allows filers to file an extension. Be aware that an extension gives filers additional time (until October 16th in 2023) to file their tax returns, but it doesn’t give filers additional time to pay their taxes. Filers should pay their estimated tax bill when they file their extension request. It’s possible to file the extension directly on the IRS website.
What to do if you can’t afford to pay your income taxes:
The IRS offers payment plans, or the taxpayer can get a loan to pay unanticipated taxes bills. Not paying estimated taxes by the April deadline subjects filers to IRS penalties and fees. Those paying estimated taxes should indicate their tax payment is an estimated amount that is part of an extension request. This is true for those mailing a check and paying the IRS electrically using the Electronic Federal Tax Payment System, or EFTPS.
Changes to Retirement Account Contributions
The IRS is also raising the contribution limits for retirement accounts. Retirement accounts include traditional and Roth IRAs, 401(k)s, 403(b)s, some 457 plans, and Thrift Savings plans. There have always been and will continue to be different allowed contribution amounts for different types of retirement accounts. Other rules, like taxpayers over 50 being allowed to make catch-up contributions, remain in effect.
During 2023, employees will be able to contribute up to $22,500 into an eligible Thrift Savings, 457 plan, 403(b), or 401(k). This is an increase of $2,500 over 2022. Catch-up contributions to these plans have also increased. Those over the age of 50 can contribute an additional $7,500 during the year for a total of $30,000.
The above-mentioned plans are established and administrated by employers, be they governments, for-profit businesses, or nonprofit organizations. Independent Retirement Accounts, or IRAs, aren’t tied to an employer. The limit for these types of accounts is going up $500 for a new total of $6,500. Those contributing the max to their employer-sponsored retirement account are still eligible to contribute up to the maximum allowed amount into an IRA.
There are two types of IRAs, traditional and Roth. Roth IRAs are only available to single filers making less than $153,000. Married couples filing jointly can make up to $228,000 and still be eligible for a Roth. There’s a phase-out range for Roths.
What is the difference between traditional and Roth IRAs? Traditional IRA contributions are tax-deductible for the year when the contributions were made. When withdrawals are made from these accounts in retirement, they are taxed at the retiree’s current tax bracket. For most people, their tax bracket lows significantly in retirement. Traditional IRAs allow contributors to lower their tax burden during their working years. However, money withdrawn before the account holder is 59 1/2 years of age or older is subject to penalties.
Those contributing to Roth IRAs don’t get a tax deduction for those contributions. However, all withdrawals during retirement are tax-free. People with traditional IRAs are required to take regular distributions, however, Roth IRAs don’t have this requirement. Also, account holders can remove money from their Roth IRAs at any time without penalties.