2023 Tax Inflation Adjustments

January 19, 2023

By Joshua Jenson, CPA

The numbers are in! The Internal Revenue Service (IRS) recently released the 2023 key amounts for those items that are routinely adjusted for inflation. These can be found in IRS Revenue Procedure 2022-38. This article will provide the breakdown, starting with those of most interest.

Nice increases related to retirement

The Traditional Individual Retirement Account (IRA) and Roth IRA have both been increased to $6,500, with the catch-up for those 50 and older remaining at $1,000. The 401(k) has increased to $22,500 with an added increase to the catch-up of $7,500 for those 50 young and older. The Simple IRA has also increased to $15,500 with an added increase to the catch-up of $3,500 for those 50 young and older. The maximum Simplified Employee Pension (SEP) IRA contribution has increased to $66,000 but still has no provision for a catch-up amount.

Although previously released, it would be worth noting the popular Health Savings Account (HSA) has increased for 2023 to $7,750 for a family plan and $3,850 for single, with both allowing a catch up of $1,000. This was specifically included in IRS Revenue Procedure 2022-24.

Estates of decedents

For estate planning purposes, there will be a major increase to the estates of decedents who pass during 2023 with a basic exclusion amount of $12,920,000—up from a total of $12,060,000 for estates of decedents who passed in 2022.

Exclusion for gifts

The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000.

The standard deduction

The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700—up $1,800 from the 2022. The standard deduction for single taxpayers and married individuals filing separately rises to $13,850 in 2023—up $900. The standard deduction for heads of households will increase to $20,800 for the 2023 tax year—up $1,400 from the 2022 tax year.

2023 marginal rates

The top tax rate will remain at 37% for individual or single taxpayers with incomes greater than $578,125 or $693,750 for married couples filing jointly. The lowest tax rate will be 10% for single individuals with incomes of $11,000 or less—or $22,000 for married couples filing jointly. The other rates are as follows:

  • 35% for individual incomes over $231,250 or $462,500 for married couples filing jointly
  • 32% for individual incomes over $182,100 or $364,200 for married couples filing jointly
  • 24% for individual incomes over $95,375 or $190,750 for married couples filing jointly
  • 22% for individual incomes over $44,725 or $89,450 for married couples filing jointly
  • 12% for individual incomes over $11,000 or $22,000 for married couples filing jointly

Election to expense certain depreciable assets

For taxable years beginning in 2023, under IRC Section 179, the aggregate cost of any IRC Section 179 property that a taxpayer elects to treat as an expense cannot exceed $1,160,000 and the amount allowed for a sport utility vehicle cannot exceed $28,900. The $1,160,000 limitation is reduced—but not below zero—by the amount for which the cost of IRC Section 179 property placed in service during the 2023 taxable year exceeds $2,890,000.

NOTE: Although not affected by anything new, it should be noted the Tax Cuts and Jobs Act (TJCA) already has scheduled bonus depreciation under IRC Section 168 to be reduced to 80% in 2023, and it will continue to be reduced by 20% each year thereafter, until it is fully phased out by Jan. 1, 2027.

Qualified business income

For taxable years beginning in 2023, the threshold amounts and phase-in range amounts under IRC Section 199A are as follows:

  • Married filing jointly - The threshold of $364,200 and phase-in range at $464,200
  • Married filing separately (including all others) - The threshold of $182,100 and phase-in range at $232,100

Limitation on use of cash method of accounting

For taxable years beginning in 2023, a corporation or partnership meets the gross receipts test of IRC Section 448(c) for any taxable year if the average annual gross receipts of such entity for the three-taxable-year period ending with the taxable year that precedes such taxable year does not exceed $29,000,000.

Threshold for excess business loss

For taxable years beginning in 2023, in determining a taxpayer’s excess business loss, the amount under IRC Section 461 is $289,000 or $578,000 for joint returns.

Take note: TCJA originally placed this play until Dec. 31, 2025. However, the American Rescue Act extended it by one year, and the recently enacted Inflation Reduction Act extended it by an additional two years. Therefore, we will be tackling this through Dec. 31, 2028.

Also, per TCJA, be aware that any actual excess business losses are carried to the following year as a net operating loss (NOL), to the extent of 80% of taxable income per the TCJA provided limitation.

For NOLs in Oklahoma, while we can no longer carry NOLs back—starting in 2021, with possible exceptions for certain farmers—the Oklahoma tax return does require the Oklahoma NOL be tracked separately from the Federal NOL. Out of an abundance of caution, you should consider attaching a separate Oklahoma election to forego the NOL carryback with the originally-filed Oklahoma return, even though the current Oklahoma instructions are somewhat vague as to whether this is will still be required for certain nonfarmers.

Wages and self-employment income

For 2023, W-2 wages and self-employment income will be subject to social security taxes up to $160,200, with a continued “no limit” for these items subject to the Medicare tax.

Eligible long-term care premiums

For taxable years beginning in 2023, the limitations under IRC Section 213 regarding eligible long-term care premiums includible in the term “medical care,” are as follows based on age:

  • Ages 40 and under: The limitation is $480
  • Ages 41-50: The limitation is $890
  • Ages 51-60: The limitation is $1,790
  • Ages 61-70: The limitation is $4,770
  • Ages over 70: The limitation is $5,960

Foreign earned income exclusion

For the tax year of 2023, the foreign earned income exclusion is $120.

Qualified adoption expenses

The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950.

Alternative minimum tax

The Alternative Minimum Tax (AMT) exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150—or $126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300.

Earned income tax credit

For tax year 2023, the maximum Earned Income Tax Credit (EITC) amount is $7,430 for qualifying taxpayers who have three or more qualifying children. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds and phase-outs.

Qualified transportation fringe benefits

For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300.

Health flexible spending arrangements

2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610.

Medical savings accounts

For tax year 2023, participants who have self-only coverage in a Medical Savings Account (MSA) must have a plan with an annual deductible that is between $2,650 and $3,950. For self-only coverage, the maximum out-of-pocket expense amount is $5,300. For family coverage, the annual deductible must be between $5,300 and $7,900. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023.

IRS Notice 2022 - 44

A few months ago, the IRS released IRS Notice 2022-44, which provides that the special per diem rates allowing taxpayers to substantiate ordinary and necessary business expenses of travel away from home will be slightly higher starting Oct. 1, 2022, through Sept. 30, 2023.

Child and dependent care tax credit

As the previous law expired, the child and dependent care tax credit—as well as the child credit—went down, falling back to the amounts we have known for years.

Items unaffected by indexing for inflation

By statute, certain items that were indexed for inflation in the past have not been adjusted.

Personal exemption
The personal exemption for tax year 2023 remains at zero, as it was for 2022. This elimination of the personal exemption was a provision in TCJA.

Itemized deductions
Again, there is no limitation on itemized deductions for tax year 2023, as this limitation was eliminated by the TCJA.

Lifetime Learning Credit
The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit (LLC) provided in IRC Section 25A is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The LLC is phased out for taxpayers with modified adjusted gross income in excess of $80,000 or $160,000 for joint returns.

Interest on education loans
Interest on education loans is still limited to a $2,500 maximum deduction for interest paid on qualified education loans under IRC Section 221 and begins to phase out with modified adjusted gross income in excess of $75,000—or $155,000 for joint returns. Interest on education loans is completely phased out for taxpayers with a modified adjusted gross income of $90,000 or more—or $185,000 or more for joint returns.

Net Investment Income Tax
We will continue to see the Net Investment Income Tax (NIIT) applied to the same income classifications in 2023, with no increase to these thresholds.

Social Security

It is worth noting that the Social Security Administration (SSA) has a cost-of-living adjustment (COLA) of 8.7% for both Social Security and Supplemental Security Income (SSI) benefits beginning in January 2023.

In 2023, retirees receiving Social Security benefits will be able to earn $56,520 in the year they reach full retirement age before their benefits are reduced by $1 for every $3 in earnings over the limit.

Beneficiaries younger than full retirement age can earn up to $21,240 in 2023 before their benefits are reduced by $1 for every $2 in excess earnings.

The maximum Social Security benefit for a worker retiring at full retirement age will increase to $3,627 per month in 2023.

Don't forget

Be sure to take the special provision into consideration that allows charitable contributions to be deducted in addition to the standard deduction that expired in 2022. Also, remember there is also the ability to deduct mortgage insurance premiums (PMI) as an itemized deduction.

Don’t forget this one! The 100% deduction of qualifying business meals ends. For tax year 2023, we will be back to the allowable amount of 50%—with entertainment expenses still yielding no tax deduction.

Nothing new, but remember that the Employer-Provided Educational Assistance provision is still in play through Dec. 31, 2025—allowing employers to pay up to $5,250 in educational assistance (including student loan payments) in a manner that is not taxable to employees, not subject to payroll taxes and deductible to the employer.

Also, continuing into 2023 through Dec. 31, 2025, is the Work Opportunity Tax Credit.

Conclusion

Be sure to share all this information with friends, family and clients so they can plan accordingly for tax year 2023—with the good news being, our tax software will make sure we get everything right in 2023!

If you are curious about an area not mentioned, be sure to review IRS Revenue Procedure 2022-38.

JOSHUA JENSON, CPA, has more than 30 years of public accounting experience bringing daily videos & value to his over 81,000 subscribers on YouTube where he has amassed more than 6,600,000 views. He has authored 2 books and traveled to more than 50 cities presenting tax courses to thousands of fellow CPAs, covering the latest tax laws and strategies. Jenson founded his own CPA firm at age 25, and still serves & advises his private clients daily. He also manages his life & disability income insurance practice, Jenson Insurance.