6 Key Tax Questions for 2023
Right now, you may be more concerned about your 2022 tax bill than you are about how to handle your personal finances in the new year. However, as you deal with your annual tax filing, it’s a good idea to also familiarize yourself with pertinent amounts that may have changed for 2023.
Not all tax figures are adjusted for inflation. And even if they are, during times of low inflation the changes may be slight. When inflation is higher, as it currently is, the changes are generally more substantial. In addition, some tax amounts can change only with new tax legislation. Here are the answers to six commonly asked questions about 2023 tax-related figures:
1. How much can I contribute to an IRA for 2023? If you’re eligible, you can contribute up to $6,500 for 2023 to a traditional or Roth IRA (up from $6,000 for 2022). If you’re age 50 or older, you can make another $1,000 “catch-up” contribution.
2. I have a 401(k) plan through my job. How much can I contribute to it? For 2023, you can contribute up to $22,500 to a 401(k) or 403(b) plan. You can make an additional $7,500 catch-up contribution if you’re age 50 or older. (These figures for 2022 were $20,500 and $6,500, respectively).
3. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? The threshold for when a domestic employer must withhold and pay FICA for babysitters, house cleaners and other domestic employees has increased to $2,600 for 2023 (up from $2,400).
4. How much do I have to earn in 2023 before I can stop paying Social Security tax on my salary? The Social Security tax wage base is $160,200 for 2023, up from $147,000 for 2022. That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.)
5. On my last income tax return, my itemized deductions didn’t exceed my standard deduction. What’s my standard deduction for 2023? If the total amount of your itemized deductions (such as charitable gifts and mortgage interest) is less than your applicable standard deduction amount, itemizing won’t save you taxes. The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing for many people by increasing the standard deduction and reducing or eliminating various itemized deductions. For 2023, the standard deduction amount is $27,700 for married couples filing jointly (up from $25,900 for 2022). For single filers, the amount is $13,850 (up from $12,950), and, for heads of households, it’s $20,800 (up from $19,400).
6. How much can I give to one person without having to file a gift tax return for 2023? The annual gift tax exclusion for 2023 is $17,000 (up from $16,000 in 2022). This amount is adjusted only in $1,000 increments, so it typically increases only every few years.
These are only some of the tax figures that may apply to you. For more information about your tax picture, or if you have questions, don’t hesitate to contact us.
Is Your Business At Risk of Retirement Plan Leakage?
Generally, the term “leakage” has negative connotations. So, it’s not surprising that the same is true in the context of retirement planning, where leakage refers to pre-retirement withdrawals from a retirement account. Now, as a business owner who sponsors a qualified retirement plan, you might say, “Well, that’s my participants’ business, not mine.”
However, there are valid reasons to address the issue with employees who participate in your plan.
Why does it matter?
For starters, leakage can lead to higher plan expenses. Fees are often determined on a per-account or per-participant basis. When a plan loses funds to leakage, total assets and individual account sizes shrink, which tends to hurt administrative efficiency and raise costs.
More broadly, if your employees are taking pre-retirement withdrawals, it could indicate they’re facing unusual financial challenges. These issues may have a negative impact on productivity and work quality and leave them unable to retire when they planned to.
What can you do?
The most important thing business owners can do to limit leakage is to remind employees about how pre-retirement withdrawals can diminish their accounts and delay their anticipated retirement dates. While you’re at it, consider providing broader financial education to help workers better manage their money, amass savings, and minimize or avoid the need for early withdrawals.
Some companies offer emergency loans that are repayable through payroll deductions to reduce the use of retirement funds. Others have revised their plan designs to limit the situations under which plan participants can take out hardship withdrawals or loans.
Can you eliminate the problem?
According to a 2021 report by the Joint Committee on Taxation, roughly 22% of net contributions made by people ag 50 or younger leaks out of the retirement savings system in a given year. Some percentage of retirement plan leakage will probably always occur, but becoming aware of the problem and taking steps to minimize it are still worthwhile for any business.