Happy New Year! With the start of a new year, you may be wondering... what's new in the tax world and how might this impact me?
Starting January 1, 2023
- Individuals can transfer $12.92 million during life or at death without triggering a federal estate tax bill. This is an increase from $12.06 million in 2022. Note that on January 1, 2026, this exemption drops to just under $6 million (Inflation adjusted).
- The annual gift tax exclusion increases to $17,000 which is an increase from $16,000 in 2022.
In the event of the death of a spouse, with a combined estate of close to 5 million (or less) consider filing a portability estate tax return (IRS Form 706) to utilize the deceased spouse's $12.92 estate tax exemption if needed. See my article entitled, "Don’t Throw Away a $12.06M Estate Tax Exemption by Accident" on Kiplinger.
- Wealthy taxpayers with taxable estates should consider gifting assets to the next generation how to avoid the imposition of estate tax. A dynasty trust can be utilized which allows the parent to retain dictatorial control over the assets gifted. A completed gift NING trust could avoid both California tax and future estate tax in the right circumstances.
- Set up on top off 529 plans for heirs.
- Create and fund a family limited partnership of family limited liability company (LLC). You can gift partnership or LLC interests for gifts.
- The key is to plan and for that plan to first focus on your long-term goals and objectives for your family. Then seek to achieve these goals in the most tax efficient method possible.
New Income Tax Rates Effective January 1, 2023
These rates are published by the Internal Revenue Service (IRS) in Revenue Procedure 2022-38. Click here to view the IRS publication.
New for 2023
The Inflation Reduction Act extended certain energy related tax breaks and indexed for inflation the energy efficient commercial buildings deduction beginning with tax year 2023. For tax year 2023, the applicable dollar value used to determine the maximum allowance of the deduction is $0.54 increased (but not above $1.07) by $0.02 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent. The applicable dollar value used to determine the increased deduction amount for certain property is $2.68 increased (but not above $5.36) by $0.11 for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25 percent.
Highlights of Changes in Revenue Procedure 2022-38
The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.
The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:
- The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
- Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
- The other rates are:
- 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).
The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
- The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).
- The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing maximum EITC amount for other categories, income thresholds and phase-outs.
- For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022. For the taxable years beginning in 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, an increase of $40 from taxable years beginning in 2022.
- For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.
- For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.
- Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
- The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.
- The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022