By Joseph P. Marmorato, CPA

As we take a deep breath following tax filing day for individuals, don’t stop your clients’ tax work now. This is a really good time to think about how to help our clients prepare for next year’s tax return. Too soon? Well, hear me out.  

Every year, the IRS announces inflation adjustments for a number of tax provisions. These adjustments impact tax brackets and retirement contribution limits. With inflation rates being the highest we’ve seen in over 40 years, the IRS increases for 2023 are significant.

Here are some areas to consider for the upcoming year. The earlier you can help your clients with these issues, the better you’ll be able to maximize any benefits for them.  

Paycheck Checkup

The federal tax code operates on a pay-as-you-go basis: taxes are paid as income is earned or received. In fact, the IRS requires that taxpayers have at least 90% of their taxes paid in by the time they file their tax return. While most employees assume that their employer is adequately withholding for them, many would be surprised to find out that is not always the case.  

In addition to avoiding potential penalties or interest on late tax payments, sufficient withholding can help avoid tax-filing surprises such as a larger tax bill than years past. Withholding gaffs can arise when a major life event occurs, such as the following:

• Marriage  
• Divorce
• A birth or adoption  
• Retirement  
• A new job
• Tax law changes

If your annual paycheck “checkup” with your client reveals a necessary adjustment to withholding elections, W-2 employees should complete a Form W-4 (Employee’s Withholding Allowance Certificate). Make sure they check with their employer before making these changes to ensure all proper forms have been completed (state withholding forms may be required as well).  

Recently, the IRS modified the form to allow individuals to withhold on other income that may not typically have withholding taken out, such as interest, dividends, and even retirement income such as IRA or 401(k) withdrawals.

Revisiting withholding elections with your clients after tax day can make sure they are sufficiently covered and gives them a good idea of what to expect for the year ahead.

Revisit Retirement Contributions

Whether your clients contribute to an employer-sponsored plan or an IRA, the inflation adjustments for 2023 will allow taxpayers to save more than ever before.  

Employer-Sponsored Retirement Plans – Employees covered under an employer-sponsored retirement plan – 401(k), 403(b), and 457) will see the following increases to contribution limits:

• Annual contributions to a qualified plan increase to $22,500, up from $20,500 in 2022.
• Additional catch-up contributions for individuals ages 50 or older increase to $7,500, up from $6,500 in 2022.  

Retirement contributions can generally be adjusted through a client’s payroll provider at any point during the year. Be sure they check their elections to make sure they’re still suitable for their personal needs and goals. Keep in mind that spreading out contributions evenly throughout the year allows them to buy into the market at different times, helping reduce the impact of volatility.  

Finally, encourage clients to find out if their employer offers a match on a percentage of their contributions. If the employer offers this benefit and the client is not contributing enough to receive a full matching contribution, they may be losing out on free money!

Traditional and Roth IRAs – Individuals who contribute to retirement accounts outside of an employer will see the following increases:

• The limit on annual contributions to an IRA increases to $6,500, up from $6,000 in 2022.
• The additional catch-up contribution for individuals ages 50 or older remains at $1,000.

The IRS also adjusted the income limits for those looking to make a Roth IRA contribution. A maximum Roth IRA contribution can be made if modified adjusted gross income is less than $138,001 for single filers and $218,001 for married couples filing jointly. When a client’s income starts to exceed these amounts, the eligible Roth contribution starts to phase out. Adjusting to these brackets now can help you and your clients plan for the year by seeking out opportunities that keep income below the thresholds.  

Maximize Gifting

Starting in 2023, the IRS allows individuals to give away up to $17,000 per person tax free. This means married couples can give up to $34,000 a year, without any concern for gift taxes.  

The federal gift tax applies to all gifts of property (including cash) made by an individual during the year that exceeds a person’s lifetime exemption. This lifetime exemption can also impact an individual’s taxable estate, so it is important for clients to be mindful of these amounts when gifting.  

Beginning Jan. 1, 2023, a married couple can transfer a combined $25.84 million of wealth, free of gift and estate tax, up from $24.12 million in 2022. A single taxpayer can transfer $12.92 million, up from $12.06 million in 2022. Be aware, the lifetime exemption amounts are set to drop to $5 million per person, adjusted for inflation, beginning in 2026.  

Take Advantage of Increased Deductions and Bracket Changes

Deductions, credits, and tax brackets are adjusted for inflation each year. While many do not require any action from taxpayers, it is good that clients be aware of these changes as they may impact their overall tax situation. Here are a few changes for 2023:

• The standard deduction will increase to $13,850 for single filers, up from $12,950 in 2022. For married couples filing jointly, the standard deduction will increase to $27,700, up from $25,900 in 2022. The additional standard deduction for individuals ages 65 or older will also increase to $1,500, up from $1,400 in 2022.  
• Tax brackets for 2023 will increase by approximately 7% over the prior year. For example, the top tax rate of 37% will now apply to single filers with incomes greater than $578,125, up from $539,901 in 2022. The 37% tax rate will apply to married filers with incomes greater than $693,750, up from $647,850 in 2022.
• The Social Security Administration announced that Social Security & Supplemental Security Income benefits will increase by a historic 8.7%. To help fund this increase, the maximum amount of earnings subject to Social Security taxes will now be $160,200, up from $147,000 in 2022.  

New Retirement Rules  

At the end of 2022, President Joe Biden signed the SECURE 2.0 Act into law, which established new rules for retirement accounts. These changes become effective over the span of several years, altering the way many Americans save for retirement.

Some of the key changes include the following:  

• Increased catch-up contribution limits for those ages 60-63.  
• Annual inflation adjustments for IRA catch-up contributions.
• Catch-up contributions for qualified plans must be made on an after-tax basis (i.e., Roth contributions) for those earning more than $145,000.  
• Allowable emergency withdrawals from retirement accounts for up to $1,000 per year.
• Employer matching contributions are now allowed to be made on an after-tax basis.  

Many of these changes are viewed to be favorable to taxpayers. However, with ninety-plus provisions included in the bill, it may be best to spend time reviewing the details to see how they may affect your clients.

Conclusion

As clients start to file away all their 2022 tax documents, spend a little time with them reviewing their financial situation to see how they will be affected by the above changes in 2023.  

Joseph P. Marmorato, CPA, is manager of tax planning at Domani Wealth in Lancaster, Pa. He can be reached at joe.marmorato@domaniwealth.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.