- Jacob Patterson
2023 Tax update!
The IRS has made some big changes for the 2023 tax year, including new tax brackets and new IRA/401k contribution limits.
First, the IRS increased the tax brackets for both single and joint filers. This change was made to avoid “bracket creep”, where consumers are effectively taxed more because their purchasing power decreases. The IRS is taking this step to keep taxes paid the same as in 2022.
How do tax brackets work?
Many people get confused about tax brackets and there are a lot of misconceptions surrounding them. This is how they work. Looking at the tables above, if you made $44,827 as a single person in 2023, you would be taxed 0% federally on the first $11,001 dollars you earn, 12% on the next $33,725 that you earn, and 22% on the $100 that you made within the third bracket. So, if you are worried about getting into the next tax bracket, don’t be! Moving into the next bracket only affects the dollars before that next bracket, it does not affect all of your earnings.
The IRS also recently announced that they would significantly increase the caps on 401(k) and IRA accounts for tax year 2023. The cap on the 401(k) was increased from $20,500 to $22,500 and the IRA cap was increased from $6,000 to $6,500. This is good news, as tax-advantaged investment accounts are a great way to keep more of your money! The catch-up contribution (for participants who are 50 and older) increased 15.4% from $6,500 to $7,500.
Written by: Jacob Patterson
Tables made by CNBC - Mike Winters (Source: IRS)