The Internal Revenue Service recently announced the most significant increase in retirement contribution and standard deduction thresholds in the past several decades. The higher limits will apply for the 2023 tax year as a response to the current record inflation levels and their impact on the cost of living. Check out these changes and what they could mean to your business taxes:
The IRS Raises 2023 Tax Brackets 7 Percent
The IRS has increased tax thresholds for standard deductions on 2023 income, by the largest amount in nearly four decades in response to historic inflation.
Here are the details:
- The standard deduction for individuals and married people filing separately will be $13,850 for the 2023 tax year. That’s a $900 increase from the $12,950 standard deduction for the upcoming tax season.
- For married couples filing jointly, the increase is to $27,700 for the 2023 tax year. That’s a $1,800 increase from the $25,900 standard deduction set for the upcoming tax year.
- The increases in the marginal tax rates reflect the same 7% rise. For example, the 22% tax bracket for this year is over $41,775 for single filers and over $83,550 for married couples filing jointly. Next year, the same 22% bracket applies to incomes over $44,725 and over $89,450 for married couples filing jointly.
The payout on the earned income tax credit is also increasing. The maximum payout for a qualifying taxpayer with at least three qualifying children climbs to $7,430, up from $6,935 for this tax year.
The child tax credit is another example of tax changes due to inflation. After the payout to parents last year jumped to $3,600 for children under age 6 and $3,000 per child age 6 to 17, its back to a maximum $2,000. The credit’s refundable portion climbs from $1,500 to $1,600 during tax year 2023.
Increased IRS Retirement Contribution Limits Also Increased for 2023
Here’s another breakdown of the changes regarding retirement contributions those who are self-employed should be aware of. Keep in mind that although there are also significant changes to employer-sponsored retirement plan limits, if you are self-employed or a full-time business owner these will not impact you.
- As a self-employed individual, you may be taking advantage of a SEP-IRA. If so, be aware that contribution limits will increase to$67,000 in 2023, up from $61,000 per year in 2022, and up from $58,000 per year in 2021. To contribute the maximum $67,000 to a SEP-IRA, you need to have paid an employee (or yourself) at least $335,000 or 20% of an employee’s salary to a SEP-IRA.
- The limit on annual contributions to an IRA increased to $6,500, up from $6,000. The IRA catch up contribution limit for individuals aged 50 and over is not subject to an annual cost of living adjustment and remains at $1,000.
- The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2023. You can deduct contributions to a traditional IRA if you meet the conditions below. If during the year either you or your spouse was covered by an employer-sponsored retirement plan, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. otherwise, the phase-out ranges do not apply. Here are the phase out ranges for 2023:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $73,000 and $83,000, up from between $68,000 and $78,000.
- For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $116,000 and $136,000, up from between $109,000 and $129,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $138,000 and $153,000 for singles and heads of household, up from between $129,000 and $144,000. For married couples filing jointly, the income phase-out range is increased to between $218,000 and $228,000, up from between $204,000 and $214,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $73,000 for married couples filing jointly, up from $68,000; $54,750 for heads of household, up from $51,000; and $36,500 for singles and married individuals filing separately, up from $34,000.
The amount individuals can contribute to their SIMPLE retirement accounts is increased to $15,500, up from $14,000.
Details on these and other retirement-related cost-of-living adjustments for 2023 are in Notice 2022-55, available on IRS.gov.
Additional Impacts for Business Owners in 2023 Related to the New Inflation Reduction Act
The Inflation Reduction Act (IRA) also has some notable tax changes for 2023. Here are some key ones that should be on the radar of all self-employed, as we reported previously here.
- Enhanced IRS enforcement could increase your risk of an audit. The IRA has big time funding for the IRS to the tune of a $3.1 billion to increase for IRS taxpayer services, $45.7 billion for IRS enforcement, $25 billion for IRS operations support and $4.7 billion for IRS technology upgrades. This means the IRS is going to have more resources than they have in almost thirty years directed at ensuring no taxpayer is left behind (or able to hide) at least for very long.
As a result, the IRS will be able to monitor online app sales, cryptocurrency transactions, and other less regulated business transactions with enhanced technology expressly for this purpose. Those who are self-employed must be upfront reporting all income as well as be meticulous in expense recordkeeping.
- More tax credits for energy-efficient purchases including new and used electric cars, which may impact you if you’re in the market for one and can take advantage of the following:
- The $500 lifetime tax credit limit increase for qualifying energy-efficient improvements to a $1,200 annual tax credit.
- Removal of the manufacturing limit on qualifying electric vehicles, (currently impacting General Motors, Tesla, Lexus, and Toyota electric vehicles) for the credit under current law.
- Limits on claims of the electric vehicle credit to Adjusted Gross Income (AGI) limits of $300,000 for married, $225,000 for head of household and $150,000 for single filers.
- An electric vehicle credit for used electric vehicles of 30% or $4,000, whichever is lower, with AGI limits of $150,000 for married, $112,500 for head of household and $75,000 for single filers.
If you’ve been thinking about making upgrades to your home for energy efficiency or purchasing an electric vehicle, then now may be the time to do it based on the tax incentives included in the IRA.
- Health insurance subsidies under the ACA are extended. The Act includes an extension of the temporarily expanded health insurance subsidies, originally instituted as part of the American CARES Act (ACA) as tax credits, that were put in place for 2021 and 2022 as part of Covid relief. There are more generous subsidies in the Act which remain available through the end of 2025.
If you are self-employed and are getting your health insurance through the government health insurance exchanges with subsidies, then you should be able to avoid any significant premium increase, all else being equal in terms of your coverage, etc.
Tax Impact of Raising Prices
When it comes to the impact of inflation on your business taxes and income, don’t focus just on tax thresholds and credits. It is critical for you to understand how increased inflation will affect your self0employed income and especially how it will likely decrease your disposable income.
You may want to consider some of these measures from our previous post and also to start looking for financial products that help protect against inflation and mitigate its impact on your self-employment income. These may include common anti-inflation assets such as gold, commodities, and various real estate investments. Gold may also serve as an “alternative currency,” particularly in countries where the native currency is losing value.
Consulting with a tax and financial professional is advised prior to making any investments in these areas and also in response to the impact of inflation on your self-employed income can help you make the best of the current business environment.