Need-to-Know 2023 Tax Updates

It’s that time of year when the Internal Revenue Service (IRS) announces changes to its rules for the next tax year ahead. While you’re likely still trying to get this tax year closed out, the latest batch of updates from the IRS is worth paying attention to. 

Here are the most important tax updates you need to know for 2023:

Tax Bracket Threshold Increased

In mid-October, the IRS announced it would be increasing the tax bracket thresholds by about 7% for the 2023 tax year. While annual alterations are typical, this level of increase hasn’t been seen since 1985. According to the IRS, the jump is necessary to keep pace with inflation.

Effect

What does this change mean? First, many individuals who were situated on the edge of their tax bracket in 2022 will now find themselves in a lower bracket. As a result, they’ll see higher take-home pay.

This also means that more employees will need to make changes to paycheck withholding amounts, retirement contributions, and health savings plans.

Employers and HR personnel should be prepared for the influx of paycheck alterations by making themselves available for guidance. They may also want to host an in-depth presentation on the implications of the tax changes before year-end.

Deduction Amounts Raised

As part of the IRS’s inflation adjustment, all 2023 filers claiming the standard deduction will see less of their income subject to federal income tax.

The IRS has announced the following increases from 2022’s standard deductions:

• $900 for single-filing taxpayers (including married taxpayers filing separately) 
• $1,800 for married, joint-filing taxpayers
• $1,400 for those filing as heads of households

Effect

The change in standard deduction amounts further decreases a filer’s taxable income. Along with increased tax thresholds, this is another opportunity for taxpayers to drop into a lower bracket.

Other Updates

• The unemployment 2023 wage base was increased in many states. Iowa’s weekly unemployment rose to $551-$676, from $531-$651, while Illinois’ new range is now $542 -$742, up from $505-$697.
• The Social Security wage base increased to $160,200, with the maximum Social Security employer contribution increasing to $818.40 in 2023.
• The amount individuals can contribute to their 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings plans in 2023 has increased to $22,500, up from $20,500 for 2022. The limit on annual contributions to an IRA increased to $6,500, which is up from $6,000.

With all the anticipated changes to employee paychecks, make sure you have a great payroll provider who can keep up. Here at Future Systems, we can ensure your year-end is less hectic. Request a quote!