As the calendar flips to 2023, it’s crucial for your Finance team to be aware of the tax changes going into effect and for you to take steps to ensure compliance.
In the ResourcefulFinancePro webinar “Tax Changes Finance Pros Need to Know Going into 2023, Pamela Fagan-Shull, president of Audit Business Services Inc., highlighted seven tax changes that will impact budgeting for your Payroll taxes. These tax changes all involve new caps that affect your employees. For the sake of their financial wellness, they need to be kept in the loop.
7 key tax changes for 2023
“Inflation has hit American families really hard. And the changes that IRS has made to the 2023 [tax code means] workers can keep more money out of Uncle Sam’s hands,” she said. “During an era of rising prices, that’s welcome news if you’re trying to prevent financial stress from making life more difficult. However, you’ve got to remember too … that inflation is increasing higher than what our cost of living is.”
- The maximum amount employees can contribute to their 401(k), 403(b), 457 plan or federal government Thrift Savings Plan jumps to $22,500 and catch-up contribution limits for employees 50 and older increase to $7,500. The total annual contribution allowed for those folks adds up to $30,000.
- Maximum annual IRA contributions are now $6,500 (up $500 from the 2022 limit). The IRA catch-up contribution limit for employees 50 and older is now $7,500 annually, an increase over the current $6,500. In addition, the adjusted gross income IRA phaseout range for single filers rises to $138,000-$153,000, and $218,000-$228,000 for married taxpayers filing jointly.
- Health savings account (HSA) contribution limits are higher: $3,850 for individual employees and $7,750 for families. Fagan-Shull added: “To qualify to contribute [to] an HSA plan in 2023, the deductible must be at least $1,500 for individual coverage or $3,000 for family coverage. Annual out-of-pocket expenses can’t exceed $7,500 for self-only coverage and $15,000 for family coverage.”
- Depending on an employee’s income and family size, the Earned Income Tax Credit range is expanding from $600-$7,430. The income phaseout threshold is $17,640 for filers with no children, $46,560 for filers with one child, $52,918 for filers with two children, and $56,838 for filers with three or more children.
- Standard deduction amounts are increasing to $27,700 for married couples filing jointly (currently $25,900), $13,850 for single employees and married individuals filing separately (currently $12,950) and $20,800 for heads of household (currently $19,400). Also note that the additional standard deduction for blind people and senior citizens is $1,850 for single filers and heads of household and $1,500 for married taxpayers (double it if you’re both blind and 65 or older). Since the passing of the Tax Cuts and Jobs Act, more people have been claiming standard deductions, so this news may prompt more than a few employees to submit a new Form W-4 to Payroll for 2023.
- Marginal tax rate thresholds are increasing. The seven tax brackets remain the same; however, the federal income tax rate tables have been adjusted for inflation. So for example, the 22% rate will now apply to employees with taxable income that exceeds $44,725 if filing single and $89,450 if married filing jointly. That’s up from $41,276 and $83,551, respectively. “Your employees … really need to pay close attention to what their total income threshold is so that they can see exactly what impact it will have on them and how much they have coming out of their checks,” Fagan-Shull commented.
- Capital gains tax thresholds are shifting. The 15% amount applies to gains $89,251-$553,850 for married couples filing jointly, $59,751-$523,050 for heads of household, $44,626-$276,900 for married filing separately and $44,626-$492,300 for single filers. The 20% amount applies to anything above those limits. Short-term capital gains assets are still to be taxed as ordinary income.
Tax change: decreases to child credits
Beginning in 2023 “taxpayers will get a significantly larger standard deduction, but they may see smaller write-offs related to their child tax credits,” Fagan-Shull said.
Employees with children may need some financial wellness resources for adjusting their sails as COVID-19 emergency increases to the Child Tax Credit and Child and Dependent Care Credit expire. This will impact parents starting with the 2022 tax year.
Social Security wage base fallout
That’s not the only thing that may take employees by surprise. You may have seen our report that the Social Security taxable wage base is going up.
According to Fagan-Shull, the raising of the wage base could not only result in lower take-home pay for some employees because more of their income is taxable, but it also means the employer pays more taxes because of the requirement to match the Social Security tax of 6.2% of the employee’s salary up to the cap.
“You want to make sure everyone understands the impact this will have on budgets … also on an employee’s final paycheck at the end of the year,” she said.
The Inflation Reduction Act factor
According to Fagan-Shull, now’s the time to start looking into taking advantage of tax cuts that are part of the Inflation Reduction Act of 2022, including:
- The Clean Vehicle Credit of $3,500-$7,500. Keep in mind not all electric vehicles will qualify, so before adding to your fleet, be sure to look over the list of federal government-approved makes and models by clicking here and see IRS Rev. Proc. 2022-42, and
- The Energy Efficient Commercial Buildings Deduction.