Financial advisors have a slew of new retirement and estate tax planning opportunities to capitalize on in 2023. Hit the ground running by communicating these ideas to your clients early in the year. Timing is everything, and that's especially true when it comes to tax planning.
Inflation Benefits
Sure, inflation is a problem, but when it comes to tax planning, it's an opportunity. The cost-of-living increases (inflation-adjusted amounts) for 2023 are the largest in history, expanding tax brackets and other tax benefits. Not only are we in a low-tax environment, but more income can now pass through the lower brackets than ever before.
1. Clients can save more for retirement on a tax-preferred basis.
More funds can be contributed to all types of retirement savings accounts in 2023. Many clients who are working can take advantage of these increases and may be able to contribute more to both IRAs and company plans (assuming they have the disposable income to do so). Identify clients who may be able to save more across several retirement accounts.
Example
Joe, age 55, has a 401(k) plan with his company.
He can contribute a total of $7,500 to an IRA (or a Roth IRA as long as his income is below the Roth contribution income limits, which also increased for 2023). The regular IRA or Roth IRA contribution limit increased from $6,000 to $6,500 for 2023.
Since Joe is 55, he can also take advantage of the $1,000 catch-up contribution for those age 50 or older. It's interesting that in this inflationary time, the $1,000 IRA catch-up contribution is one of the few limits in the tax code that does not increase. The tax law does not provide for it.
Joe can also contribute a total of $30,000 to his 401(k) plan in combined pre-tax or Roth contributions (if his company offers Roth contributions). Unlike the Roth IRA, there is no income limit for making Roth 401(k) contributions. The base contribution limit for 2023 is $22,500, and the increased catch-up contribution of $7,500 bumps the limit up to $30,000.
Assuming Joe has the disposable income or savings to make the maximum contributions, he can stash away a total of $37,500 [($7,500 in his IRA + $30,000 in his 401(k)].
If Joe is married and his spouse is 50 or older and also works for a company that sponsors a 401(k), the combined amount they can save for retirement this year alone is an impressive $75,000! ($37,500 x 2 = $75,000.) We have not seen these huge savings opportunities before, but thanks to inflation, they're here now. Advisors should connect with clients who may be in a position to take advantage of this.
Self-employed clients can also increase their SEP or SIMPLE IRA contributions for 2023.
2. Thousands of dollars of income will be taxed at lower rates.
Now let's look at the 2023 tax brackets:
Taxable Ordinary Income Brackets for 2023
| Marginal Tax Rate | Single | Married Filing Jointly |
| 10% | $0 – $11,000 | $0 – $22,000 |
| 12% | $11,001 – $44,725 | $22,001 – $89,450 |
| 22% | $44,726 – $95,375 | $89,451 – $190,750 |
| 24% | $95,376 – $182,100 | $190,751 – $364,200 |
| 32% | $182,101 – $231,250 | $364,201 – $462,500 |
| 35% | $231,251 – $578,125 | $462,501 – $693,750 |
| 37%* | Over $578,125 | Over $693,750 |
* The top rate is effectively 40.8% for those subject to the 3.8% Medicare surtax on net investment income (those with MAGI over the thresholds of $250,000 joint filers/$200,000 single filers).
In 2022, the 24% bracket for married-joint filers topped out at $340,100. It now goes to $364,200 — an increase of $24,100. That's $24,100 of additional income that can still be taxed at the low 24% rate. The bracket expansions are even larger for the higher tax brackets.
