While many individual taxpayers continue to benefit from Trump-era tax rates and deductions, enacted as part of TCJA), with a now divided Congress, there is little expectation the framework of that legislation and any benefits associated with them will change until after the 2024 elections. That said, the impact of the current inflationary environment will result in some increases in tax brackets, exemptions and deductions going forward into 2023 which should be beneficial to all levels of taxpayers.
A number of the tax changes that came out of TCJA impacting individuals will sunset in 2025 and therefore, as that time draws closer, unless the next election results in Republican control, such changes are expected to sunset after 2025. The expiration of many of these TCJA provisions were necessary to adequately score the net revenue impact of the legislation (within the 10-year budget period limitations); further legislation will be required to extend or modify such provisions following the 2024 elections.
- Impact of Inflation on 2023 Tax Rates & Deductions
On October 18, 2022, the IRS announced its annual inflation adjustments for more than 60 different tax provisions, including changes to its current tax rate schedules. These adjustments are unique in comparison to previous annual adjustments because of the significant inflation currently taking place in the United States. As a result, the announced adjustments are larger than prior years, with a roughly 7% increase to income thresholds within each federal tax bracket. An adjustment like this should result in more US taxpayers staying in lower marginal tax brackets next year, consequently reducing their overall tax obligations for 2023.
A brief highlight of the announced changes is provided below. For more information, refer to the IRS’s recently published Revenue Procedure 2022-38.
- 2023 Tax Brackets and Rates
The seven marginal tax rates in each bracket remain unchanged for 2023. However, as mentioned above, the income tax thresholds for each bracket have been adjusted to the following:
|Tax Rate||For Single Filers||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||$0 to $11,000||$0 to $22,000||$0 to $15,700|
|12%||$11,000 to $44,725||$22,000 to $89,450||$15,700 to $59,850|
|22%||$44,725 to $95,375||$89,450 to $190,750||$59,850 to $95,350|
|24%||$95,375 to $182,100||$190,750 to $364,200||$95,350 to $182,100|
|32%||$182,100 to $231,250||$364,200 to $462,500||$182,100 to $231,250|
|35%||$231,250 to $578,125||$462,500 to $693,750||$231,250 to $578,100|
|37%||$578,125 or more||$693,750 or more||$578,100 or more|
- Standard Deduction and Personal Exemption
For 2023, the standard deduction will increase by $900 for single taxpayers and married taxpayers filing separately; $1,800 for married taxpayers filing jointly; and $1,400 for heads of household. The standard deduction is also $1,500 higher for those over 65 or blind (up from $1,400 in 2022) and $1,850 higher if also unmarried and not a surviving spouse (up from $1,750 in 2022). The basic deduction limits are:
|Married Filing Jointly||$22,700|
|Married Filing Separately||$13,850|
|Head of Household||$20,800|
- Capital Gains Rates
Income earned from the sale of property is treated as capital gains, and the IRS assesses taxes on these gains based on the taxpayer’s level of income and the holding period of the property sold. Short-term gains (gains earned on property held less than a year) are taxed as ordinary income, while long-term gains (gains earned on property held more than a year) are charged at either 0%, 15% or 20%, based on the filing status of the taxpayer and their taxable income for the year. Proper planning around the receipt of taxable income and sales of capital assets can allow for taxpayers to benefit from a lower than the maximum 20% tax rate. For 2023, the IRS increased these income thresholds applicable to long-term capital gains taxes as follows:
|Tax Rate||For Single Filers||Married, filing jointly||Married, filing separately||For Heads of Households|
|0%||$0 to $41,675||$0 to $83,350||$0 to $41,675||$0 to $55,800|
|15%||$41,676 to $459,750||$83,351 to $517,200||$41,676 to $258,600||$55,801 to $488,500|
|20%||$459,751 or more||$517,201 or more||$258,601 or more||$488,501 or more|
- Alternative Minimum Tax
The Alternative Minimum Tax (AMT) system calculates and assesses AMT based on an alternate definition of taxable income, called Alternative Minimum Taxable Income (AMTI). Low-income and middle-income taxpayers are typically not subject to AMT due to large exemptions that remove their income from AMTI classification. However, this exemption phases out for high-income taxpayers. The AMT is assessed at two rates: 26% and 28%. For 2023, the AMT exemption amounts are as follows:
|Married Filing Jointly||$126,500|
AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches the following thresholds:
|Married Filing Jointly||$1,156,300|
- Child Tax Credit
The maximum Child Tax Credit is $2,000 per qualifying child and is not adjusted for inflation. The refundable portion of the Child Tax Credit is adjusted for inflation and will increase from $1,500 to $1,600 for 2023.
- Qualified Business Income Deduction (Sec. 199A)
The Tax Cuts and Jobs Act of 2017 includes a 20% deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $182,100 (or $364,200 for joint filers) in 2023. This deduction remains available through 2025 for sole proprietors and pass-through entities (partnerships and S corporations).
- 401(k) and IRA limit increases
The amounts that individuals can contribute into their 401(k) plans, 403(b) plans, and most 457 plans will increase in 2023 to $22,500, up from $20,500 for 2022. Similarly, the limit on annual contributions into an IRA will increase to $6,500, up from $6,000.
The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is increased to $7,500, up from $6,500. Therefore, participants in these plans who are 50 and older can contribute up to $30,000, starting in 2023. The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
- Year-End Charitable Gifting Opportunities
For taxpayers that itemize their deductions, donations to eligible charities and nonprofit organizations can provide significant tax savings, resulting in greater giving to such organizations. Gifting can be made in various forms including gifts of cash, securities or other property, including interests in business entities. Consideration should be given to making such gifts prior to December 31st and the impact such gifts will have on a taxpayer’s overall income tax liability.
For high-net-worth individuals looking to gift to nonprofits but who may not have yet determined which charities to give to, or where the establishment of a private foundation is not feasible, the Donor Advised Fund (DAF) structure offers opportunities to earmark amounts to be gifted (and deducted) prior to the actual payment being made to such nonprofit. The funds gifted to a DAF are immediately deductible, can grow tax free while held, and allow you to support IRS-qualified charities with grant recommendations from the DAF that you endorse. For large charitable gifts, a private foundation can be established to maintain a higher level of control over the gift and its ultimately disbursement, which can include distributing private foundation assets to DAF.
- Loss Planning
The recent downturn in the stock market has some taxpayers considering triggering their unrealized losses in order to offset the recognition of other current year gains. Similarly, the mosses in the cryptocurrency market, dubbed by some as a “crypto winter,” has resulted in currently depressed value and in some case most likely unrecoverable losses through a string of bankruptcy filings. Most recently, Blockfi and FTX declared bankruptcy and before that the cryptocurrency platform Celsius filed for chapter 11 bankruptcy during this last summer.
With the recent downturn and loss of value in the stock and virtual currency markets, some taxpayers have considered triggering their unrealized losses in order to offset the recognition of other current year gains. However, these same taxpayers may not wish to permanently and economically abandon their positions if the losses may ultimately be recoverable. One potential solution to this dilemma involves selling out of positions, recognizing a loss, and immediately thereafter repurchasing the same position before the market price materially changes. From an economic perspective, the taxpayer’s position has not changed, but the taxpayer has successfully managed to trigger losses that can be used to offset other current year gains.
As a longstanding rule under the Internal Revenue Code however, losses recognized from the sale and repurchase of the same or similar positions in stock or securities are disallowed for tax reporting purposes if, within 30 days before or after the date of sale, the taxpayer has acquired substantially identical stock or securities. This limitation on the recognition of such losses is commonly referred to as the “wash sale rule.” Sellers to traditional securities should be aware of this rule to ensure the loss triggered by selling the position is ultimately allowable for tax purposes.
However, losses on cryptocurrency losses are not believed to be subject to this rule, allowing the tax benefit of selling at a loss even if there is an instantaneous reacquisition of the same position Specially, the U.S. Tax Code does not offer consistent definitions for stock or securities, which has resulted in some uncertainty with respect to the wash sale rule’s application to cryptocurrency transactions, specifically those transactions where a taxpayer buys and sells identical cryptocurrency assets within a 30-day window. Hence, the wash sale rule’s lack of applicability to certain types of cryptocurrencies can present opportunities for taxpayers holding unrealized loss positions in virtual assets to monetize their current losses while maintaining their overall economic value in the crypto assets. Because the CFTC has concluded that Bitcoin is a form of commodity, and because these virtual currencies generally do not share many of the features that characterize a security for federal income tax purposes, taxpayers currently have an opportunity to treat many cryptocurrencies as a commodity and not a security and therefore exclude such positions from the wash sale rules. In 2021, the Biden administration’s Build Back Better bill included language that would have applied the wash sale rule to the disposition of digital assets. Although the bill stalled in Congress, these developments hint at aspirations by the government to regulate this area in the future as well as a government view that the wash sales do not in fact capture cryptocurrencies transactions within their scope. But for now it would appear that the cryptocurrency falls outside of the wash rules, presenting a unique opportunity to investor holding momentarily depressed tax positions.
Finally, if taxpayers hold cryptocurrencies related positions going through bankruptcy, there may be opportunities to trigger these losses even if positions can not be sold or otherwise transferred as well as the potential to obtain ordinary instead of capital losses, depending on the underlying facts. Whether this is an option for you will require a more in-depth analysis of your specific facts.