The end of the year is a time for reflecting on what happened and planning for what is to come. As 2023 draws closer, we wanted to highlight the changes that occurred in the past year, tax considerations for this year and next, and how you can prepare for a prosperous 2023.
Changes in 2022 that May Impact You
Some financial planning limits have changed for 2023, which may impact your retirement plan, Social Security, Medicare, federal tax rates, and standard deductions. Learn more via the links below, or consult the IRS website for full details on contribution limits.
In October, the IRS announced an increase in the maximum amount you can contribute to your employer-sponsored retirement plan in 2023.
Due to high inflation, the cost-of-living adjustment means maximum retirement contributions will be rising almost 10% in the upcoming year. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased to $22,500 (which is up from $20,500 in 2022). Annual contribution limits have also been increased for traditional and Roth IRAs, up to $6,500 from the $6,000 limit of 2022.
If you receive Social Security benefits, you can expect them to be boosted by 8.7% in 2023. This cost-of-living adjustment (COLA) was announced by the Social Security Administration on October 13th, and it is a massive increase from that of previous years.
The notice, issued by the Department of Treasury and the Internal Revenue Service, means updated regulations of required minimums for distributions, or RMDs. This notice comes in the wake of the significant confusion around the SECURE Act of 2019. This notice will provide some penalty relief to those who avoided taking RMDs as a result of the SECURE Act.
2022/23 Tax Considerations
Increasing your withholdings can be beneficial at any time of the year to ensure you will not be met with any unwanted surprises come tax season. Though it may not make a significant difference to increase withholdings close to the end of the tax year, it can be a great way to plan for 2023.
Save more for retirement
Though retirement savings should be a year-round consideration, the end of the year is an optimal time to reassess the amount you have contributed throughout 2022 and prepare for the year ahead. Make sure you have claimed your full 401(k) match before the end of the year, and contribute to IRAs before tax day, to reap the full benefits of these accounts. Similarly, consider setting up a Health Savings Account (HSA) for the tax benefits and savings on healthcare.
If you are 72 or older, do not forget to withdraw your required minimum distributions from traditional IRAs or 401(k)s before the end of the year!
Defer income to next year
If you choose to defer any of your income into the next year, you can spend that additional cash on investments, which would otherwise go toward income tax. If you are not planning on entering a higher tax bracket in 2023, there are multiple ways for you or your business to defer taxable income until the new year. Another way to lower your tax bill is to accelerate deductions, which can be done by making a charitable donation before the end of the year.
The holidays are the perfect time to make a charitable donation to help your family get into the giving mood. There are many ways to give to charity, but if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.
Donor-advised funds offer a way to receive tax benefits now and make charitable gifts later. A donor advised fund is an agreement between a donor and a host organization (the fund). Your contributions are generally tax-deductible, but the organization becomes the legal owner of the assets. You (or a designee, such as a family member) then advise on how those contributions will be invested and how grants will be distributed. Although the fund has ultimate control over the assets, the donor’s wishes are generally honored.
How can you prepare for next year?
In addition to your preparations for tax season, the end of the year can be a great time to take a wider look at your financial progress and goals. Do you still aim to retire at a certain age? Are you still saving for the same goal (vacation, car, property)? Take note of how far you have come, and review what needs to be adjusted in the year ahead!
The holidays can be a very busy and stressful time; we hope these insights will help you end the year on a positive note and guide you into a financially successful 2023! As always, reach out to the Blakely FInancial team if you have any questions about your portfolio.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.