Get ready for some shifts in the tax code next year. With divided government, don’t expect any major tax overhauls from Congress. But there are still important tax changes in store for 2023 that could impact your returns. 

In this post, we’ll walk through what to keep an eye on. You’ll learn about expiring tax breaks, inflation adjustments, proposals on the table, and more. Being aware of possible changes now gives you a chance to plan accordingly. Let’s dive in!

Expiring Tax Provisions

First up, several temporary tax provisions are set to disappear after 2022 unless Congress acts. These include popular credits and deductions many filers have benefited from the last few years. Here’s what is on the chopping block:

The expanded Child Tax Credit will likely shrink from up to $3,600 per kid back down to $2,000 per child. That’s a huge drop in relief for families. The credit will also become far less refundable, leaving lower-income households with less assistance.

Expansions to the Earned Income Tax Credit are also up in the air. Provisions that deliver more aid to childless workers and lower the eligibility age from 25 to 19 are at risk unless lawmakers extend them.

If you itemize deductions, you may find it harder to write off medical expenses in 2023. The threshold will probably revert from 7.5% of adjusted gross income to 10%. Ouch if you have high health costs.

A few other disappearing deductions homeowners and donors should note — mortgage insurance premiums and charitable giving perks are on the chopping block.

Brackets and the Standard Deduction

Each new year also brings inflation tweaks to the tax code. Expect the standard deduction to increase a few hundred bucks per filer. Tax bracket levels will also shift upward, though likely not enough to counteract wage growth for many taxpayers.

What does this mean? Well, if you take the standard deduction, you’ll save a tad more. But if your earnings rise faster than inflation, you could find yourself pushed into a higher tax bracket.

For those planning charitable donations, larger standard deductions mean even fewer filers will benefit from itemizing. Simple returns relying on the standard deduction get a small boost.

Payroll Tax Cap Going Up 

High earners, get ready to pay more in Social Security taxes in 2023. The wage base ceiling where the 6.2% tax drops off will rise to around $160,000 from $147,000 as inflation marches upwards.

For the self-employed, that likely means shelling out over $7,000 more for Social Security next year. Employers will also foot higher payroll taxes.

On the bright side, the higher wage cap helps strengthen Social Security’s financial footing (at least for the next few years). But the extra bite may hit hard if you’re near the threshold.

Retirement Account Limit Increases

While higher taxes sting, retirement savers will get a lift in 2023 courtesy of expanded IRA and 401(k) limits. Look for roughly $2,000 more in headroom if you save through a workplace plan or IRA. 

Specifically, you’ll be able to squirrel away around $22,500 next year if you’re under 50, and $8,500 more if you’re over 50. That’s up from $20,500 and $6,500 currently.

Again, while welcome, the boost likely won’t match inflation completely. But every bit helps when saving for retirement. See if you can take advantage of the higher limits to ramp up tax-advantaged savings.

AMT Exemption Bump

The dreaded Alternative Minimum Tax was originally targeted at the ultra-wealthy but over time has hit some upper-middle-class taxpayers too. The good news is the AMT exemption will expand by a few thousand bucks in 2023. 

If your income is under around $78,000 as a single filer or $126,500 as a married couple, you likely won’t owe AMT even if you take big deductions. That exemption lift keeps the AMT beast at bay for many more filers.

But higher earners won’t escape AMT’s grasp. Work with your accountant if it looks like you’ll still face exposure. Planning can limit the AMT damage.

Possible Tax Proposal Resurrections 

Though major tax hikes are improbable next year, Democrats could put forward bills with:

– A higher corporate tax rate (25-28% vs today’s 21%)

– Increased capital gains taxes for high net worth investors 

– Minimum taxes targeting billionaires 

– Roth conversions for retirement plans (taxes now, but no taxes on withdrawals)

Will any of these proposals gain traction in a split Congress? Unlikely. But something to keep on the policy radar in case winds shift.

Potential Tax Proposals to Monitor

While major tax legislation is unlikely due to Washington gridlock, a number of tax policy proposals could resurface in 2023:

Higher Corporate Tax Rate

Democrats have proposed raising the current 21% corporate tax rate to 25% or 28% to fund spending initiatives. With businesses already facing economic headwinds, corporate taxes would reduce profits and could dampen stock prices.

Increased Capital Gains Tax Rate 

Taxing carried interest as ordinary income and increasing the top capital gains rate from 20% to 25% has been suggested to equalise tax treatment for investment income vs. wages. This could lower returns for high net worth investors.

Minimum Tax on Billionaires

The Billionaire Minimum Income Tax would impose a 15% minimum tax on the unrealized gains of tradable assets held by billionaires’ households. While targeting the ultra-wealthy, critics argue it could be hard to implement. 

Notification of Retirement Accounts

Proposals to shift retirement accounts to Roth treatment could resurface, requiring upfront taxes on contributions while eliminating taxes on withdrawals. This would provide future tax certainty for savers but result in bigger initial tax bills.

While passage is uncertain, taxpayers should be aware of these proposals and their potential impact on tax planning if enacted. Consult with a trusted tax advisor to stay abreast of potential changes.

Conclusion

The upcoming year is likely to bring about changes to the tax code that could affect your tax picture and financial planning. Being aware of expiring tax provisions, inflation adjustments, and proposed tax reforms provides the opportunity to proactively assess their potential impact on your tax liability. 

Connecting with your tax preparer can help you determine whether any year-end tax planning moves could minimise your 2023 taxes. By looking ahead to possible tax changes, you can make savvy choices to reduce your tax burden in the year ahead. A little preparation goes a long way when it comes to optimising your taxes.