[Last updated on December 8, 2023]
With the 2023 tax year upon us come January of 2024, retirees, those on the cusp of retirement, and caregivers face new tax adjustments that could influence their financial planning. This guide highlights these changes, clarifying what has changed and what it means for your pocketbook.
Income tax bracket changes
Marginal tax rates have been adjusted for various income brackets. The previous tax rates ranged from 10% to 37% for different income levels. Depending on their income, retirees might fall into different tax brackets than before, potentially affecting their after-tax income. See the tax bracket changes on the Internal Revenue Service (IRS) website to see if yours has changed.
Standard tax deduction for people age 65 and older and blind people
There is an additional 2023 standard deduction of $1,850 for those at least 65 or blind. If both conditions apply, the deduction amount doubles. A similar provision existed before, but the deduction amount has increased. This increase offers older adults and the blind a greater tax reduction, potentially resulting in modest tax savings.
Retirement savings changes
The contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is raised to $22,500. Also, the annual contribution limit to an IRA increased to $6,500. The prior limits were $20,500 for 401(k) and related plans and $6,000 for IRAs. These increases can significantly impact the growth of retirement savings over time.
Changes to the required minimum distribution (RMD) age
The age for beginning to take required minimum distributions (the amount that must be withdrawn from retirement accounts each year) has been raised to 73. In 2022, it was 72. Retirees now have an extra year before they must start taking RMDs from their retirement accounts.
Penalties for not taking RMDs
The excise tax rate for not withdrawing the full amount of the RMD has been reduced to 25% of the amount of the RMD not taken. It can drop further to 10% if the account holder corrects the RMD within two years. The previous penalty was a 50% excise tax. This change offers substantial relief for retirees who miss their RMDs. Though taking the RMD remains essential to avoid penalties, reducing the penalty rate can save retirees a significant amount in cases of oversight.
Catch-up contribution
The catch-up contribution limit for employees age 50 and over in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased to $7,500. The previous limit was $6,500. Older adults now have the opportunity to contribute an additional $1,000 toward their retirement savings, which is especially beneficial for those who may have started saving late or are looking to bolster their nest egg before retirement.
Long-term care insurance (LTCi) premium deductions
Tax-deductible limits for long-term care insurance (LTCi) premiums have been adjusted. For example, those aged “more than 60 but not more than 70” have a new limit of $4,770. The previous limit for the same age group was $4,510. The increased limits provide higher tax deductions for those paying LTCi premiums. The potentially reduced taxable income especially benefits retirees who have these insurance plans.
Estate and gift tax changes
The federal gift/estate tax exemption has risen to $12,920,000, and the annual exclusion amount has increased to $17,000. In 2022, the exemption was $12,060,000, and the annual exclusion was $16,000. Individuals can give away more without incurring taxes, benefiting older adults looking to pass on wealth.
Energy-efficient home improvement credit changes
Taxpayers may qualify for a tax credit of up to $3,200 for energy-efficient home improvements made after January 1, 2023. The previous rules offered different credit amounts and conditions. Retirees making energy-efficient improvements to their homes can get significant tax credits, which reduces their tax liability.
Clean vehicle credit change
Taxpayers can get a credit of up to $7,500 for purchasing a new, qualified plug-in electric vehicle or fuel cell vehicle, with specific rules based on purchase dates. The previous rule also provided a credit, but the conditions and amounts were different. Older adults purchasing clean vehicles can benefit from notable tax credits, promoting the adoption of eco-friendly transportation.
Anticipated 1099-K law change postponed to after tax year 2023
While the gross payment threshold for filing a 1099-K was anticipated to change, the IRS announced on November 21, 2023, that it would postpone this tax law change. The IRS website states that tax year 2023 will be considered another year for transitioning to the new law to avoid confusion and potential misfilings for many taxpayers. The current rule remains that “reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023.”
Navigating the intricate maze of tax laws can seem daunting. Though numerous, these modifications for the tax year 2023 are pivotal in shaping financial strategies for older adults and caregivers. While this guide offers a synopsis, it’s paramount to consult with a tax expert to use the nuances of these changes to your best advantage.
