Ep. 52 | IRS NEWS – 2023 Tax Bracket Updates

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Welcome to the teaching tax flow podcast where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.

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Welcome back to the Teaching Tax Flow podcast, everybody. Today’s episode number 52, perfect time of year to do this, but we’re gonna take a look at the tax bracket updates for 02/2023. So what you can expect for this year currently that we are in, again, 02/2023, tax year 02/2023. So before we do that, as always, let’s take a quick moment and thank our sponsor.

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Welcome back to the podcast as always. I’m John Trpolsky here from the TTF team joined as always by my better looking brother from another mother, Chris Pacquero. What’s happening, man? How are you?

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I am well. How are you doing? Oh, I’m doing fantastic, man. We’re about

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to talk about, tax year ’23 updates, so I hear. Is that correct?

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Well, I’m sure everyone’s been waiting with bated breath for the IRS’s revenue procedure ’22 or 02/1938. Sounds exciting, but actually, it is it really helps on the tax planning and strategy side of things. The IRS came out, announced its tax brackets for the 2023 year, so this will be for tax returns being prepared in 2024, but for the 2023 year for individual tax returns. They also have some other inflation related items that we’re gonna chat about at the end of this podcast, but I want everyone to remember that although we’re gonna be talking about tax brackets, which are very, very important, it’s really important for everyone to understand their MTR, their marginal tax rate. When we’re the marginal tax rates takes into account other factors other than a tax bracket.

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It takes into account phase outs of certain credits and deductions. That being said, the heart of your MTR is the tax bracket. So let’s talk about what the IRS did for the twenty twenty three

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tax brackets. Alrighty. Alrighty. And, yeah, these are, Chris, these changes that are made, you know, obviously released direct from the IRS. Is this something that they change often, or is this really big news in a sense that, you know, there’s been a change?

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Here’s what the change is. I mean, is it how often do they do this is actually my question.

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These are adjusted each year for inflation, and a lot of times they’re very, very minimal adjustments on the on these tax brackets. But we we saw I mean, based on the economy and some of the inflationary issues that are occurring, the brac I think the adjustments upward were more generous than than expected. And when so when a tax bracket adjusts up, it usually when you hear tax and up, you’re thinking that’s a bad thing. But what that means is that you’re allowed to, you’re allowed to keep income, more income, in a lower tax bracket. As we know, we have a progressive federal tax here in this country, so the larger your taxable income is, the law the larger the federal taxes and the rate of that tax.

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Now, we do get this a lot in, just, John, you and I out and about, at conferences, talking to taxpayers. We’ve had this question come up quite a few times in our Defeating Taxes private Facebook group, and I want to be clear that if you are, your tax bracket, really that tax bracket, the importance of that is for every additional dollar you earn, what is that dollar taxed at? So, John, if you let’s say you’re in a 10% tax bracket, and everything goes up and you go into the 20% tax bracket, now there’s no such thing as a 20% tax bracket, but let’s just play along. A lot of times people think that, oh no, that’s terrible, all of my income’s now gonna be taxed at 20%. That’s not true.

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Only the amount of income that exceeds that 10% bracket gets taxed at 20%. It doesn’t retroactively go back and tax all your income at that higher bracket. Excellent.

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I’m glad you explained that too because this is something that even, you know, many years back, I used to always think about. Right? It’s like, oh, if I go over by $1, then, oh, I’m kind of you know, I’m in the hole then for everything leading up to that one dollar, which is not the case at all. As you mentioned, it’s, you know, it’s almost, like a ladder approach. So So it’s like, yes.

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You’re in this bracket here, which then this bracket here is this amount, and then, you know, all the way up the ladder, Rusev.

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Well, this time of year, we’ve just went through the tax extension filings, and we’re looking at fourth quarter of twenty three. And we’re inevitably, especially in our private CPA practice, running into into taxpayers that have a significant amount of income, and they’re concerned about taxes, and it’s a very valid concern. That being said, I’ve yet to see a % marginal tax rate, so you’re better off, having taxable income than not having taxable income. It’s just a matter of what you do with that taxable income really dictates dictates the amount of tax you’re gonna pay on that.

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Excellent. Excellent. So walk us through these changes a little bit. If if somebody doesn’t have this in front of them, you know, what are these updated brackets to for tax year ’23? What are we looking down down the barrel?

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Let’s do some really easy math because you might be out for a jog, a run, you might be driving. So let let’s think about, back of the napkin math. Let’s say you’re you’re dub you have income. Let’s say you have a w two for $40,000, and let’s say the let’s say the standard deduction is you’re married, your spouse doesn’t have any income, and the standard deduction is $20,000 So $40,000 of income, $20,000 standard deduction, you would then be taxed on $20,000. 40 minus 20 is 20.

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So there have been adjustments not only to the taxable income brackets, but also the standard deduction. The standard deduction is the amount that you can earn before you pay a penny of federal income tax. Now we’re not talking about self employment tax, and we’re there’s another episode about itemized deductions versus standard deductions, but we’re gonna assume, looking at the standard deduction, that’s the amount of income you can earn without paying any federal income tax. So for someone that’s married filing jointly, that number went up by $1,800 from 2022 to the 2023 year, and it’s up to $27,700. So a married couple can make married couple, filing joint couple, the first twenty seven thousand seven hundred dollars regardless if you have a mortgage, make any type of charitable contributions, pay any type of taxes, you can earn $27,700 and pay no federal tax.

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That’s pretty generous. And that went up by $800. For single taxpayers or married individuals filing separately, that amount went up $900, so half of the 1,800, to $13,850. So this play and that’s now your new standard deduction. For head of household, the standard deduction is it which is a special filing status when you are are single, yet you have dependents, or qualifying qualifying person in your household to make you head of household.

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That standard deduction went up $1,400 kinda cutting it in the middle to $20,800 So the bottom line is let’s take let’s take a a college student. Right? Let’s say a college student works a W-two job. They earn $10,000 They have no federal income tax to pay. Now they’ve paid into Social Security or Medicare and their employer may have withheld federal income tax.

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That federal income tax would be returned to them when they prepare their tax returns. So it’s really important to understand for anyone in this situation that is in an earning level below the standard deduction, you really you would be in our teaching tax law system a very high green diagnosis, meaning you you could be putting money if you into a Roth IRA or doing things that are gonna defer tax or reduce your tax don’t does not make sense because you’re not paying any tax in the first place. Federal income tax. Again, we’re focusing on the federal income tax, not any type of self employment tax.

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Excellent. And really quick question too. I know we, you know, we speak about different tax strategies as it relates to somebody’s marginal tax rate or, you know, their bracket, but really on on how they how someone could take advantage of certain strategies when it comes, you know, to quote, unquote tax time and really raising that level, or I should say that dollar amount for an individual to not yet have to to pay federal income tax, that really extends the opportunity even further for, say, somebody wanted to, hire their child, right, to operate

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in their business regardless of what they say they do in the business. Totally irrelevant at this point, but it raises that bar even a little bit higher. So that obviously extends to that tax strategy as well. Correct? Absolutely.

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So the strategy of, let’s say, you do hire your child and, they’re doing legitimate work for the business, this makes them more lucrative. So I’ll give you an example. Let’s say your child is single. They’re helping you out with your business. You pay them you pay them $13,500 on a on a w two, they would pay no federal income tax.

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And in fact, if they didn’t have any federal tax withholding, they wouldn’t even have to file a tax return. They could, though, put money into a Roth IRA because they have eligible wages and let that money grow tax free.

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Excellent. Excellent. So, yeah, it’s all it all kinda ties together some way or another. But

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And as far as for the that standard deduction is a hurdle. Until you get over that hurdle, you’re paying no federal income tax anyway. Once you get over that hurdle, that’s where the tax brackets kick in. The highest tax bracket, the top top tax rate is still 37%, which is very low historically. And, that’s for taxpayers that are that are in the almost for Mary Joy, about $700,000 of taxable income.

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Single taxpayers over five about $578,000 of taxable income. Now, again, when you get into those ranges, your your marginal tax rate, and your tax bracket are are are different because there are other taxes and phase outs that that come in. So a great way to think about the difference between marginal tax rate and tax bracket, the the difference is larger the the higher amount of income you have or the low the very low amount of income that you have. In the middle, there’s not so much of a difference. And why would I say that?

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Well, if you’re in the lower income situation, excuse me, and you’re qualifying for an earned income credit or a retirement savers credit or deducting student loan interest, those things phase out once you get to kind of that, you know, that middle income area. So so, yeah, so you’re

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a college kid that’s a part time worker. MTR is not is is not as important to them to fully understand. On the other side of the fence, somebody that’s, you know, over a hundred k plus, 200 k, 3 hundred, 40 k a year, obviously, MTR almost supersedes tax bracket more importance.

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Correct. I would say that the m what the MTI the difference between your marginal tax rate and your tax bracket is significant when your income’s, let’s say, really small or really large. We’ll just put it that way. So we have those tools already set up for people to use, to figure out their marginal tax rate. Excellent.

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Excellent. Excellent. So if

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you If somebody hasn’t looked these up, they are on the IRS website. And, actually, we’ll put the link in the show notes on this one too if you wanted to read a little bit more about it. Chris, I know you have already read this about thirteen, fourteen times in its entirety. So we we know you’ve read it plenty of times. What what other pieces of this change, you know, are are either in effect now or going to

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be in effect as as far as for everything done here? Alright. So so for single, let’s let’s talk about something. The lowest tax bracket or tax rate’s 10%. So for single people, that tax that 10% tax rate extends up to the first eleven thousand dollars of income for married joint ’20 ‘2 thousand.

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So, John, in theory, a married filing joint couple has a standard deduction of $27,500, gets a and stays in the 10% tax bracket for 20 the first twenty two thousand dollars worth of income. So twenty seven seven plus 22 is about 47. Let’s just say someone that’s married jointly, their first forty eight thousand dollars of taxable income, rather, obviously that’d be about $22,000 of taxable income, would cost them only $2,200 worth of tax because it would be in that 10% bracket. But after the 10% bracket, the brackets go from twelve, twenty two, 20 four, 30 two, 30 five. Most people kind of live in that 12% bracket to 22%.

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If we’re talking about married couples, the first, you know, the up to 22% of $22,000 of taxable income, the 10%, and then it goes into the 12%, or I’m sorry, the 12% bracket from $22,000 of taxable income for a married couple up to about 90,000. And then at 90,000, it goes from 12 to 22. So here’s the something here’s the big takeaway. For someone that’s a married couple, understand that your marginal tax rate will pretty much double once you go over about $90,000 worth of taxable income, and that is about $127,000 worth of total income. So for someone that, let’s say, they make a nice wage of $110,000 let’s say their spouse is a homemaker, in essence, they never get over that 12% tax bracket, which is very generous.

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It’s half of that for someone that’s single. So that’s that’s just three that’s that’s just how the the brackets work. So for someone that’s a single taxpayer or married filing separately, you jump into that 22 tax bracket, which is where a lot of people live, at $44,000 of taxable income or approximately, $57,000 worth of total income when you when you look at the the the standard deduction. So, you know, any one of the 10 or 12% bracket, we really treat them as a goal diagnosis. We’re not too concerned about tax.

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We’re looking for more tax free income and growth, especially for retirement planning. So once you get into that 22, 20 four percent bracket or higher, and we’re talking federal rates, not even state rates, we then you start getting into that red diagnosis where you’re you’re going up into the you know, you’re paying your your involuntary business partners, we like to say, the IRS, and and any state or city that you live in, significant amount of your income.

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But Which actually segues into into a question I was gonna ask too is, you know, based off of your experience, what we won’t even say it, what tax bracket, but usually at about what income level do you really start to stress or drive home with with clients in y’all’s private practice, really the importance of tax planning. Is it something that you really try to get them aware of very, very early on when they really, we should say can’t take advantage of things, but they obviously can’t take advantage of most of the strategies and opportunities that are out there. But at what point do you really start to tell them, like, if you don’t do anything, you’re almost a a village idiot at that point. So

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Well, I believe at all income levels, you should be tax planning. It does it just comes down to diagnosing and prescribing. Right? So diagnose your tax situation, prescribe different tax, opportunities. So let me give you an example.

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Because the the lie that we’re told is that you have to have a lot of income or a lot of assets to do tax planning. I would argue that the people that don’t have a lot of income or assets, tax planning is much more important because their margin for error is very low. So let’s think about someone that is in let’s say you have a single person. Let’s say she’s a teacher. She just got a teaching job, and she’s going to get her start off at a base salary of $50,000.

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I’m just making numbers up. We know teachers are very underpaid, but let’s just say that’s the starting wage. She’s single, no children. Her first fourteen thousand dollars of income would be tax free. It’s because it’s under the standard deduction.

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The next $11,000 worth of income would be at 10%. The remaining amount would still only be at 12%. Why is it important for her to it’s important for her to start saving for retirement, but a lot of times, she might start putting money into her and typically teachers will have a four zero three b or a four fifty seven plan. But a lot of times, they put money into the retirement plan tax deferred. And now this money grows after the next forty, fifty years, and she’s gonna have to pay tax on it when she takes out when she’s retired at a very high and probably a higher tax rate, and she’s gonna have to pay tax on all of that growth.

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Well, I would argue that she should deeply consider putting money into a Roth component of a retirement account or funding a Roth IRA because the tax benefit is so small right now. It’s more they budgeted $5,000 into that Roth. If the money doubles, you know, it should double, let’s say, seven it should double five times, okay, which she before she returns. So 5,000, the tax benefit for her putting money into that $5,000 into a pretax account is only $720, let’s say, 600 to 7 hundred dollars. But if she lets it grow tax free, five becomes five doubles to, oh boy, I might have set myself up for a for a bad calculation on a live podcast, right?

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I know you sometimes. Five is gonna double, becomes 10, becomes 20, becomes 40, becomes 80, becomes $160,000 So that decision today gives her $160,000 of tax free money when she retires.

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So for her Amazing how

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it compounds. What’s that? It’s absolutely amazing how it compounds like that, isn’t it? So just something like that. Another factor, if looking at health insurance, she should put money pretax away for her health insurance.

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She should contribute to a health savings account. Even if she’s healthy, put the money away tax deferred now because that money will grow tax free. And as long as it’s used for health, you know, qualified health expenses, medical expenses, it’s tax free. So she might be single and healthy now, but what happens fifteen years down the road if she has a if she has a family and she has someone in the household that’s ill and needs needs needs some money for medical expenses? So planting those seeds early, it’s just as important for someone, no matter what their age, at a beginning income level than, than just people that are at a high marginal tax bracket.

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So Excellent. And that’s one of the reasons we started this podcast to start teaching tax flow to help help people out.

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Wow. So we appreciate all of the all the 10 year olds that listen to this podcast. You’re doing a

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great job. What’s up? Hey. We’re trying.

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Keep taking the tips. Right?

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So we’re gonna, yeah, we’re gonna we’re gonna touch on a couple other thing other, things IRS did in this revenue procedure, with their inflation adjust inflation adjustments for 2023. You know, we talk a little bit about estate planning. We are in we are in the golden era of estate planning, meaning the estate tax exemption is at an all time high. What that means is that if you pass away, how money how much in assets can you transfer to your beneficiaries without paying without them paying any tax or your estate paying any tax? Now we if the beneficiary is your spouse, that’s another story.

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But the point is the estate tax exemption went up to almost $13,000,000 12 million 9 hundred and 20 thousand dollars went up $860,000 from 2022 to 2023. For those, we had a amazing guest on, on our Mr. R Show podcast, which is designed for tax tax preparers who specialize in foreign income and foreign tech people, foreign taxpayers here in The US or or or expats doing business, overseas. But the the the foreign earned income exclusion went up to a hundred and $20,000. So if you’re a US resident and you’re working overseas, you get an exemption from your foreign income here in The States for up to a hundred potentially up to a hundred and $20,000.

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So that’s generous. The gift tax exclusion went from 16,000 to $17,000. What that means is that I can give up to $17,000 worth of gifts to as many people as I want without ever paying any tax, without them paying any other tax, and without even reporting it. Now, obviously, we have people in the community that are giving out more than that. There are some advanced strategies for avoiding tax when you’re transferring assets or gifting, but that’s, you know, that’s important.

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So those are some of the key items. The only other one I wanna mention is the earned income credit. The earned income tax credit is for working families that have a little that are in a lower marginal tax rate, and that credit, which is a refundable credit, went up went up over $500. So the max credit, and it’s need based, is $6,935. Now it’s $7,430.

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Awesome. Awesome. And and, again, these numbers or these increases in a good way, good increases, not bad ones, those are for tax year ’23. So this does not affect anything prior to that. Strictly ’23 and beyond until there’s obviously another change.

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Correct?

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You are a % correct. Hey.

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I’ll take it. And on that note, I always gotta quit on a hideout. There, if anybody, again, as I mentioned a little bit earlier, really wants to read in this a little bit more, we’ll put the direct link, on the IRS’s website. I know we have that. We’ll put it in the show notes here so you can click on that follow through.

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It outlines pretty much everything we talked about for the most part. At least those brackets are very clearly defined on what is what in there as well as some other items as well. So, hopefully, everybody enjoyed this. Hopefully, you took it as good news. There’s no bad news here at all, at least in in my eyes.

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Chris, I think you you’d probably agree with that as well. So please check it out. Feel free to read that article. This will be something that, obviously, we’ll be talking about for probably the next year. You know, these numbers will will be referenced over and over again.

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So until next time, we’ll see everybody next week. Thanks as always for joining us on this episode where me and Chris dove into the wonderful, but yet sometimes misunderstood topic of IRS federal tax brackets. So that being said, any further questions as always, feel free to reach out to our team directly. Send us an email at hello@teachingtaxflow.com. Jump on to that defeating taxes private Facebook group as always, but even more importantly now, we have launched, this is coming up on 10/20/2023 at 1PM Eastern.

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We are doing a free mastermind on tax planning. So, if you’re familiar with tax planning, obviously, you know the value in what we are going to cover on this free live webinar. We’re doing it on Zoom, by the way. No need to hop on an airplane. But, as I was mentioning, if you know the value of it, obviously, it’s a no brainer.

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Hop on it. You’ll learn a couple things, but also, if tax planning is really a new concept to you, you’re not sure what it is, you think, well, maybe it’s only reserved for, you know, the ultra wealthy or somebody such as, you know, not myself, it’s for somebody else, it’s not a fit for me, please jump on that even if you jump on for half of it. If it’s not something that interests you, not something that you feel is right for you, I can almost guarantee that your mind will be changed. Tax planning is something that every US taxpayer, basically every single person can take advantage of in one way or another. So, if you look in the show notes down below, off to the left, off to the right, wherever you’re listening to this, I’m gonna drop the link in there.

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This is a direct Zoom invite registration link. Really three, four questions that are on there. Fill it out. Join us for that tax planning master class. Again, free.

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We’re doing this on Zoom. Chris Picuro, also who you heard in the show, is gonna be hosting this for us. He is gonna dive into some fantastic tips, tricks, strategies behind this. You don’t wanna miss this one. So, we will see everybody on that master class and on this podcast next week.

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