I hope 2023 has gone well for you thus far. I would like to share a few important tips for getting your tax and personal financial planning in shape throughout the year. Federal income tax brackets are rising.
Federal income tax rates fall into seven tax brackets based on taxable income. Significantly, the highest applicable tax bracket does not reflect the percentage that must be paid for federal income tax. For example, a single filer in the 22 percent tax bracket for 2023 doesn’t pay at a 22 percent rate on all taxable income, but instead pays 10 percent on taxable income up to $11,000, 12 percent on the amount from $11,000 to $44,725, and 22 percent above that (up to $95,375).
Because the tax income brackets are being adjusted to account for inflation, the current economy may result in a portion of 2023 income being taxed in a lower bracket.
The “standard deduction” allowable to taxpayers who do not itemize their deductions has risen to an historic high. The standard deduction for single filers increases from $12,950 for tax year 2022 to $13,850 for the 2023 tax year, and for couples filing jointly from $25,900 in the 2022 tax year to $27,700 in 2023. For taxpayers aged 65 and older, the standard deduction is even more advantageous. Single filers age 65 and older can increase their standard deduction by $1,850. The standard deduction for joint filers age 65 and older increases by $1,500 apiece, for a $3,000 total if both joint filers are over age 65.
Instead of utilizing the standard deduction, taxpayers may “itemize” their tax deductions, based on actual (and verifiable) deductible expenses. Obviously, itemizing of deductibles is beneficial only if total itemized deductions exceed the current standard deduction, which is at a historic high. However, deductible contributions to a “qualified” plan–a plan such as an IRA that generates tax-deferred income, such as an IRA–may have the additional benefit of resulting in a lower tax bracket, and should be carefully considered. Similarly, charitable donations to entities such as the Gulf Coast Community Foundation may have the added benefit of causing a lower tax bracket.
There’s also good news regarding Mississippi income tax. Beginning in 2023, Mississippi has abolished state income tax on the first $10,000 earned, with income in excess of $10,000 taxed at 5%. Mississippi’s 5% income tax rate will decrease over the next three years to a 4% rate for tax year 2026. Further, our Governor has pledged to seek elimination of the Mississippi income tax during the 2023 legislative session, which (if enacted) would make Mississippi the tenth state without state income tax.
The need for a current Last Will and Testament and other related estate planning documents cannot be over-emphasized. Even if your family “knows what I want,” their knowledge under Mississippi law has no legal effect. Further, it’s far more expensive for after-death affairs to be resolved without a Will. Financial documents such as life insurance policies, bank accounts, brokerage accounts, and Wills should be reviewed approximately every five years, or upon significant life-changing events such as marriage, death, divorce, and childbirth.
Significantly, substantial lifetime gifts of property should never be made without professional consultation. Although lifetime gifts might be appropriate as an estate planning tool in some circumstances, such gifting may result in a tax nightmare for the recipients. Substantial lifetime gifts should be made only after discussion with a qualified tax professional.
Advanced planning may substantially reduce your 2023 tax bill. Understanding the tax brackets can help you implement smart tax strategies, such as adjusting income tax withholding to avoid a big year-end tax bill. Don’t neglect reviewing and if necessary, updating your Will and other financial and estate planning documents.
Paul M. Newton, Jr. is an attorney in Gulfport, and is licensed in both Mississippi and Louisiana. Mr. Newton received his law degree from the University of Mississippi and obtained a Masters of Law in Taxation from New York University. Mr. Newton has served as the Chairman for the Mississippi State Bar Section on Taxation, and has been selected by his fellow national attorneys for inclusion in the Best Lawyers in America annually since 1993 in the specialties of corporate law, corporate litigation, business law, business litigation, tax law, tax litigation, estates and trusts, and estates and trusts litigation. He may be reached at email@example.com or (228) 863-8827.