As we usher in 2023, keeping track of changes to the Internal Revenue Service (IRA) and the Social Security Administration's (SSA) guidelines is essential. These changes could impact your paycheck in a good or bad way, hence the importance of paycheck planning. Above all, it is much easier to plan for the unexpected when you are prepared well in advance.
Without further ado, here are some fundamental changes that could impact your 2023 paycheck.
Defined Contribution Plans: Effective January 1, 2023, the limitation for 401(k) plans will increase from $20,500 to $22,500. For SIMPLE retirement accounts, the limits will increase from $14,000 to $15,500. Additional catch-up contributions for individuals aged 50 and above are growing from $6,500 to $7,500.
Individualized Retirement Accounts: The limit on an IRA's annual contributions is supposed to increase from $6,000 to $6,500. It is also worth noting that the 'catch-up' contributions for investors aged 50 and above remain steady at $1000, increasing the total limit to $7,500 annually.
Defined Benefit Payment Plans: In 2023, the defined benefit plan will increase by $20,000. In 2022, this limit stood at $245,000, a $15,000 increase from the previous year, which brings the total to $265,000 in 2023.
Social Security: There will be an 8.7 percent increase in Social Security and Supplemental Security Income benefits in 2023. In addition, you can earn up to $21,240 annually without deducting your Social Security Benefits. For any amount you make over $21,240, your social security benefit reduces by $1 for each $2 you earn above that figure. However, you can earn up to $56,520 a year if you have reached full retirement age.
Social Security Taxes: In 2023, the wage tax rate will remain at 6.2 percent for employees and employers each, as it was in 2022. In addition, the taxable minimum is at $160,200, an increase from $147,000 the previous year.
Social Security Benefits: These benefits will increase by 8.7 percent in 2023 due to the yearly cost-of-living adjustment, also known as COLA, required by law. It is a massive increase from 5.9 percent in 2022 and great for individuals who depend on their Social Security benefits when planning their paychecks.
Medicare Tax: Like the previous three years, the Medicare tax remains unchanged at 1.45 percent. In addition, if you earn more than $200,000 a year in 2023 as an individual filer, you will be required to pay an additional 0.9 percent surtax.
Standard Deductions: The 2023 standard deduction amounts for single or married filers filing separately stand at $13,850. For married individuals filing jointly and qualifying widow(er)s, the deduction is $27,700. The head of the household deduction stands at $20,800, a $1,400 boost from 2022.
Flexible Spending Accounts: In 2023, the IRS will increase the maximum to $3050, up from $2850 the previous year.
Adoption Credit: The adoption credit per eligible child in 2023 is $15,950. In 2022, the maximum credit stood at $14,890. That's an increase of $1,060.
Since tax codes change every year, keeping track of what's new and what's not is advisable. Paycheck planning is one of the best ways to reevaluate your living expenses, budget, saving plans, deductions, and retirement investments. Of course, the last thing you want is to find yourself in trouble with Uncle Sam or unable to sustain your lifestyle. But when you plan, you'll know what to expect, how to manage complex financial situations, and live a financially sustainable lifestyle.