Standard deductions, tax rates and limits for retirement plan contributions are among the IRS changes for the 2023 tax year that should weigh heavily in clients' tax planning, advisors say.

The top tax rate remains 37% for single filers whose incomes are greater than $578,125, or $693,750 for those who file jointly. Other new rates for single filers include 24% for incomes starting at $95,375 ($190,750 for married joint filers); 32% for incomes starting at $182,100 ($364,200 for married joint filers); and 35% for incomes starting at $231,250 ($462,500 for married joint filers).

The 2023 standard deduction for couples will be $27,700, an $1,800 increase. For single filers and those who use the "married filing separately" status, the deduction will be $13,850, up $900. For those filing as "head of household," the standard deduction will be $20,800, up $1,400. The foreign earned income exclusion also rises to $120,000, up from $112,000 for 2022.

“If your income in 2023 is the same as 2022, you will pay a bit less but solely because your wages/income are not receiving positive adjustments,” said Morris Armstrong, enrolled agent and RIA at Armstrong Financial Strategies in Cheshire, Conn. “If your income is up the average 4% to 5%, your effective tax will be somewhat similar because your tax brackets are just filling up more slowly than in 2022.”

Frank Corrado, managing director, principal at Robertson Stephens Wealth Management, Holmdel, N.J., added, “Other benefit-related increases indexed to inflation would apply to wealthy taxpayers, but with a smaller impact, including increased parking subsidies, flexible spending accounts and medical savings accounts."

How should wealthy taxpayers alter their tax planning? Gail Rosen, a CPA in Martinsville, N.J., recommends deferring income into 2023 or accelerating expenses into 2022. “If your taxable income is in the end of a tax bracket, there will be tax savings by deferring,” she said. “Taxpayers in the 32%, 35% or bottom of the 37% bracket will save more taxes in 2023, versus 2022, than taxpayers in the lower brackets.”

“It would be better to take the income in 2023 to take advantage of the broader tax brackets,” Corrado said. “This could relate to the timing of a bonus, the sale of an asset, or the timing of receipt of business income for a cash-basis taxpayer. The same concept would apply to deductible expenses.”

The combined contribution limit to 401(k) and similar retirement plans for those age 50 or more is going up $3,000, to $30,000, “so we’re encouraging all of our higher-income clients to maximize contributions,” said Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minn. “These pre-tax contributions reduce a client’s taxable income which, in some cases, saves a client 35 to 45 cents on the dollar in taxes. The same with back-door Roth IRA contributions, as they’re increasing to $7,500 for those age 50-plus.

“Given the probability that the highest tax rates may be increasing even higher in the future, we love this strategy,” Primeau said.

Clients should look to fully fund company retirement plans, said Chris Murray, San Francisco-based practice leader in tax services at Aspiriant.

“The beginning of the calendar year is always a good time to review your withholding,” he said. “Married couples with dual income often find that withholding can be short due to the progressive nature of the tax system.” 

Expansion of marginal tax brackets gives retirees the ability to convert more assets from their tax-deferred IRAs to their tax-free Roth IRAs without jumping into a higher marginal income tax bracket, said Tyler Sterk, wealth advisor at Kayne Anderson Rudnick in Los Angeles, adding that with the standard deduction increasing, charitable taxpayers should reevaluate their giving strategy to make sure they’re still receiving a tax benefit.

Consider a donor-advised fund to bunch two or three years’ charitable contributions into one year, Primeau said. “This may allow you to itemize deductions for 2022 [and take] the standard deduction for 2023 and 2024,” he said. “Plus, using appreciated securities to fund the DAF allows you to diversify without paying income tax.”

This strategy may be especially helpful if you’re anticipating an unusually high-income tax year from the sale of a business, real estate property, or other appreciated investment, Sterk said.