Inflation has lifted the ceilings for the federal tax brackets like never before.

Since indexing began nearly 40 years ago, “The jump between the 2022 and 2023 federal tax brackets is the largest on record both in percentage terms and in nominal dollar terms,” says Alex Muresianu, a policy analyst at the Tax Foundation, a Washington, D.C., think tank. For instance, the top ordinary bracket for single filers now starts at $578,125, a 7% year-over-year surge of more than $38,000.

What’s particularly impressive about the record leap is that these days, the federal brackets are adjusted using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), which typically produces smaller increases than the previously used CPI-U.

The upshot is that clients can report more income than last year while maintaining the same marginal tax rate, whether they’re eager to cash in Series I savings bonds or, as many advisors advocate, convert more pretax retirement money to a Roth account in hopes of avoiding potentially higher rates come 2026, when the Tax Cuts And Jobs Act could sunset.

Consider today’s 22% bracket for joint filers. Its ceiling is $12,600 higher than last year, having reached $190,750.

Clients taking required minimum distributions from their retirement accounts may have the most opportunity to report more income. Because 2023 RMDs are based on account values at the end of 2022, a year in which equities sank, “Someone with a $30,000 RMD in 2022 likely has roughly a $25,000 RMD in 2023. That suggests at least about $20,000 extra room in the 22% bracket for a married couple 73-plus years old, if you include the increase in the standard deduction, too,” says Jeremy Keil, a financial planner with Keil Financial Partners in New Berlin, Wis. Of course, retirees’ higher Social Security income will eat up some of the bracket expansion.

Mutual fund distributions might, too. “When markets are up significantly but volatile along the way, that can be a year when mutual funds make larger than normal capital gain distributions. Be on the lookout for those distributions and let clients, and their accountants, know what to expect,” advises John Scherer, principal and founder of Trinity Financial Planning in Middleton, Wis.

Maxing out a tax rate is one thing. Triggering higher Medicare premiums is another. So advisors should keep an eye on the income brackets for Medicare’s income-related monthly adjustment amount, or IRMAA, when maneuvering income into 2023. You don’t want to bump up the client’s cost for Medicare Parts B and D two years from now accidentally.

However, you may want to do it intentionally. “Try to pack income in one year so that the client pays IRMAA for one year, not multiple years,” says Glenn Schwier, a CPA and partner at Nisivoccia LLP in Mount Arlington, N.J.

Backdoor Blues
These days, nothing is more tax-fashionable for a high-income client than a backdoor Roth conversion, in which the client makes a non-deductible contribution to a traditional individual retirement account and then converts it to a Roth, ideally paying tax only on a minimal increase, if any, in the account’s value from the initial contribution until the conversion.

But a common mistake is “failing to gather an understanding of whether the client has other pretax IRAs,” says Christopher Fundora, director of retirement planning at Traphagen CPAs & Wealth Advisors in Oradell, N.J. Besides the IRA the client wants to convert, having another traditional IRA, or a rollover IRA, SEP IRA or SIMPLE IRA, can subject the conversion to the exasperating pro rata rules. These can render a large part of the conversion taxable, depending on the client’s circumstances, although the clients can avoid that by rolling those IRAs into a solo 401(k), employer plan or another corporate retirement vehicle, Fundora notes.

“A backdoor Roth needs to be considered in the context of the client’s aggregate retirement portfolio structure,” he says, adding, “In the case of a married couple, both spouses can take advantage of a backdoor Roth even if one does not earn wages.”

Not Enough
Some clients aiming to maximize 2023 contributions to employer-sponsored retirement plans “are coming up short,” reports Bruce Primeau, president of Summit Wealth Advocates in Prior Lake, Minn. Indexing has boosted the ceiling on 401(k) contributions from $27,000 last year to $30,000 this year for taxpayers 50 and older. “That’s a substantial increase, and some clients didn’t adjust their contribution to account for it,” Primeau says. He says advisors should review their clients’ contributions and project them through December 31.

Advisors should check clients’ with-holdings, too. The interest rate the IRS currently charges on tax underpayments has soared along with interest rates in general, Schwier points out.

You can help your clients and prospects avoid interest (plus penalties) by verifying that they meet the esti-mated tax safe harbor—in other words, that they’ve paid in to the feds, through withholding and estimated tax pay-ments, at least 100% of their 2022 total income tax, or 110% of it if last year’s adjusted gross income topped $150,000 ($75,000 for married individuals filing separately).

“Many of our clients, as long as they won’t have to pay interest or a penalty, are fine knowing they’ll owe the IRS at tax time. They’d prefer to have the money collecting 5% interest until April 15 rather than give it to the government early,” Schwier says.

And One For Entrepreneurs
“Beginning in tax year 2023, sole proprietors are able to set up a self-employed 401(k) plan before their tax filing deadline, including extensions, and make contributions for the prior year,” says Roger Morrissette, the vice president of small business retirement products at Fidelity Investments who works out of Smithfield, R.I.

Previously, business owners had to establish these plans by year’s end to get a current-year deduction. Morrissette says Fidelity anticipates the new rule “will result in greater participation” in these plans.

That’s good for entrepreneurs. A solo 401(k) lets them contribute as both employee and employer, offering larger deferrals than other plans, up to $66,000 for 2023 or, for clients 50 or older, $73,500.