2023 State Tax Changes

The Tax Foundation released a fantastic list of notable state tax changes for 2023. It was so good, I wanted to post it here, rather than just tweeting it out, since not everyone uses Twitter. Here’s the link to the site, which includes personal income tax rate changes, corporate tax changes, sales and use tax changes, and a host of miscellaneous new and changed provisions.

Budget Deal Extends Some Expired Tax Provisions

The budget deal that was agreed upon in Congress and signed by the President early this morning includes “Tax Extenders”, which extend some previously expired tax provisions retroactively to 2017. These include the exclusion from gross income of discharge of qualified principal residence indebtedness, the ability to deduct mortgage insurance premiums, the deduction for college tuition and fees, and the credit for residential energy improvements (windows, etc.). See this summary (https://email.steptoecommunications.com/22/1412/uploads/summary-of-tax-extenders-agreement.pdf) for a full list. Make sure to consider these items when gathering inputs for your 2017 taxes.

Am I Working Too Much?

Am I working too much? If you’re like me, the answer is probably "yes". In this particular case though, I’m asking the question from a tax standpoint, specifically referring to a popular misconception about the way we pay income taxes. There are currently six tax Federal tax brackets: 10%, 15%, 25%, 28%, 33%, and 35% as shown in the table below from the Resources section of the PWA webpage.

Your marginal tax bracket increases with your taxable (after exemptions and deductions) income. So, if you’re married and have combined taxable income of $143k, your marginal tax rate is 28%. If your combined taxable income is $142k, your marginal tax rate would be 25%. So, doesn’t this mean that you could save tax more than $1k in tax by earning $1k less at work for the year because 143k * 28% is more than $1k greater than 142k * 25%? That’s where the misconception lies. The answer is no and here’s why. Your entire income is not taxed at your marginal tax rate. You are taxed at each incremental tax rate along the way. So if your taxable income is $143k (and you’re married), you’re taxed 10% on the first $17,400 of taxable income + 15% on the additional income up to $70,700 + 25% on the additional income up to $142,700 + 28% on the last $300. You should be able to see that your tax on the first $142k is exactly the same as if you only made $142k. The only income you pay 28% on is the incremental income which puts you in that bracket. The tax code is created so that you can never make more net (after-tax) income by earning less money. Virtually everyone to whom I’ve explained this over the years, including the students in the CFP® classes I’ve taught have breathed a sigh of relief. It seems that people tend to stress a little bit over the fact that they may be making a little too much income, pushing them into the next tax bracket, and costing them a ton of money when they could have enjoyed a week of unpaid vacation relaxing on the beach and made more after taxes. This can’t happen, so don’t worry that it’s happening to you. Of course that still doesn’t mean you’re working too much, but at least you’re not working so much that it’s actually costing you money.