Taxes are most likely our largest ongoing liability. Therefore, we should understand the latest tax brackets for 2023. I go through this exercise every year to guide how I will spend my time, my most valuable asset.
Based on a thorough understanding of the 2023 tax brackets, we can then logically come up with the most tax-efficient, best income to earn to live our best lives.
The best income is subjective. However, it is an income that enables an individual or family to save for retirement, take vacations, raise two kids, own a home, drive a safe car, and not feel like they are getting ripped off by the government. The best income also means you feel like you have work-life balance.
In 2023, the median household income in America is roughly $75,000. Therefore, at the very least, we can agree the best income to live a great life is higher. However, a household could be one person or several.
To find the optimal income, let's first review the 2023 income tax brackets for both singles and for married couples. In these charts, I have also included the long-term capital gains tax rates. The short-term capital gains tax rate equates to the ordinary federal income tax rate.
We’ll then move onto the latest standard deduction amounts, alternative minimum tax exemption levels, and estate tax thresholds.
Single 2023 Income Tax Brackets
The biggest income tax rate jump is from 12% to 22%. This occurs when an individual's income increases from $11,011 to $44,725 to $95,376 to $182,100.
The second biggest income tax rate jump is from 24% to 32%. This occurs when an individual's income increases from $95,376 to $182,100 to $182,101 to $231,250.
Further, the biggest differential between the ordinary income tax rate and the long-term capital gains tax rate is for income between $231,251 to $578,125. This difference is 20% (35% – 15%).
Married, Filing Jointly 2023 Income Tax Brackets
The biggest income tax rate jump is from 12% to 22%. This occurs when a married couple's income increases from $22,001 to $89,450 to $89,451 to $190,750.
The second biggest income tax rate jump goes from 24% to 32% when a married couple's income goes from $190,751 to $364,200 to $364,201 to $462,500.
The biggest differential between the ordinary income tax rate and the long-term capital gains tax rate is for income between $462,501 to $693,750. This difference is 20% (35% – 15%).
2023 Income Tax Brackets For Heads Of Households
There are still ongoing talks with Joe Biden and most Democrats about increasing income tax rates and capital gains tax rates. With a divided Congress, it doesn't seem likely there will be tax increases.
However, if there are increases, the highest marginal income tax rate would increase from 37% to 39.6%. The rate would kick in for single filers with income over $400,000, heads of household over $425,000, married joint filers over $450,000, and for married separate filers over $225,000.
In other words, the income thresholds would be lowered for the highest marginal income tax rate for all household formations.
2023 Standard Deduction Amounts
The 2023 standard deduction amounts are as follows:
- Single or married filing separately: $13,850 ($12,950 in 2022)
- Married filing separately: $13,850 ($12,950 in 2022)
- Married filing jointly: $27,700 ($25,900 in 2022)
- Head of household: $20,800 ($19,400 in 2022)
If you are age 65 or older, your standard deduction increases by $1,750 if you file as single or head of household. If you are legally blind, your standard deduction increases by $1,750 as well.
In other words, the standard deduction amounts reduce your taxable income by the amount per filing status. You can also make up to the 2023 standard deduction amounts and pay no income taxes. This is ideal for students and other low-wage workers who want to contribute to a Roth IRA.
Please encourage your children to earn money and contribute the maximum $6,500 into a Roth IRA. You're supposed to contribute after-tax money into Roth IRA. It then compounds tax-free and gets to be withdrawn tax-free. However, for those children and adults earning under the standard deduction amount, they get to contribute tax-free as well!
If you have a small business, opening up a custodial Roth IRA for your child is a no-brainer. In 10 years, your children will likely thank you for your tutelage. Starting with $50,000 – $100,000 in a Roth IRA as an adult will put them far ahead of the average 18-22-year-old with nothing.
2023 Capital Gains and Qualified Dividends Tax Rates
For 2023, long-term capital gains and qualified dividends face the following tax rates:
Single Or Married Filing Separately Long-Term Capital Gains Tax Rate
0% tax rate up to $44,626
15% tax rate up to $492,300
20% tax rate over $492,300
Married Filing Jointly Long-Term Capital Gains Tax Rate
0% tax rate up to $89,250
15% tax rate up to $553,850
20% tax rate on any income beyond $553,850
You will see these capital gains and qualified dividends tax rates conveniently included in the charts above in the most right column.
One of the best reasons to generate more passive income is due to the lower long-term capital gains tax rate compared to ordinary income.
2023 Alternative Minimum Tax (AMT)
The 2023 AMT exemption amount is increased to:
- $81,300 for unmarried individuals (single people)
- $126,500 for married people filing jointly
In 2023, the 28 percent AMT rate applies to excess AMT of $220,700 for all taxpayers ($110,350 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once AMT income reaches $578,150 for single filers and $1,156,300 for married taxpayers filing jointly.
2023 Earned Income Tax Credit (EITC)
The maximum Earned Income Tax Credit (EITC) in 2023 for single and joint filers is $560 if the filer has no children. The maximum credit is $3,995 for one child, $6,604 for two children, and $7,430 for three or more children.
Here's another way to look at the maximum income you're able to earn by number of children to receive a child tax credit.
If the U.S. government really wants to boost the population replacement rate, perhaps it should give child tax credits for all households.
2023 Annual Gift Tax Exclusion
For 2023 the annual exclusion for gifts to individuals is $17,000, up from $16,000 in 2022. Each $17,000 gift basically reduces your estate value by $17,000.
If you have an estate valued at greater than the estate tax threshold or is likely to be above the estate tax threshold upon your death, it behooves you to give more money away or spend more. Otherwise, any money above the estate tax threshold will be taxed at 40%.
2023 Estate Tax Threshold
The 2023 estate tax threshold per person is now $12,920,000, up from $12,060,000 in 2022. But again, the estate tax threshold could come down under the Biden administration. President Biden has proposed cutting the estate tax threshold in half.
Another benefit from increasing the annual gift tax exclusion is that you can now superfund a 529 plan with $85,000 in 2023, up from $80,000 per person in 2022. After a bear market in 2022, super funding in 2023 seems like a relatively better value.
A married couple can superfund a beneficiary's 529 plan in one lump sum with $170,000. But remember, your IRS Form 709 must reflect your option to take the five-year election.
Superfunding multiple 529 plans is one of the most tax-efficient generational wealth transfer strategies. Instead of just gifting children, grandchildren, nieces, and nephews money, gift them eduction. A great education is what will set people free.
2023 Maximum Income For Social Security Tax (FICA)
In 2023, employees are required to pay a 6.2% Social Security tax (with their employer matching that payment) on income up to $160,200, up from $147,000 in 2022, and up from $142,800 in 2021. The maximum income amount for Social Security tax tends to follow inflation up every year.
In other words, if you make $160,200, your maximum FICA tax will be $9,932.40. But don’t forget. You also have to pay a Medicare tax rate of 1.45%. Therefore, your total FICA tax rate is 7.65%. 7.65% X $160,200 = $12,255.3. If you are self-employed, you have to pay double (15.3%)!
Below is the historical maximum income amounts that that must pay Social Security Tax. FICA stands for Federal Insurance Contributions Act, which includes 6.2% for Social Security Tax and 1.45% for Medicare tax.
The reason why lots of businesses are set up as S-Corp is to save money on FICA tax. Business owners do so by paying themselves a lower salary and higher distributions, which don't face FICA tax.
2023 Best Income Based On 2023 Income Tax Rates
Now that you know the 2023 income tax brackets, long-term capital gains tax rates, standard deduction amounts, and AMT thresholds, we can now calculate the best tax-efficient income for maximum happiness while still paying a reasonable amount of tax.
Yes, it's true that most working Americans don't pay federal income taxes. But someone has to pay income taxes to help support this great nation, so that might as well be us.
In terms of the ideal income based on 2023 income tax rates, I say they are:
- $182,100 AGI for singles
- $364,200 AGI for married couples
The above income levels face a marginal income tax rate of 24%. Any dollar over gets taxed at a more egregious 32%, an 8 percentage point jump. Why there's such a large tax rate increase compared to only a 2 percentage point increase from 22% to 24%, is a mystery.
But if you go through a detailed budget, as I have done with a $300,000 household income, you'll see that earning $182,100 for singles and $364,200 for married couples provides a very comfortable lifestyle for most Americans. Yes, at these income levels, AMT will still need to be paid. But the AMT amounts aren't egregious.
These income levels are high enough to save for retirement, own a house, vacation, and raise children. But the income levels are also low enough that you're still paying a reasonable income tax rate. The effective tax rate is actually lower.
Budget Example Of Best Income Amount For Married Couple With Kids
2023 Best Passive Investment Income Amount To Make
Earning passive investment income that is taxed up to 15% seems ideal. Therefore, if you had zero ordinary income, the ideal passive income amount in 2023 is $492,300 for singles and $553,850 for couples.
Such ideal passive income amounts are hard to achieve. Therefore, a more realistic combination is to earn the ideal income levels of up to $182,100 for singles and $364,200 for married couples and earn passive investment income up to a total combined income of $492,300 and $553,850, respectively.
In other words, the ideal income combination for a single person would be $182,100 in ordinary income plus up to $310,200 in passive investment income ($492,300 – $182,100).
The original income faces the highest marginal income tax rate of 24% and the passive investment income faces the highest long-term capital gains tax rate of 15%. In other words, the two income types are taxed at different rates.
Just note that there is also the 3.8% Net Investment Income Tax you have to pay on investment income if you earn above $150,000 as a single or $250,000 as a married couple. Hence, you're 15% long-term capital gains tax rate really could be 18.8%.
If you haven't started building your taxable portfolio to generate passive income yet, get going. It took me 13 years to generate enough passive income to cover my basic living expenses. And it has taken me 23 years to make enough passive income to provide for a family of four in San Francisco.
Best Passive Income Amount For A Married Couple Is Different
Using the same math and logic, the ideal income combination for a married couple would be $364,200 in ordinary income plus $189,650 in passive investment income ($553,850 – $364,200).
But does this sound ideal? I'd rather have the majority of my income come from passive investment income. This way, the pressure is off to always have to grind to generate active income.
Therefore, the ideal income composition would be at least $276,926 (50.1% of $553,850) in passive investment income taxed at 15%, and $276,924 (49.9% of $553,850) in ordinary income taxed at a marginal 24% rate.
The Second Best Income Amounts To Earn Based On 2023 Income Tax Brackets
If you can't make $182,100 as a single person or $364,200 as a married couple, there's a second best income amount for a balanced life while paying a reasonable amount of taxes. They are:
- $44,725 AGI for singles
- $89,450 AGI for married couples
At these income levels, you are only paying a marginal income tax rate of 12%. Every dollar more than these levels faces a 22% marginal income tax rate up to $95,375 for singles and up to $190,750 for married couples filing jointly. A 10 percentage point jump in the marginal federal income tax rate is pretty steep.
Given these are Adjusted Gross Income amounts, you can actually make more by adding up the deductions. For example, $89,450 plus $27,700 in standard deductions for a married couple equals $117,150.
The only problem with earning less income is that you have less of an absolute dollar amount to save and invest.
Therefore, if you plan to earn the second ideal income amount, you had better enjoy your job or already be near or in retirement. At these income levels, it will be very hard to retire early and do something else. Taking on a side hustle is a good ideal.
Budget Example Of Second Best Income Amount For Married Couple
Note: MAGI stands for Modified Adjusted Gross Income. It takes into account all the deductions and credits.
What's Your Ideal Income Based On Future Income Tax Rates?
I've argued the best time to retire may be when tax rates are rising and the social safety net is growing. I left work in 2012 mainly because I was burned out.
The possibility of also facing a 39.6% marginal income tax rate just didn't sound appealing. I didn't love the money that much. If I had, I would have kept grinding away for maximum income. But like I’ve argued, the best income is not an infinite amount due to taxes.
Today, I'm mainly focused on doing work that I 100% enjoy. The income that comes from it is a bonus. However, I'm still careful about trying to accurately forecast my future investment income because it plays a big part in the overall tax rate I will pay and the effort required to earn.
Paying a total effective tax rate (federal, state, FICA) up to 25% is ideal in my opinion. At 25%, you're contributing to the greater good while also keeping 75% of your hard-earned money. Paying any more than a total effective tax rate of 25% starts to get in the grey zone.
Sure, during your high-energy years when you're aggressively looking to earn as much as possible, paying a higher tax rate is more digestible and may even be welcome. However, as you get older and stop to smell more roses, you'll want to optimize more for time than money.
Please let me know what you think is the best tax-efficient income to earn is and why! Do tax rates and rules affect the amount you’re willing to work? What do you think is missing from the tax code to make society better?
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