The IRS has released higher federal tax brackets for 2023 to adjust for inflation.
The standard deduction is increasing to $27,700 for married couples filing together and $13,850 for single taxpayers.
There are also changes to the alternative minimum tax, estate tax exemption, earned income tax credit and flexible spending account limits, among others.
IRS raises income threshold and standard deduction for all tax brackets. Amid soaring inflation, the IRS this week announced higher federal income tax brackets and standard deductions for 2023.
The agency has boosted the income thresholds for each bracket, applying to tax year 2023 for returns filed in 2024.
These brackets show how much you’ll owe for federal income taxes on each portion of your “taxable income,” calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.
Higher standard deduction
The standard deduction will also increase in 2023, rising to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers may claim $13,850, an increase from $12,950.
More from Year-End Planning
Here’s a look at more coverage on what to do finance-wise as the end of the year approaches:
The IRS also boosted figures for dozens of other provisions, such as the alternative minimum tax, a parallel system for higher earners and the estate tax exemption for wealthy families.
There’s also a higher earned income tax credit, bumping the write-off to a maximum of $7,430 for low- to moderate-income filers. And employees can funnel $3,050 into health flexible spending accounts.
While the agency hasn’t yet released 2023 limits for 401(k) and individual retirement accounts, experts predict IRA limits will jump to $6,500 for savers under 50.
Senate Finance Committee Chair Ron Wyden (D-OR) have proposed different ways to tax unrealized capital gains every year. Their shared goal is understandable, with trillions of dollars escaping income tax under current law. But each plan raises serious administrative and legal problems. My colleague, Rob McClelland, and I suggest a simpler, more effective approach: Tax unrealized gains of the wealthy at death at a higher rate than if assets are sold or given as gifts during life.
Current law encourages the wealthy to hold their assets until death, when those gains escape income tax permanently. This happens for two reasons. First, current law does not treat a bequest as a sale so no income tax is due at death. And, second, heirs are allowed a “stepped-up basis” where they never pay tax on any increase in the value of property during a decedent’s lifetime.
The results: Government loses a massive amount of revenue, wealth inequality is perpetuated through generations, and investors are encouraged to retain (or “lock-in”) poorly balanced, and less productive, portfolios. More than fifty years ago, two leading tax experts described the failure to tax gains of property transferred at death as “the most serious defect in our federal tax system.”
To fix this longstanding flaw, our plan would tax unrealized gains at death for the very rich (couples with more than $100 million and singles with more than $50 million) at the tax rate for ordinary income—currently 37 percent. But profits from sales or gifts of assets during life would still be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes.
Our proposal turns the existing incentive for appreciated assets on its head. Instead of encouraging people to hold their appreciated assets until death to avoid income taxes, our proposal encourages them to sell these assets before they die.
For example, imagine an entrepreneur who owns $100 billion of his company stock, for which he paid nothing when he founded the firm. Under our proposal, if he holds his stock until death, he’d owe $37 billion in income tax. But if he sells during life, he would owe $23.8 billion. And, if he wants to transfer his stock to his children without paying the $37 billion, he could give his stock to them during his life and pay $23.8 billion.
To determine the reach of our proposal, Rob reviewed data from the 2019 Survey of Consumer Finances, which he combined with Forbes 400 information (which is excluded from the survey). He estimated that taxpayers subject to our proposal have unrealized gains totaling about $7.5 trillion in 2022.
If these households realize $6 trillion of their $7.5 trillion of that gain during their lifetimes, and the remaining $1.5 trillion at death, our proposal would raise almost $2 trillion over time. Over the next 10 years alone, our plan could raise several hundred billion dollars, just like Biden’s and Wyden’s plan. (Our plan could raise more than theirs eventually, as our tax rate at death is higher than Biden’s and Wyden’s.)
For simplicity, we assumed the unrealized gains don’t grow over time, which likely makes our estimates conservative.
Taxing the wealthiest households on their unrealized gains at death is much easier to administer than Biden’s or Wyden’s plans to tax them annually. Our plan would rely on existing estate tax returns, and valuations, which the rich already file, while Biden’s and Wyden’s plans would require new annual filings for taxpayers during their lifetimes.
While few taxpayers would pay Biden’s or Wyden’s tax, many more would need to value all their assets annually, as taxpayers close to the line might move in and out of the regimes over time. How would the IRS determine whether all these taxpayers filed properly?
Finally, our proposal to collect taxes on transfers by gift or bequests is well -established under the US Constitution, but collecting taxes outside of transfers during their lifetimes raises unresolved legal issues.
I am a Senior Fellow in the Urban-Brookings Tax Policy Center. I research, speak, and write on a range of federal income tax issues, with a focus on business
The Internal Revenue Service, struggling to deal with a massive backlog of paper filings, decided to “destroy an estimated 30 million paper-filed information return documents in March 2021,” the agency’s watchdog reported last week.
The IRS said in a statement Thursday that taxpayers “have not been and will not be subject to penalties resulting from this action.” It said that it processed 3.2 billion information returns in 2020 and that the destroyed documents are not tax returns but documents submitted to the IRS by third-party payors.
It added that 99% of the information returns were already processed and the remaining 1% of those documents “were destroyed due to a software limitation and to make room for new documents relevant to the pending 2021 filing season.”
The agency also said that “this situation reflects the significant issues posed by antiquated IRS technology.” The destruction of documents has sparked a backlash from tax preparers, with some reportedly concerned that the decision could hamper the agency’s ability to verify returns and trigger additional error notices.
“IRS management’s decision to destroy information return documents due to the processing backlog raised numerous questions regarding IRS’ decision making and risk assessment process,” Edward Karl, vice president of taxation at the American Institute of CPAs, said in a statement. “The IRS’ recent statement provided some of the answers, but American taxpayers deserve to know why this decision was made and how it might impact them.”
Rep. Bill Pascrell (D-NJ), chairman of the House Ways and Means Oversight Subcommittee, on Friday called for President Biden to replace IRS Commissioner Chuck Rettig, describing the document destruction as the latest black eye for the agency.
“The IRS is vital to public confidence in our nation and its Trump-appointed leader has failed,” Pascrell said in a statement. “The manner by which we are learning about the destruction of unprocessed paperwork is just the latest example of the lackadaisical attitude from Mr. Rettig.
This latest revelation adds to the public’s plummeting confidence in our unfair two-tier tax system. That confidence cannot recover if all the American people see at the IRS is incompetence and catastrophe.”
While the report doesn’t specify which information returns the agency chucked, the news has triggered angry responses from tax professionals, particularly after another difficult filing season.
“I was horrified when I read the report describing the destruction of paper-filed information returns,” said Phyllis Jo Kubey, a New York-based enrolled agent and president of the New York State Society of Enrolled Agents.
Missing information returns can cause a “mismatch” at the IRS, delaying refunds because the agency can’t verify details on a taxpayer’s returns, she explained.
While the eventual consequences of the decision are unknown, tax professionals have long complained about the stream of automated IRS notices, with limited options to reach the agency.
“If they’re not putting those into the system, there’s going to be discrepancies, which means potential notices that are sent out,” said Dan Herron, a San Luis Obispo, California-based certified financial planner and CPA with Elemental Wealth Advisors.
Although the IRS halted more than a dozen types of automated notices in February, Herron says the constant correspondence is still creating headaches for taxpayers and advisors.
“There were no negative taxpayer consequences as a result of this action,” the IRS said in a statement on Thursday. “Taxpayers or payers have not been and will not be subject to penalties resulting from this action.”
Brian Streig, a CPA with Calhoun, Thomson and Matza LLP in Austin, Texas, said the news was a “break of our trust,” pointing to the burden on the business community.
“Small businesses stress out every year in January trying to accurately prepare these informational returns and get them filed on time,” he said. “To see the IRS just destroy these is almost like the IRS admitting they don’t really care.”
If you have some money invested in mutual funds, using them to pay off debt may seem like an attractive option. You may assume that you’ll get more benefit from using the money that you’ve invested to eliminate debt (and the associated high interest rates). But cashing in your mutual funds may not be the best way to become debt-free if there are other options available. And depending on where you hold your mutual funds, you could end up receiving a steep tax bill.
Key Takeaways
Cashing out mutual funds may not be the best option for repaying debt.
You may owe capital gains tax on mutual funds that you cash out from a taxable brokerage account.
Cashing out mutual funds from an IRA or other qualified retirement account could trigger income tax on earnings, as well as an early withdrawal tax penalty.
Withdrawing money from your investments to pay debt means missing out on future growth from compounding interest.
Pros and Cons of Cashing Out Mutual Funds to Pay Off Debt
Using mutual funds to pay off debt may seem appealing at first glance. If you aren’t using the money that you’ve invested for any particular financial goal, then why not use it to pay off credit cards, student loans, or other debts? After all, eliminating debt can free up more money in your budget that you can then reinvest in mutual funds, stocks, or other securities.However, there are some problems with that logic.
Specifically, there are two major drawbacks associated with cashing out mutual funds to pay down debt. The first is taxes; the second is how it may negatively impact your long-term financial goals.In terms of tax implications, there are two ways that cashing out mutual funds to pay debt can backfire, depending on where you hold them. If you have mutual funds in a taxable brokerage account, then cashing them out may trigger capital gains tax if you’re selling them above what you initially paid for them.
Short-term capital gains on securities owned for less than one year are subject to ordinary income tax rates.1 The long-term capital gains tax rate is 0%, 15%, or 20%, depending on your income.
If you hold mutual funds inside an individual retirement account (IRA), then you can avoid capital gains tax. But you may pay ordinary income tax on earnings, as well as a 10% early withdrawal penalty, depending on the type of IRA, how long you’ve had the account, and your age at the time of withdrawal.
If the mutual funds are in an IRA, you may pay ordinary income tax on the entire withdrawal, the exception would be if you had any basis in your IRA. Then a 10% penalty may apply. The rules are slightly different for Roth IRAs, especially when it comes to taxes.
Aside from the tax consequences of using mutual funds to pay down debt, it’s also important to consider how it may impact your ability to grow wealth. By selling off mutual funds and not replacing them with other investments, you miss out on the power of compounding interest. Depending on how much of your mutual fund holdings you choose to sell, that could mean losing thousands of dollars in growth over time.
If you’re considering cashing out mutual funds in a brokerage account, use an online capital gains tax calculator to estimate how much you may owe on the sale.
Other Options for Paying Off Debt
Cashing out mutual funds isn’t the only way to manage debt. There are other possibilities for eliminating debt faster while also saving money on interest, including:
Refinancing student loans, personal loans, or other loans at a lower interest rate
Consolidating credit card debts into a single personal loan
Taking advantage of 0% credit card balance transfer offers
Selling vehicles or other non-investment assets that you own and applying the proceeds to your debt balances
If you’re struggling with debt repayment, then you may consider other options, such as a debt management plan or debt settlement. With a debt management plan, you work with a certified credit counselor to create a plan for paying off what’s owed. This may include reducing interest rates or fees. You make a single payment to the credit counselor, who then distributes the funds among your creditors.
Debt settlement is something that you may consider for past-due debts. This involves working with a consumer debt specialist to negotiate debts with creditors. The goal is to pay off debts for less than what’s owed to avoid filing for bankruptcy as a last resort.
Debt management and debt settlement may have potentially negative impacts to your credit score, so it’s important to weigh these options carefully.
Making an Informed Decision
If you’re considering selling mutual funds to pay off debt, it’s important to do your research beforehand. Your broker or financial advisor can provide you with the expected rate of return for a mutual fund going forward. Compare this rate to the fund’s historical performance to ensure its accuracy. If the mutual funds pay dividends, then this amount should be included in the assessment. If funds are held within a retirement account, find out the fees and penalties for cashing out.
Again, cashing out of a traditional IRA before age 59½ results in a 10%, or 25% if you have a SIMPLE IRA, tax penalty. There are exceptions for withdrawals, such as disability, medical debt, certain educational expenses, and buying a home. Mutual funds held within regular brokerage accounts have the standard commission charges, but the fund itself still may charge a fee for redeeming your shares. Brokers and financial advisors are great resources for this information.
The interest rate on your debt and the length of the loan should provide the last pieces of evidence to make an informed decision. Debts such as credit cards and short-term loans typically have higher interest rates than longer-term debts such as vehicle loans or mortgages. For mortgages, check to make sure that you have a fixed interest rate. Adjustable-rate mortgages (ARMs) can keep increasing over time and lead to payments that might balloon above your ability to repay them.
Note
A 401(k) loan also is an option for repaying debt, but if you separate from your job before the loan is repaid, then the entire amount could be treated as a taxable distribution.
The Bottom Line
While becoming debt-free may be relief, there are some downsides to consider if you’re using mutual funds to achieve that goal. Fees and penalties are red flags when thinking about cashing in your mutual funds. Loss of future investment income and the lack of a retirement account can put you in a worse situation later in life.
You can make additional debt payments using current income to shorten the length of the loan and reduce the total amount of interest that you have to pay, assuming your budget allows it. If you’re truly struggling with how to repay debt, then consider reaching out to debt relief companies to see how they may be able to help.
When researching debt relief companies, be sure to get a clear explanation of the services that they offer and the fees that you might have to pay before signing a contract for services.
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Nathan Buehler is a well-established writer on the VIX and its related exchange traded products. Nathan also provides coverage on publicly traded companies, commodities, and personal finance/budgeting. Not only is Nathan a writer, but he is also a teacher. His drive to help others doesn’t end in the classroom. This is evident by the time and commitment he gives to his readers through personal feedback and open discussion of topics. He has written articles on topics such as economics, investing, and finance.
Superior Court of Pennsylvania (1894). “Brooke et al versus the City of Philadelphia et al”. Weekly Notes of Cases Argued and Determined in the Supreme Court of Pennsylvania, the County Courts of Philadelphia, and the United States District and Circuit Courts for the Eastern District of Pennsylvania. Kay and brother. 34 (18): 348.
It’s a well-known fact that Singaporeans love property. Before the pandemic, it was common to hear of hordes of people thronging condominium showrooms where units are snapped up like hotcakes.
While the pandemic has eliminated these throngs, the property market continues to remain buoyant. Last month, 99.co and SRX reported that condominium resale prices climbed for the 15th consecutive month, hitting a new all-time high.
The rental markets for HDB flats and private property also benefitted from Singapore’s economic recovery, with condominium rents climbing by 9.1% year on year in October. But it’s not all good news for investors.
Physical property requires heavy upfront capital and constant upkeep. Property-related stocks, on the other hand, offer an alternative, acting as a proxy for owning physical capital and can easily be accessed through the stock market.
REITs and property stocks are breathing a sigh of relief as economic activity picks up. As an investor, you may wish to take a second look at property-related stocks as they offer some compelling characteristics. Here are five reasons why they are attractive.
1. A scarce resource
No matter how you cut it, land is a scarce resource in our tiny island. That’s the reason why the government has been trying to maximise the space by building higher and increasing the plot ratio for properties. Property developers such as CapitaLand Investment (SGX: 9CI) and City Developments Limited (SGX: C09) that own land banks have a valuable asset on their balance sheets.
And REITs such as Frasers Centrepoint Trust (SGX: J69U) and Mapletree Commercial Trust (SGX: N2IU), which owns a portfolio of heartland retail malls and retail cum commercial properties in Singapore, respectively, are sitting on a veritable gold mine. By buying into such companies and REITs, investors can indirectly own a piece of valuable real estate.
2. Tax exemptions
Companies naturally are obliged to pay corporate taxes to the taxman at the current rate of 17% on their chargeable income. REITs, however, have a distinct advantage in this area. As long as they pay out at least 90% of their earnings as distributions, REITs are exempted from paying income taxes.
In addition, investors also do not need to pay income taxes on dividends received from both REITs and property developers. So, REIT investors win on two fronts as their distributions are completely exempted from income tax. Contrast this with owning an investment property where the property tax rate stands at 10% of the annual value of the property.
3. Easy to transact
Selling physical real estate can be a tedious process. You will need to engage a property agent and lawyer, and get in touch with the banker who offered you the mortgage. Not to mention the property is also an illiquid asset that may take weeks or even months to dispose of.
In contrast, property stocks and REITs offer much less hassle. As they are listed on a stock exchange, you can easily transact through the platform. The market is also fairly liquid and you can obtain your cash much more quickly should you sell. All you need is a stockbroker to facilitate the transaction.
4. Piecemeal holdings
When you’re dealing with physical property, you can’t sell it off piece by piece. It’s impossible to just, for example, sell off the dining room while retaining the rest of the property. For property-related stocks, though, you can choose to sell all or part of your shareholders.
This ability to transact in piecemeal fashion provides you, the investor, with much more flexibility.
5. An external manager
Owning an investment property comes with a set of responsibilities including maintenance and tenant management. You have to periodically check in on the property to ensure it is in good condition and also liaise with your tenant on rent collections. If the unit is vacant, you have to expend the effort to locate a suitable replacement tenant or else your cash flow dries up.
On the other hand, REITs appoint a manager that takes care of all the above, and the portfolio will be professionally managed by a competent team of staff.
The REIT manager’s duty is to ensure the properties are occupied and well-maintained, and that all tenants pay up on time. You can thus outsource the management of the properties to a competent manager who has your best interests at heart. Stay tuned for another five reasons as to why we believe property stocks are a great asset class to own!
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“REIT 50 Years Timeline”. Reit.com. Archived from the original on 2012-11-13. Retrieved 2012-12-18. Section 10(a) of Public Law no. 86-779, 74 Stat. 998, 1003-1008 (Sept. 14, 1960), enacting Internal Revenue Code sections 856, 857 and 858.
“News for SA Reit Association”. Mahipal Singh, Security Analysis with Investment and Portfolio Management, Isha Books 2011, page 145. Baljeez Hbk, July 12, 2007 So, KK.
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