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For 2023, the keyword for Expat Taxes is inflation. Inflation has many bad aspects, but some good ones include increased Foreign Earned Income Exclusion, higher 401(k) contributions, and higher IRA contributions. This article will discuss these IRS changes and how they may affect your US Expat Tax Updates for 2023.
The biggest one for expats will be the change to the FEIE. As you may know, the FEIE is indexed to inflation, and for the 2022 tax year, which gets filed in 2023, you can exclude up to $112,000. For you planners out there, the limit for the 2023 tax year, which is filed in 2024, is $120,000. This is a significant increase, especially for those earning more than $112,000. The limit will continue to rise each year as inflation continues to increase.
Retiring abroad can be very complex, but keeping up with the updates and changes can make your tax filing much more straightforward. Thresholds on 401ks have increased in 2023, and the maximum you can contribute if you are under 50 years old is now $22,500, up from $20,500 for people under 50.
If you are over the age of 50 and have not yet retired, it may be worth considering taking advantage of the catch-up contribution. The catch-up contribution allows those older than 50 to make an additional $7,500 in 401k contributions for the 2022 tax year, up from $6,500 in the 2021 tax year. If a person is eligible for both the standard $19,000 limit and the catch-up contribution, then they can contribute up to $26,500 in 2023.
IRA limits have also increased to $6500 up from $6000 in 2022. If you are over 50, you can add an extra $1000 to that as your catch-up contribution.
The standard deductions have also increased in 2023 to $27,700 for Married couples filing jointly, up from $25,900 in 2022. Single filers get an increase to $13,850, up from $12,950 in 2022. The standard deduction for heads of a household has increased to $19,400, up from $18,800 in 2022. This means fewer people will itemize their deductions than in previous years since they’ll get more benefits from claiming the standard deduction instead of itemizing items like mortgage interest payments and charitable donations on Schedule A of Form 1040EZ/A.
The threshold for Capital gains went up a bit as well, and if your taxable income is below $44,625 as a single filer or $89,250 as an MFJ (Married Filing Jointly) filer, you would pay no capital gains. If your taxable income is between $44,625 and $492,300 as a single filer or $89,250 and $553,850 as an MFJ filer, you will pay 15% on capital gains. If you are over that income level, then the capital gains tax rate jumps to 20%.
If you are self-employed or have the ability to increase your salary, you may want to do so. A single filer can now earn $156,350 and owe zero income tax, assuming you utilize the FEIE for the full $120k, plus a full $22.5k for your 401k contribution and $13.85k for the standard deduction before you have to pay any income tax. If you are Married Filing Jointly, and can both utilize the FEIE, then this increases to $312,700 before you owe any income tax. Remember, you will need to pay Self Employment tax on the income before the FEIE is applied, and if you are self-employed, that would be 15.3%.
We hope this has clarified some confusion surrounding US Expat Tax Updates for 2023. There are a lot of tax rules out there, and we want to help you understand them so that you don’t get caught off guard come tax season. For general questions on expat taxes or working with Greenback, contact our Customer Champions.