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How inflation could affect 2023 tax brackets: You may get an unexpected ‘tax cut,’ in a way

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As you probably know, the federal income tax rate brackets, and many other federal tax parameters, are indexed for inflation using a factor based on the monthly average of changes in the chained Consumer Price Index, or chained CPI. Due to the way they are calculated, upticks in the chained CPI numbers during inflationary times, like now, are a bit lower than upticks in the regular CPI numbers that you read about in the media. But the differences are relatively trivial. To keep things simple in this column, let’s just call the chained CPI the CPI and go with it. OK? Onward.  

As you may have noticed, inflation has been surging this year, and that will be reflected in the monthly CPI numbers that will be used to calculate the inflation adjustment factor for your 2023 federal income tax brackets. Those brackets, and other inflation-adjusted federal tax parameters, will probably be announced in November. They will be based on the monthly average of CPI changes during the federal government’s fiscal year that began in October of last year and will end in September of this year.  

Impact of inflation on 2022 and 2023 tax brackets

For the 12 months that were used to calculate the inflation adjustment factor for the 2022 tax year, inflation was mild in the first half and started running hotter only in the second half. As a result, the inflation adjustment factor for 2022 was only about 3.1%. For example, the beginning of the 24% rate bracket for a married joint-filing couple is $178,150 of taxable income for 2022. That’s 3.13% higher than the corresponding number of $172,750 for 2021. Basically, ho hum.   

That was then. This is now. You’ll not be surprised to hear that there will be a much-higher inflation adjustment factor for the 2023 tax year. According to my calculations, we are headed for about a 7% inflation adjustment. Maybe more depending on how inflation pans out through September. For the eight months taken into account so far, we are looking at a factor of about 7.1%. Let’s assume that the inflation adjustment factor for the 2023 tax year will be 7%. 

How would that affect your personal federal income tax situation? Please keep reading.  

Inflation-adjusted guesstimates for your 2023 tax year

With an assumed 7% inflation adjustment factor, all the federal income tax bracket boundaries would increase by about 7%. It won’t be exactly 7%, because federal tax parameters are adjusted in certain dollar increments with rounding. For example, the tax bracket numbers are adjusted in $25 increments, but the standard deduction numbers are adjusted in $50 increments. Annual contribution limits for your 401(k) account are adjusted in $500 increments. The unified federal estate and gift tax exemption numbers are adjusted in $10,000 increments. 

Moving right along, an assumed 7% inflation adjustment factor would increase the 2023 tax rate brackets as follows:

Joint Filers


Heads of Household

End of the 10% bracket




Beginning of 12% bracket




Beginning of 22% bracket




Beginning of 24% bracket




Beginning of 32% bracket




Beginning of 35% bracket




Beginning of 37% bracket




 Impact: Other things being equal, you could have 7% more taxable income next year and have the same federal income tax bill as this year. Nice. While almost nobody likes inflation, it’s an ill wind that blows no good, as the saying goes.

An assumed 7% inflation adjustment factor would increase the 2023 standard deduction amounts as follows: 

Joint Filers


Heads of Households




Impact: If you don’t itemize deductions, your standard deduction would shelter 7% more income from the federal income tax next year. Good. 

An assumed 7% inflation adjustment factor will increase the top of the 0% federal income tax bracket for 2023 long-term capital gains and qualified dividends as follows: 

Joint Filers






Impact: Other things being equal, you could have 7% more in federal-income-tax-free long-term capital gains and dividends next year. Good.

An assumed 7% inflation adjustment factor would increase the beginning of the 20% maximum federal income tax bracket for 2023 long-term capital gains and qualified dividends as follows: 

Joint Filers






Impact: You would have a better chance of avoiding the 20% maximum rate next year. Good.

And there’s more

An assumed 7% inflation adjustment factor would increase the maximum 401(k) contribution from the current $20,500 to $21,950 next year. Good. 

An assumed 7% inflation adjustment factor would also increase lots of other federal tax parameters, such as the 2023 phase-out ranges for deductible contributions to traditional IRAs, the 2023 phase-out ranges for contributions to Roth IRAs, the 2023 phase-out ranges for the qualified business income (QBI) deduction for small business owners, and the unified federal gift and estate tax exemption for you 17 dear readers who will be affected by that. 

It’s all good — as long as you would prefer to pay less taxes next year rather than more.   

Can you take this “good news” to the bank?

Uh, no. The preceding taxpayer-friendly guesstimates assume there will be no new legislation that affects your 2023 federal tax position. However, there are rumblings from D.C. that some Democrats, including West Virginia Senator Joe Manchin, are discussing a scaled-down version of President Biden’s ill-fated Build Back Better (BBB) bill. A resurrected BBB could include federal tax increases — such as jacking up the top income tax rate from the current 37% to 39.6%, starting next year. There could be other unfavorable changes for certain taxpayers if anything gets through our beloved Congress. 

The bottom line

Don’t get cocky. Stay tuned for possible negative developments. Needless to say, we will keep you informed.


American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.

letizo News



However bad the year has been for most stocks, it has been especially harsh for state-licensed cannabis sellers.

In just the past month, the

AdvisorShares Pure US Cannabis

exchange-traded fund (ticker: MSOS), which tracks America’s multistate operators—or MSOs—fell 25%, while the

S&P 500

dropped 7%.

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How Do Mega Backdoor Roths Work?

letizo News



A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.

Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.

Roth Account Basics

Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.

First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.

Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:

  • Single filers: MAGI of $125,000 or less

  • Married filing jointly: MAGI of $198,000 or less

  • Head of household: MAGI of $125,000 or less

You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.

Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.

What Is a Backdoor Roth?

A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.

But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.

How a Mega Backdoor Roth Works

A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:

You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.

If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.

Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.

You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.

Benefits of a Mega Backdoor Roth

There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.

You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.

Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.

Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.

So who is a mega backdoor Roth right for? You may consider this move if you:

  • Have an eligible 401(k) plan at work

  • Have maxed out traditional 401(k) contributions

  • Are not eligible to contribute to a Roth IRA because of your income

  • Have additional money that you want to invest for retirement

  • Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover

Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.

Mega Backdoor Roth Alternatives

If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.

Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.

Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.

Bottom Line

A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.

Tips for Retirement Planning

  • If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.

  • Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.

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Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.

letizo News



Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.

China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.


(ticker: BABA) and


(0700.H.K.) were among the companies fined as a result.

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