Theirs said it is adjusting many of its rules to account for the impact of inflation, ranging from personal income tax brackets for 2023 to the standard deduction. The changes could mean tax savings for some taxpayers next year.
The higher limits are intended to avoid “bracket creep” due to inflation, which can push workers who have received annual cost-of-living wage increases into higher tax brackets, even if their standard of living has not changed.
The IRS makes these adjustments every year, but high inflation this year means that many of the changes are greater than in a typical year. Americans are grappling with stubbornly high inflation, which is eating away at their purchasing power, with average wage gains lagging behind the sharp rise in prices.
The higher reserve thresholds could relieve some taxpayers who fall into lower tax brackets as a result, Tim Steffen, director of tax planning at Baird, said in an email. For example, Steffen noted that a married couple earning $200,000 in 2022 and 2023 would save $900 in taxes next year because more of their income would be taxed at a lower rate.
Here are the changes announced by the IRS on October 18, with the inflation-adjusted provisions taking effect for the 2023 tax year. Taxpayers will file their 2023 tax returns in early 2024.
The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you have to pay taxes on.
- For married couples filing jointly, the standard deduction will increase to $27,700, up from $25,900 for the current tax year. That’s an increase of $1,800, or a 7% increase.
- For single taxpayers and married individuals filing separately, the standard deduction will increase to $13,850 in 2023 from $12,950 currently. That’s an increase of about 6.9%.
- Heads of households will see their standard deduction in 2023 increase from $19,400 this year to $20,800. This is an increase of 7.2%.
“The flip side, however, is that it will be harder to itemize your deductions in 2023,” Steffen said. “That means your tax payments, mortgage interest and charitable contributions are less likely to give you a tax advantage next year.”
Most taxpayers benefit from the standard deduction, especially after the Tax Cuts and Jobs Act 2017 enacted a more generous deduction. Only about 14% of taxpayers itemized their taxes after the adoption of the tax overhaul, a drop of 17 percentage points compared to before the law, according to the Tax Foundation.
The IRS increases tax brackets by approximately 7% for each type of filer, such as those filing separately or as married couples. The top marginal rate, or top income-based tax rate, remains 37% for single taxpayers with incomes over $578,125 or married couples with incomes over $693. $750.
The lowest rate remains at 10%, which will affect people with incomes of $11,000 or less and married couples earning $22,000 or less. Below are tables with the new tax brackets.
Tax brackets indicate the percentage you will pay in taxes on each portion of your income. A common misconception is that the highest rate is what you’ll pay on all of your income, but that’s not true.
Take a single taxpayer earning $110,000. In 2023, she will benefit from a standard deduction of $13,850, which will reduce her taxable income to $96,150. She will pay:
- 10% tax on his first $11,000 of income, or $1,100 in taxes
- 12% tax on income from $11,000 to $44,735, or $4,048
- 22% tax on the income bracket of $44,735 to $95,375, or $11,140
- 24% tax on the portion of his income from $95,374 to his taxable income limit, $96,150 or $775
Together, she will pay the IRS $17,063 in taxes, giving her an effective tax rate of 17.7% on her taxable income.
Flexible Spending Accounts
Flexible spending accounts allow workers to deposit money, up to the limit allowed by the IRS, into an account that can be used to pay for medical expenses. Since the funds are withdrawn from their accounts on a pre-tax basis, this provides tax savings for many workers.
The new IRS limit for FSA contributions for 2023 is $3,050, an increase of about 7% from the current tax year’s $2,850 threshold.
Since employees set their FSA limits in the fall, before the new calendar year, people will use this new IRS threshold to decide their contributions in the coming weeks.
Earned income tax credit
The maximum amount for households claiming the earned income tax credit will be $7,430 for those with three or more children, up from $6,935 for the current tax year, the IRS said. .
Capital gains tax brackets
Capital gains – earnings from investments or other assets – are taxed using different brackets and rates than earned income. Income thresholds for capital gains taxes are also adjusted due to inflation, the IRS said.
For example, in 2022, single taxpayers earning less than $41,675 are not required to pay capital gains taxes on their investments. This threshold will increase by approximately 7% to $44,625 in 2023. Single taxpayers who earn more than this amount are subject to a 15% capital gains tax, while those who earn more than $492,300 in 2023 will be subject to the higher capital gains rate of 20%.
Biggest gift exclusion
People can also give up to $17,000 in gifts in 2023 without paying tax on the money, up from $16,000 in the current year.
Inheritance tax limit
The estates of wealthy Americans will also get a bigger cut in 2023. The IRS will exempt up to $12.92 million from estate tax, up from $12.06 million for those who died in 2022. , an increase of 7.1%.