The IRS said Tuesday that it is adjusting many of its rules for 2023 to account for the impact of inflation, from the personal income tax bracket to the standard deduction. The change could mean tax savings for some taxpayers next year.
The higher limit is intended to avoid “bracket creep” due to inflation, which can push workers into higher tax brackets who, despite their standard of living, have received growth in higher tax brackets.
The IRS makes such adjustments annually, butThis means that many changes are more significant than in a typical year. Americans stubbornly grapple with high inflation, which is eating away at their purchasing power as average wage gains lag behind a sharp rise in prices.
Tim Stephen, director of tax planning with Baird, said in an email that the higher provisioning threshold could provide relief to some taxpayers who fall in lower tax brackets. For example, Stephen noted that a married couple earning $200,000 in both 2022 and 2023 would save $900 in taxes the following year because more of their income would be taxed at a lower rate.
Here are the changes announced Tuesday by the IRS, with inflation-adjusted provisions taking effect for the 2023 tax year. Taxpayers will file their 2023 tax return in early 2024.
The standard deduction is used by people who do not report their taxes, and it reduces the amount of income on which you must pay taxes.
- For married couples filing jointly, the standard deduction will increase from $25,900 to $27,700 in the current tax year. This is an increase of $1,800 or a jump of 7%.
- For single taxpayers and married individuals filing separately, the standard deduction will increase from $13,850 in 2023 to $12,950 currently. That is, an increase of about 6.9 percent.
- Heads of households will see their standard deduction increase this year from $19,400 to $20,800 in 2023. That is, an increase of 7.2%.
“However, the flip side of this is that it will be harder to reduce your cuts in 2023,” Stefan said. “That means your tax payments, mortgage interest, and charitable contributions are less likely to provide you with a tax benefit next year.”
The IRS is raising the tax bracket to about 7% for each type of tax filer, such as those who file separately or as married couples. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes over $578,125 or married couples with incomes over $693,750.
The minimum rate remains 10%, which will affect individuals earning $11,000 or less and married couples earning $22,000 or less. Below is a chart with the new tax brackets.
Tax brackets show the percentage you will pay in taxes on each portion of your income. A common misconception is that the highest rate is the one you’ll pay on your entire income, but this is false.
Take a single taxpayer who earns $110,000. In 2023, she will take a standard deduction of $13,850, reducing her taxable income to $96,150. She will pay:
- 10% tax on his first $11,000 income, or $1,100 in taxes
- 12% tax on income from $11,000 to $44,735, or $4,048
- $44,735 to $95,375, or $11,140 . 22% tax on share of income up to
- 24% tax on the portion of his income up to the limit of his taxable income from $95,374, to $96,150, or $775
Together, she would 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 put money in one account, to the extent permitted by the IRS, that can be used to pay for medical expenses. Since the money is taken from their accounts on a pre-tax basis, it provides tax savings for many workers.
The new IRS limit for FSA contributions for 2023 is $3,050, a roughly 7% increase from the current tax year’s limit of $2,850.
Because employees set their FSA limits in the fall, ahead of the new calendar year, people will use this new IRS limit to decide on their contributions over the next few weeks.
earned income tax credit
The IRS said the maximum amount for claiming the earned income tax credit would be $7,430 for families with at least three children, compared to $6,935 in the current tax year.
capital gains tax bracket
Capital gains — gains from investments or other assets — are taxed using different brackets and rates than earned income. The income limit is also being adjusted for capital gains taxes due to inflation, the IRS said.
For example, in 2022 single taxpayers who earn less than $41,675 are not required to pay capital gains tax on their investments. This limit will increase by about 7% to $44,625 in 2023. Single taxpayers earning above that amount are subject to a 15% capital gains tax, while those who earn more than $492,300 in 2023 will be subject to a top capital gains rate of 20%.
big gift exclusion
People can give up to $17,000 in gifts in 2023 without paying taxes on the money, up from the current year’s $16,000.
property tax limit
The wealth of wealthy Americans will also get a big break in 2023. The IRS will exempt up to $12.92 million from estate taxes, up from $12.06 million for people who die in 2022 — a 7.1% increase.