Inflation impacts everything – the cost of goods, services, utilities and even taxes. In 2023, the IRS adjusted some 2023 tax guidelines to lessen the chance of earned income bracket creep. Bracket creep occurs when your salary is increased to offset the cost of living impacted by inflation. These increases can push you into a new tax filing bracket – despite your standard of living staying status quo.
The IRS increased each provision by about 7% for 2023, meaning some taxpayers could find relief despite receiving inflationary income adjustments. For instance, a married couple earning $200,000 in 2022 and 2023 will save $900 in taxes as more of their income is taxed at a lower rate. This change is welcomed by those reeling from the tax refund shock felt by the end of the Covid-19 pandemic tax credits.
Standard deduction
The standard deduction is used by people who don’t itemize their taxes, reducing the income tax owed.
- The standard deduction for married couples filing jointly is $27,700 for 2023, up from $25,900 in the 2022 tax year. That’s an increase of $1,800 in 2023.
- For single taxpayers and married individuals filing separately, the standard deduction is $13,850 in 2023, compared with $12,950 last year.
- Heads of households’ standard deduction in 2023 jumps to $20,800 from $19,400 in 2022.
There is a catch. These shifts challenge itemized deduction opportunities in 2023. Mortgage interest, charitable contributions and tax payments will likely provide less relief than you are accustomed to seeing. Most taxpayers take the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction.
Inflation Impacts to Tax Brackets
The shift in IRS tax brackets will impact anyone filing separately or as married. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above $578,125 or married couples with incomes higher than $693,750.
A single taxpayer who earns $110,000 can take a standard deduction of $13,850, reducing the taxable income to $96,150.
- 10% tax on her 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 portion of the income from $44,735 up to $95,375, or $11,140
- 24% tax on the part of her income from $95,374 to her limit of taxable income, $96,150, or $775
In this scenario, the total owed to the IRS is $17,063, amounting to an effective tax rate of 17.7% on taxable income.
Earned Income Tax Credit
The maximum amount for households claiming the Earned Income Tax Credit will be $7,430 for those with at least three children, compared with $6,935 in the current tax year, the IRS said.
Capital Gains Tax Brackets
Capital gains — the profit from investments or other assets — are taxed using different brackets and rates than earned income. The income thresholds for capital gains taxes were also adjusted due to inflation for 2023.
For instance, in 2022, single taxpayers who earned below $41,675 were not required to pay capital gains taxes on their investments. In 2023, that threshold is rising by about 7% to $44,625. Single taxpayers who earn above that amount are subject to a 15% capital gains tax, while those who make above $492,300 in 2023 will be subject to the top capital gains rate of 20%.
Estate Tax Limit
Wealthy Americans will also get a more extensive estate tax break in 2023. The IRS will exempt up to $12.92 million from the estate tax in the current tax year, up from $12.06 million for people who died in 2022 — an increase of 7.1%.
Flexible Spending Accounts (FSA)
Flexible spending accounts allow workers to set aside money for medical expenses. Because the funds are taken from their accounts on a pre-tax basis, it offers 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 threshold of $2,850.
Inflation impacts everything – goods, services and even taxes. While the IRS has graciously shifted the tax brackets for income earners and modified many of the subsequent tax burdens for man, the 2022 tax season isn’t over yet. Call us if you need help filing an extension, amendments or understanding deductions and withholdings. Not everyone is a tax expert, but we are. We can help you know money-saving opportunities and how new tax codes and liabilities impact your financial stability.