The Internal Revenue Service announced on Tuesday that it is changing many of its regulations to account for the impact of inflation, including individual income tax rates for 2023 and the standard deduction.
The increased restrictions are intended to combat “bracket creep,” which may drive workers who receive yearly cost-of-living pay increases into higher tax bands even though their quality of living hasn’t changed.
The IRS makes similar adjustments on a yearly basis, but due to this year’s high inflation, many of the modifications are more significant than in a usual year. Americans are dealing with persistently rising inflation, which is eroding their purchasing power as average pay increases lag behind the steep rise in costs. As a result of the increased provision thresholds, certain taxpayers may find themselves in lower tax rates.
The IRS announced the following modifications on Tuesday, with the inflation-adjusted provisions taking effect for the 2023 tax year. In early 2024, taxpayers will file their 2023 tax returns.
Standard deduction
People who do not itemize their taxes utilize the standard deduction, which minimizes the amount of income that must be taxed.
For married couples filing jointly, the standard deduction will rise to $27,700, up from $25,900 in the current tax year. That’s an increase of $1,800, or a 7% bump.
For single taxpayers and married individuals filing separately, the standard deduction will rise 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 jump to $20,800 from $19,400 this year. That’s an increase of 7.2%.
Tax brackets
The IRS is boosting tax brackets by about 7% for each type of tax filer, such as those filing 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 above $578,125 or for married couples with income higher than $693,750.
The lowest rate will continue at 10%, affecting individuals earning $11,000 or less and married couples earning $22,000 or less. The new tax brackets are depicted in the charts below.
Flexible spending accounts
Flexible spending accounts allow employees to deposit money in an account that can be used to pay for medical expenditures, up to the IRS limit. Many workers benefit from tax savings since the money are deducted from their accounts pre-tax.
The new IRS maximum for FSA contributions in 2023 is $3,050, a 7% increase over the current tax year’s limit of $2,850.
Because employees establish their FSA limits in the autumn, ahead of the new calendar year, they will be deciding on their contributions over the next few weeks, based on the new IRS level.
Earned Income Tax Credit (EITC)
The maximum amount for households claiming the Earned Income Tax Credit will be $7,430 for those with at least three children, up from $6,935 in the current tax year, according to the IRS.
Exclusion of larger gifts
People may now contribute up to $17,000 in gifts without paying taxes in 2023, up from $16,000 this year.
The estate tax exemption
In 2023, affluent Americans’ estates will also benefit more. The IRS will exclude up to $12.92 million from the estate tax, up from $12.06 million in 2022 – a 7.1% rise.