New Inflation Adjustments: 2023 Updated Brackets, Standard Deductions and More

Amid rising inflation, the IRS has announced several changes coming for 2023, including higher federal income tax brackets and standard deductions. As the cost of food, energy and other essentials increase, the four-decade high inflation we’re currently experiencing could impact tax bills for many Americans next year.

While tax rates are generally adjusted for inflation, the newly announced changes are notable compared to years prior. Here’s what you need to know.

  • Standard deductions have increased. For the nearly 85% of taxpayers who claim standard deductions, rather than itemized, the deduction level is rising.
    • For married couples filing jointly for tax year 2023, the standard deduction rises to $27,700, up $1,800 from the prior year.
    • For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900.
    • For heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
  • Marginal rates changes: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly). The other rates are:
    • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
    • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
    • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
    • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
    • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).
    • 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
  • Retirement savings: The amount of pretax money you can contribute to your retirement is going up in 2023. Individual employees will be able to contribute up to $22,500 to their 401k retirement plans for the 2023 tax year, up from $20,500 in 2022, while the limit on annual contributions to an IRA increased to $6,500, up from $6,000.
  • Earned Income Tax Credit increase: The maximum Earned Income Tax Credit amount will increase to $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022.
  • Flexible heath spending changes: Contributions to health flexible spending arrangements will increase to $3,050.
  • Estates impacts: Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
  • Gifting increases: The annual gift exclusion increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.
  • What’s not changing? The personal exception tax remains at 0. There also continues to be no limitation on itemized deductions. Separately, modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit will also not be adjusted for inflation for taxable years beginning after December 31, 2020.
  • Timing is key. Remember, the 2022 rates here will apply for the 1040 you file in early 2023. These changes are for tax year 2023, meaning the return you file in early 2024.

Do you have questions about how these changes may impact you, or are you ready to make a tax plan for 2023? As always, our trusted tax advisors are ready to support you.

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