Inflation adjustments are bigger than usual in 2023: coming in at about 7% for more than 60 federal tax provisions, including personal tax deductions, capital gains thresholds, and estate taxes.
As part of the changes, income tax brackets are being bumped up, producing the most savings for the highest-income taxpayers. Single filers will need to make over $578,125, and married couples filing jointly will need to make over $693,750 to reach that top 37% marginal tax rate.
Here are the official marginal rates for 2023:
- 37% for incomes over $578,125 ($693,750 for married couples filing jointly)
- 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)
“While such adjustments take place annually under a formula set by Congress, this year’s unusually large increases will be welcome news to anyone whose wages have not kept up with significant price increases over the last year,” The Wall Street Journal states. The adjustments generally apply to tax returns filed in 2024, although those on payroll may not have to wait until Tax Day to enjoy a reduction in withholdings resulting in a larger paycheck.
Additional highlights include:
- Capital gains thresholds that are also increasing by about 7%, which could translate to tax savings on profits outside of income and wages.
- The standard deduction for married couples filing jointly rising to $27,700, up $1,800 from the prior year. The deduction for single filers increases to $13,850. (There remains no limitation on itemized deductions.)
- The Alternative Minimum Tax exemption amount rising to $81,300 and phasing out beginning at $578,150 ($126,500, phasing out at $1,156,300, for married couples filing jointly).
- The foreign earned income exclusion increasing to $120,000, up from $112,000 in 2022.
- The annual exclusion for gifts increasing to $17,000, up from $16,000.
- No federal estate tax charged on amounts up to $12,920,000, which is also a roughly 7% increase from 2022.
- The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increasing to $300.
- The health flexible spending arrangement threshold increasing to $3,050.
Of course, it’s not all good news. The personal exemption for tax year 2023 remains at zero, for instance, and there’s no change to the Lifetime Learning Credit phaseout. Also, as SHRM points out, high earners may also be affected by increased Social Security payroll taxes because the maximum earnings subject to the tax increases from $147,000 to $160,200.
With more than 60 tax provisions affected by inflation adjustments for 2023, this is certainly not an exhaustive list. Plus, the adjustments affect each taxpayer differently, so it’s important to talk through the changes with your tax advisor directly. If you earn a paycheck or pay yourself a salary, start by reviewing your withholdings. Then, keep these other changes in mind throughout the year and use them to inform your tax strategies. The recent Inflation Reduction Act may also affect your personal and business taxes in 2023, mostly as it relates to energy efficiency purchases and clean energy production, so keep that in mind as well.
What’s more, don’t forget that these changes aren’t set in stone. The IRS (and Congress) could have surprises in store for us. Further inflation can also reduce the impact these increased tax breaks give you. While the inflation adjustment this time around is large, it could pale in comparison to increased costs as we push through an uncertain year. Feel free to contact us with questions.
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