The Internal Revenue Service increased the standard deduction and the income levels at which tax rates become applicable for 2023 to account for rising inflation.
Individuals with incomes exceeding $578,125 and married couples with incomes above $693,750 will be subject to the maximum marginal tax rate of 37% in 2023 as a result of inflation adjustments issued by the agency on Tuesday.
The standard deduction will increase to $27,700 for married couples and $13,850 for individuals, increasing almost 7% over this year, allowing taxpayers to shield a more significant portion of their income from federal income taxes. From $2,850, the maximum contribution to a healthcare flexible spending account will increase to $3,050.
As a result of the highest rate of inflation in the last four decades, tax code modifications are also unprecedentedly high. They occur annually per Congress’s calculations and closely match experts’ forecasts. This is the biggest automatic change to the standard deduction since 1985 when key tax system components were first linked to inflation. Beyond these regular adjustments, Congress had dramatically increased the deduction, most notably in the 2017 tax bill when it was nearly doubled.
The new modifications will take effect for the 2023 tax year and reduce tax hikes caused by inflation. In January, these will be reflected in decreased tax withholding from paychecks, resulting in increased take-home pay in early 2019. The bigger tax rates and basic deductions will be utilized by filers beginning in the first quarter of 2024.
Tuesday’s announcement included changes to the income tax rates and hundreds of other elements. The estate and gift tax exclusion per person will increase to $12,92 million from $12,06 million. The yearly gift tax exclusion, or the amount a person may donate to another person without impacting lifetime limitations, will increase from $16,000 to $17,000.
There are six tax rates below the top 37% level, and the criteria for married couples are double the thresholds for single taxpayers. The rates apply to taxable income, which is the amount of income remaining after deductions. In 2023, the 10% bracket will increase to $11,000, the 12% bracket will increase to $44,725, the 22% bracket will increase to $95,375, the 24% bracket will increase to $182,100, the 32% bracket will increase to $231,250, and the 35% bracket will increase to the top-bracket threshold.
Some yearly modifications for 2023, including income requirements for retirement accounts and the maximum amount of permissible pretax contributions to 401(k) plans, have not yet been disclosed by the Internal Revenue Service.
The Social Security Administration revealed the 2023 inflation adjustment for the Social Security payroll tax this week, which will apply to wages up to $160,200 as opposed to $147,000 in 2022.
Many, but not all, tax code dollar values are annually adjusted for inflation. When inflation is strong, non-variable tax deductions and credits lose value more rapidly. For instance, the maximum child tax credit stays at $2,000 and begins to phase off when an individual’s income hits $200,000, and a married couple’s income reaches $400,000. The maximum allowable deduction for capital losses against ordinary income is $3,000, and the state and local tax deduction remains capped at $10,000.