Income Tax Brackets & IRS Tax Inflation Adjustments for 2023
New Tax Brackets for 2023Every year, the IRS relies on inflation news to make changes to the tax rate for taxpayers across the country. As people know, inflation has risen nationwide. While rising inflation has created a crunch for many people, it can also provide some tax breaks in 2023 for many. The IRS increased the income thresholds for its federal income tax brackets by thousands of dollars.
The income that you receive in different brackets — as your income passes certain levels — is taxed at different rates. For example, in 2022, you are taxed at a 10% rate up to a maximum of $10,275. In 2023, that maximum will rise to $11,000 — and upward as your income grows. These adjustments are intended to make sure that you are not paying higher taxes on what is effectively a lower amount of income due to inflation.
If you make $75,000 per year in 2022, you will owe over $12,000 in income taxes. In most cases, that is deducted as you receive your regular paycheck. If your income does not rise to meet inflation in 2023, you will still make $75,000, but your tax bill will drop to around $11,800, saving you several hundred dollars over the course of a year.
The tax brackets for 2023 will be as follows:
- The lowest rate is 10% for people making $11,000 or less, or $22,000 or less for married couples filing jointly. This is a difference of $725 per person from the 2022 rates.
- The next is 12% for people making up to $44,725 in 2023, rising from $41,775 in 2022, an increase of $2,950. For married couples filing jointly, this rises from $83,550 to $89,450, a difference of $5,900.
- In the 22% tax bracket, you can make up to $95,375 in 2023, up from $89,075 in 2022, an increase of $6,300. For married couples, this rises from $178,160 to $190,750, an increase of $12,600.
- The 24% tax bracket covers up to $182,700 in income in 2023, up from $170,050 in 2022, an increase of $12,050. For married couples, this moves to $364,200 from $340,100, an increase of $24,100.
- Im the 32% tax bracket, you can make up to $231,250 in 2023, up from $215,950 in 2022, an increase of $15,300. Likewise, for married couples, this will reach $462,500 from $431,900, an increase of $30,600.
- The 35% tax bracket on income will rise to $578,125 from $539,900, an increase of $38,225. For married couples, this will rise to $693,750 from $647,851, an increase of $45,900.
- Income above those levels is taxed at 37%.
It is important to note that your entire income is not taxed at the highest percentage, only the portion of your income that falls within each band. These changes to 2023 tax brackets are not the only differences that have come with the news on inflation.
401k and IRA Limit IncreasesThe amount that individuals can contribute to their 401(k) plans and IRAs has also increased for 2023, in line with inflation. These cost-of-living adjustments might allow you to save more for your retirement in 2023.
For employees participating in 401(k), 403(b), and most 457 plans, as well as the Thrift Savings Plan run by the federal government, the 2023 contribution limit will reach $22,500. This is an increase of $2,000 above 2022 contribution limits.
For individual contributions to an IRA, you can contribute $6,500 in 2023, up from $6,000 in 2022. While people aged 50 and up can make an additional catch-up contribution of $1,000 per year, this did not change in the cost of living adjustment and remains the same.
However, the 401k contribution limits 2023 have changed for catch-up contributions to 401(k), 403(b), 457 and related plans. People aged 50 and up can contribute an additional $7,500 in 2023, up from $6,500 in 2022. This means that total contributions for employees aged 50 and older can reach $30,000 in 2023. People with SIMPLE plans aged 50 and older can contribute $3,500 in 2023, up from $3,000 in 2022.
The tax deductibility phase-out range for IRA contributions has also risen in 2023. This applies to people who contribute to a traditional IRA even though they or their spouse also have a workplace retirement plan. If you do not have a retirement plan at work, these phase-outs of your tax deduction do not apply to you.
- Single taxpayers contributing to an IRA who are covered by a workplace plan: Phase-out range increases to $73,000-$83,000, up from $68,000-$78,000.
- Married taxpayers filing jointly where the IRA contributor is covered by a workplace plan: Phase-out range increases to $116,000-$136,000, up from $109,000-$129,000.
- Married taxpayers filing jointly where the IRA contributor’s spouse is covered by a workplace plan: Phase-out range increases to between $218,000-$228,000, up from $204,000-$214,000.
- Married couples filing separately where the individual filer is covered by a workplace plan: Remains the same at $0-$10,000.
- Single taxpayers: Phase-out range between $138,000-$153,000, up from $129,000-$144,000
- Married filing jointly: Phase-out range between $218,000-$228,000, up from $204,000-$214,000
- Married filing separately: No increase, remains at $0-$10,000.
IRS Tax Inflation Adjustments for 2023These adjustments for inflation can also affect your ability to access certain tax credits, which can be key to tax savings. Here are some of the credits that will change in 2023.
For the Saver’s Credit, the Retirement Savings Contributions Credit, the income limit for eligibility rises to $73,000 for married couples filing jointly, up from $68,000 in 2023. It is $54,750 for heads of household, up from $51,000 and $36,500 for singles and married people filing jointly, up from $34,000.
The maximum Earned Income Tax Credit will reach $7,430 for taxpayers with three or more qualified children, an increase over $6,935 in 2022. The calculation table has detailed information about income thresholds.
The gift exclusion will rise to $17,000 in 2023, an increase over the $16,000 exclusion in 2022. If you earn money overseas, the foreign earned income exclusion rises to $120,000, up from $112,000.
Raised Standard DeductionsOf course, the standard tax deduction is particularly important for tax savings. The 2023 standard deduction is a specific amount that reduces your taxable income each year, without taking itemized deductions.
For 2023, the standard deduction for single people and married people filing separately will rise to $13,850, an increase of $900 over 2022 amounts. For married couples filing jointly, the standard deduction for 2023 will be $27,700, an increase of $1,800. Finally, heads of households will see a standard deduction of $20,800, a $1,400 increase from 2022.
These changes reflect the rising cost of key metrics, like rent and electricity prices, grocery bills, health insurance costs and interest rates.
Inflation Adjustments for Tax Year 2023
These are not the only tax changes for 2023. Below are some more of the IRS’s announced inflation adjustments for 2023:
- Under the Inflation Reduction Act, energy-related tax breaks and the energy efficient commercial buildings deduction are indexed for inflation. For energy-related tax deductions, the maximum allowance is $0.54, increasing by $0.02 for each percentage point certifiably reducing total energy costs by over 25%, with a maximum of $1.07 per point. If you are planning to claim an energy-related deduction, speak to your accountant to ensure all of your documentation is in order.
- The Alternative Minimum Tax exemption amount rises to $81,300 and phases out at $578,150 for single taxpayers in 2023. For married couples filing jointly, this begins at $126,500 and phases out at $1,156,300. This is an increase over $75,900 in 2022, phasing out at $539,900.
- The monthly limitation for qualified parking or the qualified transportation fringe benefit reaches $300 for 2023, a $20 increase each month.
- For people who pass away in 2023, the basic exclusion from estate taxes rises to $12,900,000, up from $12,060,000.
- The adoption tax credit rises to $15,950 in 2023, an increase of $1,060 from 2022.
- Medical Savings Plans will have a higher limit on deductibles and annual expenses.
Picnic Tax Can Help You Deal With Tax Changes
These changes could help you to save on your 2023 taxes, especially if you did not see a significant rise in your income to accompany inflation. However, it can be complicated to sort through all of the potential deductions and other savings that you may be able to access while acting in accordance with tax laws.
Picnic Tax can help you. This system connects you with a professional accountant, rather than just using software to help you fill in the tax forms. You can benefit from advance fixed pricing while working with a CPA helping you personally to maximize your savings. Contact Picnic Tax today to match with a CPA who can help you maximize your tax benefits and plan for your financial future.