IRS Inflation Adjustments for 2023
2022 has been a challenging year for most of us. The cost of everything has gone up – our decades high inflation rate is at 8.2% – while our stock portfolios are down. The Internal Revenue Service (“IRS”) recently issued its 2023 annual inflation adjustments for certain tax provisions. When most people think of the IRS, they do not think of good news; however, we have some as many of these adjustments are higher than they have been in past years. The result of this is income tax savings for taxpayers.
Two tax items that are usually of great interest to most people are the standard deduction and the income tax rates and brackets. The standard deduction for 2023 rises 7% from its 2022 level. The deduction for married couples filing a joint return rises to $27,700 – up $1,800 and for single people the deduction goes to $13,850 – up $900. The larger standard deduction means larger tax breaks for taxpayers as more income is exempt from tax. As the number of people using the standard deduction has increased dramatically in the past few years, an increased deduction means more savings for more taxpayers than ever before.
Similarly, and although income tax rates remain the same, the income ranges for the income tax brackets also have increased by 7%. This means that less income will be taxed at higher rates. For example, using the new brackets, a married couple that made $150,000 in both 2022 and 2023 would pay roughly $1,000 less in tax in 2023 than in 2022.
The top marginal income tax bracket of 37% applies to married couples with incomes of more than $693,750 and for single people with incomes of more than $578,125. The rest of the tax brackets follow:
- 35% for incomes over $231,250 ($462,500 for married couples filing a joint return)
- 32% for incomes over $182,100 ($364,200 for married couples filing a joint return)
- 24% for incomes over $95,375 ($190,750 for married couples filing a joint return)
- 22% for incomes over $44,725 ($89,450 for married couples filing a joint return)
- 12% for incomes over $11,000 ($22,000 for married couples filing a joint return)
- 10% for incomes under $11,000 ($22,000 for married couples filing a joint return)
If your income is the same in 2023 as it is in 2022, your overall tax bill will go down as more of your income will be taxed at lower rates in 2023.
Saving for retirement continues to be important to all taxpayers and the IRS has helped us here as well. The amounts you can contribute to qualified retirement plans and individual retirement accounts in 2023 also jumps. For qualified retirement plans, the contribution amount increases from $20,500 to $22,500 and for IRAs it is up to $6,500 from $6,000. The catch-up contribution amount for those over 50 remains the same at $1,000. This is good news as it allows more money to be saved on a before tax basis for retirement. The contribution limit for HSA’s also increases from $3,650 to $3,850 for self-only plans (and from $7,300 to $7,750 if on a family plan).
On a final note, the annual gift tax exclusion amount increases to $17,000 from $16,000.
For most of us, the rise in inflation and decrease in our stock portfolios over the past year has not been a good thing. And all things being equal, none of us would like to see this trend continue. It appears though that the IRS has given us some good news with these adjustments so let us hope it translates into some tax savings for all of us in 2023.