With inflation rates being the highest in several decades, the Internal Revenue Service (IRS) announced inflation adjustments for the tax year 2023. These inflation adjustments are some of the biggest adjustments made in history that will change individual income tax brackets and increase some key tax deductions and credits for the tax year 2023 (the taxes you will file in 2024).
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The IRS announces incremental adjustments to tax benefits every year tied to inflation. But after a year of the highest inflation growth in four decades, the adjustments announced this year are more significant than in previous years. The most noteworthy increases are about 7% for standard deduction amounts, income tax brackets, and the Earned Income Tax Credit for the tax year 2023. In a separate announcement, the IRS announced a record increase to 2023 retirement contribution limits.
You are probably wondering, “What are the inflation adjustments?”, “What tax benefits are increased by inflation adjustments?”, “What are the inflation adjustment amounts for the standard deduction, Earned Income Tax Credit, and income tax brackets?” and “What are the increased retirement contribution limits?”
TurboTax has you covered. Below we will cover the key announced adjustments and what that may mean for you.
What is a Standard Deduction and the Related Inflation Adjustments?
The standard deduction is a specific deduction that the IRS allows and adjusts for inflation every year. The standard deduction is based on filing status and you can get an additional amount if you are 65+ or blind. Following tax reform, the IRS reports that close to 90% of taxpayers now take the standard deduction instead of itemizing their deductions. With the recently announced inflation adjustments, even more people may move into claiming the standard deduction instead of itemizing their deductions since their standard deductions may be more.
For single taxpayers (and those married filing separately) the standard deduction rises to $13,850 for 2023 (up $900 from the $12,950 in the tax year 2022). The 2023 standard deduction for couples married filing jointly is $27,700 (up $1,800 from $25,900 in tax year 2022). For those filing head of household, the standard deduction will be $20,800 for the tax year 2023 (up $1,400 from $19,400 amount for the tax year 2022).
For taxpayers who are blind or at least age 65, you can claim an additional standard deduction of $1,500 per person for 2023 (up from the $1,400 in the tax year 2022) or $1,850 if they are unmarried and not a surviving spouse. If you are both 65 or older and blind, the additional deduction amount is doubled (totaling $3,000 for 2023).
Beginning in the tax year 2023, if you can be claimed as a dependent on another person’s tax return, your standard deduction is limited to the greater of $1,250 or your earned income plus $400.
What are the Marginal Income Tax Rates?
For the tax year 2023, the top marginal tax rate will remain at 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
The other marginal rates are:
- 35% for single taxpayers with incomes over $231,250 ($462,500 for married couples filing jointly)
- 32% for single taxpayers with incomes over $182,100 ($364,200 for married couples filing jointly)
- 24% for single taxpayers with incomes over $95,375 ($190,750 for married couples filing jointly)
- 22% for single taxpayers with incomes over $44,725 ($89,450 for married couples filing jointly)
- 12% for single taxpayers with incomes over $11,000 ($22,000 for married couples filing jointly)
The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
What are the Capital Gain Tax Rates?
Generally, capital gains are profits you made from a sale of assets and investments – think stocks, bonds, cryptocurrency, and real estate. Depending on how long you have held the asset (short term vs long term) will determine how it is taxed. Most net capital gain is no higher than 15% for most people and some or all net capital gains may be taxed at 0% depending on your income.
For the tax year 2023, a capital gains rate of 15% applies if your taxable income is more than $44,625 but less than or equal to $492,300 for a single filer (or more than $89,250 up to $553,850 for those married filing joint returns).
The top rate of 20% will not apply until single filers' income is more than $492,300 or more than $553,850 for married filing joint filers.
What is the Earned Income Tax Credit?
Earned Income Tax Credit (EITC) is the country’s largest program for working people with low to moderate income levels with millions of Americans receiving EITC each year. For the tax year 2023, the maximum EITC amount is $7,430 for qualifying taxpayers who have three or more qualifying children. This amount is up from $6,935 for the tax year 2022.
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What are the Health Flexible Spending Account and Medical Savings Account Increases?
Beginning in the tax year 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that allow for the carryover of unused dollars, the maximum carryover amount will be $610.
For the tax year 2023, Medical Savings Accounts for individuals who have self-only coverage, the plan must have an annual deductible that is not less than $2,650 but not more than $3,950. For self-only coverage, the maximum out-of-pocket expense amount is $5,300. For family coverage, the annual deductible is not less than $5,300 but the deductible cannot be more than $7,900. For family coverage, the out-of-pocket expense limit is $9,650 for the tax year 2023.
What are the Payroll Taxes Increases?
Employers and employees are required to have a percentage of their wages withheld for taxes under the Federal Insurance Contributions Act – or FICA. FICA payroll taxes are composed of social security taxes (old-age, survivors, and disability insurance taxes) and Medicare taxes (hospital tax insurance). The maximum amount of earnings subject to these payroll taxes will increase in 2023 to $160,200 up from $147,000 in 2022.
What are the 401k and IRA Contribution Limit Increases?
The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has increased to $22,500 for 2023 (up from $20,500 in 2022).
The limit on annual contributions to an IRA increased to $6,500 for 2023 (up from $6,000 in 2022). The IRA catch-up contribution limit for individuals aged 50 and over has not changed and remains at $1,000.
What are Other 2023 Changes?
- Fringe Benefits: The monthly limit for tax-free qualified public transportation and parking fringe benefits increases to $300 (up $20 from the $280 monthly limitation for 2022).
- Foreign Earned Income Exclusion: For taxpayers earning foreign income, the income exclusion for the tax year 2023 is $120,000 up from $112,000 for the tax year 2022.
- Qualified Adoption Expenses: The maximum credit allowed for adoptions for the tax year 2023 is up to $15,950, up from the maximum of $14,890 for 2022.
- Gift Tax: For those gifting, the annual exclusion for gift tax increases to $17,000 per recipient for the calendar year 2023, up from $16,000 for the calendar year 2021.
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