New tax brackets and standard deductions are now in effect, potentially boosting paychecks and lowering income tax for many Americans, who enter the new year still reeling from sky-high prices.
The big picture: The Internal Revenue Service made a few other changes to account for inflation, including raising contribution limits for tax-deferred retirement plans in 2023 and a 3-cent increase to the mileage rate.
- The higher limits to 401(k) plans can help people save more for retirement, which in many cases will help lower their income tax.
- The new tax adjustments apply to tax returns filed in 2024, but the IRS also changed the 2023 tax withholding tables, which determine how much money employers should withhold from employee wages in paychecks for federal taxes.
Why it matters: Cost of living adjustments like those on taxes, Social Security payments and wages that may have previously gone unnoticed are now crucial in the era of high inflation, Axios' Emily Peck explains.
Income tax brackets 2023
By adjusting the tax brackets — as the IRS does every year — it is attempting to stop "bracket creep," which happens when inflation pushes taxpayers into a higher income tax bracket without an increase in real income.
Retirement limit increase 2023
Americans can contribute up to $22,500 into 401(k), 403(b) and most 457 plans — $2,000 more than the $20,500 contribution limit for 2022.
Meanwhile, the limit on annual contributions to an IRA increased to $6,500, up from $6,000.
- The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000, the IRS said.
Between the lines: The income ranges for determining eligibility to make deductible contributions to traditional IRAs, to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2023, the IRS said.
Tax deductions for 2023 tax year
The 2023 tax year standard deduction for married couples filing jointly will be $27,700, up $1,800 from the deduction for the 2022 tax year.
- For single taxpayers, the standard deduction is $13,850, up $900.
Between the lines: While tax rates remain the same, the income limits for each tax rate are different.
- That means your top tax rate might have gone down.
- For example, if you were earning $90,000 a year in 2022 your top tax rate was 24%. In 2023, it's 22%.
FSA contribution limit up in 2023
Of note: The IRS also announced in October that it was raising the limit for 2023 contributions to health flexible spending arrangements to $3,050, up from $2,850 for 2022.
More from Axios:
