The IRS Has Raised 2023 Tax Brackets, Standard Deductions, and Other Inflation Adjustments

When it comes to taxes, there are many things that can affect your income – inflation being one of them. This year, the IRS has announced that it will be raising the 2023 tax brackets, standard deductions, and other inflation adjustments in order to reflect these rising costs.

In a recent announcement, the IRS (Internal Revenue Service) has stated that they will be raising the tax brackets, standard deductions, and many other inflation adjustments for 2023 tax season. This means that people’s taxable income will have higher numbers than in previous years.

While this may seem like a bad thing for people who are already struggling to make ends meet, it is important to keep in mind that these changes only impact the 2023 tax year. In other words, you don’t need to worry about them right now, and they are based on broader market trends rather than your own personal circumstances.

The standard deduction is now claimed by more than 85% of taxpayers, rather than itemized deductions. If a married couple files jointly, their deduction will be $27,700 in 2023–$2,000 more than the previous year. For those filing separately or as head of household, the respective deductions will be $13,850 and $20,800–also increased by $2,000 each.

From 2022 to 2023, the extra standard deduction for those aged 65 and up will gradually increase from $1,400 to $1,500 per person. If that senior is unmarried, their additional deduction will be $1,850 in 2023 instead of $1,750.

The individual tax brackets for both ordinary income and capital gains will rise 7% in 2023. So, the lowest 10% ordinary income tax bracket will cover the first $22,000 of taxable income for a married couple filing jointly, up from $20,550 in 2022.

The 24% bracket for couples will begin at $190,750 in 2023, up from $178,150 in 2022. The 37% rate will apply to taxable income exceeding $693,750 in 2023, an increase from $647,850 in the previous year.

The 2023 income tax brackets for ordinary income (which encompasses salaries, self-employment income and interest) are towards the bottom of this post. It’s important to note that the 2022 rates will be in effect when you file your 1040 in early 2023. 

The United States federal tax brackets have been adjusted for inflation since 1985 in an effort to keep up with the cost of living. This provision was passed in 1981 after a period of high inflation that made everyday items more expensive.

The adjustments aim to ensure that people aren’t pushed into higher tax brackets due to inflation. In 2023, if your income remains stagnant despite inflation, you could theoretically pay lower taxes than in 2022. In short, you may receive a tax cut to make up for some of the earnings lost to inflation.

The income levels at which taxes on Social Security benefits are imposed is not indexed. In 2023, benefits will be increased by 8.7% due to cost of living adjustment, which means that more moderate income retirees will have to pay federal taxes on their benefits.

If you are a married couple with an annual income (including long term capital gains) under $89,250, you will not be taxed on qualified stock dividends or long-term capital gains.

In addition, the gains rate is 15%. If a couple’s taxable income exceeds $553,850 in 2023, they will be subject to the top gains rate of 20%, up from $517,200 in 2022. For people filing individually, the 15% capital gains and dividends rate begins once their income surpasses $44,625 in 2023. This is an increase from the $41,676 cutoff in 2022. However, the top 20% tax bracket for single filers won’t occur until they make more than $492,300 annually in 2023; this figure was previously set at $459,760.

Several key credits are also adjusted for inflation.To elaborate, the maximum earned income tax credit for eligible taxpayers with three or more children will be $7,430 in 2023 which is a slight increase from last year’s 2022 rate of $6,935. The credit phases out at slow and gradual pace for families who are just starting to earn more money. For example, a married couple with three children will begin to see their EITC phase out at $28,120 of income in 2023. However, they won’t lose the entire credit until their income hits $63,398.

Not only does inflation pose problems for those on a fixed income, it also affects the wealthy’s ability to pass down money tax free. In 2023, you are able to give gifts amounting up to $17,000 per person without having to use your lifetime gift and estate tax exemption or paying gift tax.The lifetime exemption will increase to $12.92 million in 2023, compared to the current $12.06 million.

For a clearer picture, you may refer to the tables below: