2022 is about to be put to bed, so that means we must look ahead to 2023, and for taxpayers that requires keeping up with coming IRS tax changes.
As can be expected, the IRS has announced tax changes for 2023 and the good news is it could result in some workers taking home more of their hard-earned paychecks.
“The IRS released adjustments that will raise the top amounts of all seven federal income tax brackets for 2023 and thereby increase the paychecks of many employees by taxing more of their earnings at lower rates,” reported the Society for Human Resource Management.
While there are usually tax bracket adjustments each year, 2023 is getting a good overhaul because of historically high instant rates.
“Because inflation is higher than at any time in the past four decades, tax code adjustments are unusually high as well,” reported The Wall Street Journal. “This is the largest automatic adjustment to the standard deduction since core features of the tax system were first indexed to inflation in 1985.”
Tax Brackets, Standard Deductions Raised 7 Percent
NerdWallet says that annual inflation adjustments for the 2023 tax year have led to many key tax provisions — including the income thresholds for the federal tax brackets — increasing “by roughly 7 percent to account for the sky-high inflation Americans have seen throughout 2022.”
The IRS released “revenue procedure 2022-38” changes on Oct. 18, 2022.
“For the tax year 2023, the top tax rate remains 37 percent for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly),” said the IRS.
The other rates are:
- 35 percent for incomes over $231,250 ($462,500 for married couples filing jointly)
- 32 percent for incomes over $182,100 ($364,200 for married couples filing jointly)
- 24 percent for incomes over $95,375 ($190,750 for married couples filing jointly)
- 22 percent for incomes over $44,725 ($89,450 for married couples filing jointly)
- 12 percent for incomes over $11,000 ($22,000 for married couples filing jointly)
“The lowest rate is 10 percent for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly),” reported the IRS.
CNBC says to keep in mind that the U.S. has a progressive, or graduated, tax system, so income isn’t taxed at a flat rate. Instead, it’s taxed at differing rates – 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent – as it rises past certain thresholds or tax brackets.
The standard deduction for married couples filing jointly for the tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from the amount for the tax year 2022.
CNBC says that the standard deduction is taken by about 90 percent of all U.S. tax filers and is a flat amount that reduces your taxable income for a given year.
IRS: Other Tax Change Highlights for 2023
The IRS reported that the tax year 2023 adjustments that will apply to tax returns filed in 2023 include:
- The Alternative Minimum Tax exemption amount for the tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).
- The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for the tax year 2022. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phase-outs.
- For the tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 2022.
- For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
- For the tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200 from the tax year 2022; but not more than $3,950, an increase of $250 from the tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For the tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for the tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for the tax year 2023, an increase of $600 from the tax year 2022.
- For the tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for the tax year 2022.
- Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.
- The annual exclusion for gifts increases to $17,000 for the calendar year 2023, up from $16,000 for the calendar year 2022.
- The maximum credit allowed for adoptions for the tax year 2023 is the number of qualified adoption expenses up to $15,950, up from $14,890 for 2022