Breaking Down How Tax Brackets Will Change in 2023
By: James Flippin · October 20, 2022 · Reading Time: 3 minutes
Bumping Up Brackets
The Social Security Administration released its cost-of-living adjustment, or COLA, last week, announcing an 8.7% increase to retirees’ benefits in 2023. It is the largest such bump in 40 years. Inflation, too, is at a 40-year high. This is no coincidence.
Across the board, the government is taking steps to address inflation. The IRS announced rule adjustments earlier this week concerning the rate at which income is taxed. These include a shift in tax brackets and a change to the standard deduction.
As the potential for a protracted recession lingers, the IRS is hoping to avoid what’s known as “bracket creep,” in which cost-of-living raises push taxpayers into a higher bracket, adversely affecting their take-home pay.
Diving into the Details
These changes will apply to the 2023 tax year, and returns that will largely be filed in 2024. For married couples filing jointly, the standard deduction will increase by $1,800, and for heads of households, it will increase by $1,400. Single taxpayers and married taxpayers filing separately will see it boosted by $900.
On top of that, tax brackets will be adjusted. The highest tax rate of 37% will now be applied to individuals making over $578,125 per year, and couples earning more than a combined $693,750. The lowest rate — 10% — applies to individuals earning $11,000 or less, which is up from last year’s $10,275 threshold.
For further context, a single taxpayer who makes $90,000 this tax year faces a top tax rate of 24%. In 2023, the same income will face a top rate of 22%.
What Else Changes?
In response to inflation, the IRS will also raise the alternative minimum tax — or the minimum amount higher earners must pay, regardless of tax deductions and other benefits — as well as the estate tax exemption for wealthy families. Similarly, the IRS has boosted the earned income tax credit and the amount employees can put toward health flexible spending accounts, or FSAs.
One area still lacking clarity involves saving for retirement. While the IRS has not yet disclosed how the maximum contribution will be adjusted for 401(k) and IRAs, some experts expect it to also rise. With inflation eating away at spending power for many Americans, every change is significant.
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