High Inflation May Affect Your Taxes Next Year
The Internal Revenue Service (IRS) recently announced next year’s inflation adjustments, which are higher than average due to increased inflation. What can taxpayers expect?
Here’s how inflation may affect your taxes in 2023.
Updated tax brackets
As expected, the rise in inflation has led to a more significant increase in tax brackets for 2023. The new brackets will be:
35% for single taxpayers with incomes over $231,250 and married couples filing jointly with incomes over $462,500
32% for single taxpayers with incomes over $182,100 and married filing jointly with incomes over $364,200
24% for single taxpayers with incomes over $95,375 and married filing jointly with incomes over $190,750
22% for single taxpayers with incomes over $44,725 and married filing jointly with incomes over $89,450
12% for single taxpayers with incomes over $11,000 and married filing jointly with incomes over $22,000
10% for single taxpayers with incomes below $11,000 or married filing jointly with incomes below $22,000.
The increase does not apply to the marginal tax rate. The rate will remain 37% for single taxpayers with incomes over $578,125 and married couples filing jointly with incomes over $693,750.
Increased standard deduction
Taxpayers who usually take the standard deduction can also expect an increase for 2023. The 2023 standard deduction will go up by $900 for single taxpayers, $1,400 for heads of households, and $1,800 for married couples filing jointly. The new standard deductions will be:
$13,850 for single filers
$20,800 for heads of household
$27,700 for married filing jointly
Other Tax Changes
The Alternative Minimum Tax exemption amount for single filers will increase from $75,900 in 2022 to $81,300 in 2023 and begin to phase out at $578,150 compared to $539,900 in 2022. For married couples filing jointly the AMT exemption will increase to $126,500 in 2023 compared to $118,100 in 2022 and begin to phase out at $1,156,300 compared to $1,079,800 in 2022.
The maximum Earned Income Tax Credit will increase from $6,935 in 2022 to $7,430 in 2023 for qualifying taxpayers with three or more qualifying children. The EITC phases out at certain income thresholds.
The foreign earned income exclusion will increase from $112,000 in 2022 to $120,000 in 2023.
Estate tax exemptions will increase from $12,060,000 in 2022 to $12,920,00 in 2023.
Limits will also increase for other tax benefits such as employee salary reductions, medical savings accounts, gift tax exclusions, and adoption credits.
Retirement contribution limits are also expected to increase due to higher inflation adjustments. The increase may be as high as 8% or 9%, which would not only benefit retirement savings long term, but also impact overall tax burden for the 2023 tax year.
For some taxpayers, these adjustments may lead to a lower tax burden. Because each situation is different, it’s important to meet with a knowledgeable tax professional. The professionals at HFM can help you develop a plan to maximize tax benefits while remaining compliant with current tax law.
If you have questions, contact HFM today. Our professionals are well versed on the latest issues to provide our clients with professional, personalized services.