How Inflation Could Help Cut Taxes in 2023
On Tuesday, the IRS announced several adjustments for the 2023 tax year to account for the impact of inflation. For many taxpayers, these changes could result in tax savings: Most of your wages in 2023 could receive lower tax rates compared to this year, and you could qualify for a larger standard deduction. Here are the changes announced by the IRS and what they mean for your wallet next year.
standard deduction
The standard deduction is the dollar amount that most taxpayers can deduct from their taxable income. Until you itemize your deductions, you can deduct the standard deduction set by the IRS to reduce your overall tax bill.
The IRS inflation adjustment includes a higher standard deduction in 2023. It will be $13,850 ($900 up) for singles and $27,700 ($1,800 up) for couples applying together.
Income tax
The IRS has also raised the income thresholds for each tax bracket. Your tax bracket shows the rate you will pay in taxes on each portion of your income. ( CBS explains that while many believe the highest rate is what you’ll pay on your entire income, this is misleading.)
The 2023 IRS adjustments mean an increase of approximately 7% in each group, adjusted for inflation:
- 10% applies to the first $11,000 of income for single applicants ($22,000 for couples applying jointly).
- 12% applies to income over $11,000 ($22,000 for joint filers)
- 22% applies to income over $44,725 ($89,450 for joint applicants)
- 24% applies to income over $95,375 ($190,750 for joint applicants)
- 32% applies to income over $182,100 ($364,200 for joint applicants)
- 37% applies to income over $578,125 ($693,750 for joint applicants)
FSA Contribution Limits
Flexible spending accounts offer tax savings for many health care workers. The threshold in the 2022 tax year for FSA contributions is $2,850, and in 2023 the new IRS limit is up to $3,050.
This adjustment may be relevant to you right now, as employees often set FSA limits in the fall. You can use the increased threshold to determine your FSA contribution in the new year.
If you can roll over the unused portion of the FSA amount, the maximum amount allowed is $610 ($40 more than this year’s maximum).
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) allows low-income workers to keep most of their paycheck. The maximum amount for households that qualify for EITC will rise by about 7% next year. Taxpayers with at least three children will be able to claim up to $7,430 (up from $6,935 in the current tax year). Here’s how to check if you qualify for the EITC.
Finally, to reiterate, all of the above changes do not apply until the 2023 tax year. They will not affect your 2022 tax return, which you file by mid-April 2023.