The changes will apply to 2023 tax returns filed in 2024. The top tax rate will be at 37-percent for individuals earning more than $578,125 and married couples filing jointly making $693,750.
The IRS increased the tax brackets for 2023.
Here are the new 2023 tax brackets for everyone else:
|Tax Rate||Single Taxpayers||Married Couples Filing Jointly|
|10%||$0 to $11,000||$0 to $22,000|
|12%||$11,000 to $44,725||$22,000 to $89,450|
|22%||$44,725 to $95,375||$89,450 to $190,750|
|24%||$95,375 to $182,100||$190,750 to $364,200|
|32%||$182,100 to $231,250||$364,200 to $462,500|
|35%||$231,250 to $578,125||$462,500 to $693,750|
The boost in the federal income tax brackets is good news for most Americans who may be able to pay fewer taxes on their income. For example, if you’re an individual taxpayer making $43,000 annually, your taxable income is 12 percent in 2023 versus 22 percent in 2022.
So next year, even if your income doesn’t increase, your paycheck may be a little higher because, with the adjustments, you fall into a lower tax bracket.
Why does inflation cause IRS to raise tax brackets?
The IRS adjusts the federal tax brackets every year to reflect changes in the cost of living and inflation, and when inflation is high, the brackets are raised. Right now, inflation is higher than its been in 40 years, prompting the IRS to make the recent changes.
Recent data shows that the Consumer Price Index (CPI), a key measure of inflation, is up 8.2-percent over last year.
IRS increases standard deductions for 2023.
As part of the new adjustments for 2023, the IRS is also increasing the standard deductions you can take on your income tax returns. Individual taxpayers can claim $13,850, up from $12,950 in 2022. Married couples filing jointly can claim $27,700, up from $25,900 in 2022.
The increase in the standard deductions may also help to reduce the taxes you owe when you file your 2023 return if you take the standard deduction over itemizing your deductions.
Other provisions in the 2023 tax changes include increases to:
The maximum Earned Income Tax Credit to $7,430 from $6,935 in 2022
The dollar limit on health flex-spending accounts to $3,050
The amount of inheritance you can receive before estate taxes kick in, to $12,920,000
Social security benefits are also increasing due to rising inflation. The Social Security Administration recently announced an 8.7 percent cost-of-living adjustment increase to benefits in 2023. It is the largest COLA increase since 1981.