As of late 2022, annual inflation was over 8%, and consumer prices are up more than 9%. Let’s break down how inflation adjustments will affect our 2023 tax brackets.
Inflation on the Rise – IRS Response
We previously talked about the effects of inflation on business and tax trends earlier this year. And now the IRS is addressing these issues in an adjustment plan that affects more than 60 tax provisions. They recently shared a 28-page document outlining all of the provisions and changes, but we wanted to share some of the highlights with you here as well. The procedures in this provision went into effect on October 18, 2022, and will likely affect many taxpayers’ filings in the 2023 tax season.
If you or your employees have salaries that did not keep up with the crazy inflation hikes this year, tax savings could be in your future for the 2022 tax year when it comes time to file your returns. The inflation adjustments are coming from the fact that prices haven’t increased this drastically for more than 40 years!
With the price of everything – gas, groceries, homes, and everything in between – going up so quickly, the IRS has made inflation adjustments to the 2023 tax brackets. But what does that mean for you, the taxpayer? Let’s talk about it.
2023 Tax Brackets with New Inflation Adjustments
The IRS makes inflation adjustments every year, but this year the adjustments were much more substantial. Some increases range from $400 to $1,000 depending on how the taxpayer files (married jointly, head of household, etc.). And tax year 2023 withholding rates have also been adjusted, which means employees will see slightly larger paychecks even without having received a raise for the year.
For the tax year 2023, the standard deduction for those who file as married, filing jointly will increase to $27,700. This is a $1,800 increase from the previous year. For those filing single or married filing separately, the standard deduction will be $13,850 (a $900 increase). And for heads of households, the standard deduction for the tax year 2023 is $20,800, an increase of $1,400 from the previous year.
But let’s get to those 2023 tax brackets. And please remember, these latest numbers are for the tax year 2023, which means you (or your tax preparer) will use these rates during the 2024 tax season.
Here are the income thresholds for each of the marginal tax rates:
- 10% for incomes of $11,000 or less (or $22,000 or less for married, filing jointly)
- 12% for incomes over $11,000 (or $22,000 for married, filing jointly)
- 22% for incomes over $44,725 (or $89,450 for married, filing jointly)
- 24% for incomes over $95,375 (or $190,750 for married, filing jointly)
- 32% for incomes over $182,100 (or $364,200 for married, filing jointly)
- 35% for incomes over $231,250 (or $462,500 for married, filing jointly)
- 37% for incomes over $578,125 (or $693,750 for married, filing jointly)
These increases will likely push many taxpayers into lower tax brackets, thus decreasing their tax liability and even potentially increasing their refunds for the 2024 tax season.
Other Revenue Procedure Changes
There are a handful of other substantial changes to revenue procedure, according to the IRS.
The maximum Earned Income Tax Credit, which helps low- to moderate-income workers and families get a bit more of a tax break, is now $7,430 for qualifying taxpayers with 3 or more qualifying children. This is an increase of $495 compared to the tax year 2022.
And from the tax year 2023 and on, the dollar limitation employee salary reductions for health flexible spending arrangements will increase to $3,050.
Other Effects of Inflation Adjustments
There are a number of inflation adjustments being implemented around the country, both by private employers and government programs.
For example, taxpayers who are receiving Social Security payments will see an 8.7% increase in 2023, the largest increase since the early 1980s. This change will impact 70 million Americans and increase their benefit payments by about $140, on average, starting this month.
And many employers are considering or implementing more significant salary increases to combat the rising costs caused by inflation. Many companies that traditionally give 3% annual raises with a 4% raise, and a small portion of them are even giving 5-7% raises this year.
Combat Inflation Affects with Cost-Effective E-Filing
Inflation increases will likely have changed the way some of your information returns are filed, and they may even be driving big business decisions for you in the new year. Still, you can always count on eFile360 to keep your returns in order and ready for you to update or revisit when you start your 2022 and 2023 tax preparations.
As prices rise, cost-effectiveness is a more valuable attribute for you, your business, and the vendors you work with. eFile360 is the most cost-effective e-filing service for your IRS 1099, 1098, ACA, and W-2 forms. Our all-inclusive service starts at just $3.50 per recipient, the same price they were before these big inflation hikes.
Sign up for a free eFile360 account today and start updating your information returns for the tax year 2022.