In a season when inflation is eating away at incomes, there may be some relief in the new guidelines issued by the U.S. Internal Revenue Service (IRS) for 2023 filings. In addition to new tax brackets, 2023 also promises revisions in minimum tax, exemptions, credits, and limitations that may benefit taxpayers. Lower taxable incomes and larger returns are a welcome respite to many who find paying the bills an increasing struggle. Moreover, raising the income thresholds for each tax bracket should reduce the federal tax burden on individuals and families, freeing up funds to offset rising costs. This is the goal, at any rate.
IRS Announces Changes for 2023
The change in brackets for individuals and married couples who file jointly means keeping more money in American pockets. Similarly, standard deductions were altered to diminish the scope of taxable income. History demonstrates that tax rules frequently change to meet the moment. These changes happen whether it is due to war, economic depression, or other challenging circumstances. For example, before World War I, the top tax bracket, i.e., earning over $500,000 (roughly $11 million in contemporary terms), had to pay seven percent on all income. The IRS raised taxes to pay for subsequent wars and remained relatively high until the 1980s.
Higher inflation and the consequential rise in the cost of living have put financial pressure on many American households in the past year. As 2022 approaches its end, the U.S. inflation rate hovers near 8.2 percent. The consumer ultimately ends up paying for the costs of production. The average price of eggs since late summer of 2022 is double that of the prior year. Beef prices are climbing at a rate between 5.5 and 6.5 percent, according to USDA analysts. The average national dollar amount for gasoline exceeded five dollars earlier in the year. Although blunted by the release of oil in the U.S. strategic reserves, upward price pressure on gasoline continues.
What Are the Updated IRS Tax Brackets for 2023?
Returns filed by married couples filing jointly (in 2024) for the tax year 2023 will see changes.
- Those making $22,000 or less will owe 10 percent of taxable income.
- Above $22,000, people making up to $89, 450 will pay $2,200 plus 12 percent of the difference between their taxable earnings and $22,000.
- The next bracket maxes out at $190,750. Those in this bracket pay a baseline amount of $10,294 plus 22 percent of taxable earnings over $89,450.
- If the taxable revenue falls between $190,751 and $364,200, then $32,580 plus 24 percent of anything after $190,750 is payable to the IRS.
- $74,208 is the minimum tax paid by earners who make between $364,201 to $462,500; an additional 32 percent on anything above $364,200.
- Taxable income between $462,501 and $693,750 is subject to payment of $105,664 plus 35 percent of the dollar amount over $462,500.
- If $693,751 or more qualifies as taxable income, the taxpayer must pay $186,601.50 and 35 percent of anything over $693,750.
Meanwhile, single people will encounter new 2023 brackets, as well.
- Filers taking bin $11,000 or less will owe 10 percent of taxable income.
- For people earning between $11,001 and $44,725, the IRS expects $1,100 and 12 percent for monies over and above 11K.
- Taxes owed for revenue in the range of $44,726 to $95,375 will include $5,147 added to 22 percent of taxable income exceeding $44,725.
- Those in the new bracket of $95,376 to $182,100 can expect to pay $16,290 and 24 percent of anything taken in over $95,375.
- On top of $37,104, individuals making from $182,101 to $231,250 can look forward to paying 32 percent of whatever they earn over $182,100.
- The $231,251 to $578,125 bracket calls for a baseline tax of $52,832 plus 35% of the sum over and above $231,250.
- If income matches or surpasses $578,126, such individuals will pay $174,238.25 and 37 percent on everything over $578,125.
These new tax brackets 2023 figures do not account for exemptions, credits, or other write-offs.
What Is the New IRS Standard Deduction for 2023?
The standard deduction for singles will be $13,850 in the tax year 2023, up from $12,950 in 2022.
Meanwhile, married couples filing one return can take a 2023 deduction of $27,700 — nearly $2,000 higher than in 2022.
The standard deduction lowers taxable income as an alternative to itemizing specific deductions.
When utilized optimally, the new standard deduction can result in appreciable savings year over year.
Each taxpaying household must weigh whether itemizing or applying the standard deduction will yield a lower taxable income.
Other IRS Tax Changes for 2023
In addition to these broad changes in federal taxation, the IRS will also recognize a higher exemption for the Alternative Minimum Tax (AMT).
The AMT assures high earners will pay some tax regardless of exemptions and credits. In 2023, the AMT exemption will increase to $81,300.
The Earned Income Credit (EITC) is aimed at lower-income families to assist in diminishing their tax obligations. 2023 will deliver a higher maximum credit of $7,430.
Health Savings Accounts (HSAs) will enjoy higher amounts that are sheltered from taxation in 2023.
Next year, HSA exemptions can swell to $3,050. We also expect individual retirement accounts (IRAs) to see higher amounts shielded from collection.
The new tax brackets 2023, the larger standard deductions, and other targeted exemptions are responses to the difficulties imposed on Americans by high inflation and expected recession.
The government hopes to ease taxpayers’ inflation pains. It also hopes to stimulate economic activity by allowing Americans to keep more of their earnings.
Curious how the new 2023 tax brackets will affect your bottom line? Get ahead of the game and plan now before the end of the year! Set up a free consultation with one of our tax pros, and we can help you sort it out. Click here to schedule your complimentary tax consultation.