Inflation is something we all deal with, but the IRS is here to help by making adjustments every year. They’ve made some important changes for 2023.
This year, the standard deduction has gone up, and you can now contribute more to your retirement accounts. The IRS also tweaked the federal income tax brackets and capital gains tax brackets. Don’t forget about tax credits – the Earned Income Tax Credit (EITC) and Adoption Credit have seen some changes too.
In this blog, we’ll walk you through all the inflation adjustments for tax year 2023. So, let’s get started and explore these important updates!
What Are the 2023 IRS Inflation Adjustments for Taxes?
In 2023, the IRS has made changes to account for inflation. Let’s break down the important updates.
How Much Can You Deduct in 2023?
Each year, the IRS adjusts the standard deduction to keep up with inflation. Your filing status determines the amount you can claim. Here’s what you can deduct in 2023, compared to last year:
|Tax Filing Status||Standard Deduction 2023||Standard Deduction 2022|
|Head of Household||$20,800||$19,400|
|Married Filing Jointly and Surviving Spouse||$27,700||$25,900|
|Married Filing Separately||$13,850||$12,950|
If you’re blind or aged 65 and older, you’re eligible for an extra standard deduction:
|Age and Filing Status||2023 Additional Standard Deduction||2022 Additional Standard Deduction|
|65+ OR blind (single and head of household)||$1,850||$1,750|
|65+ AND blind (single and head of household)||$3,700||$3,500|
|65+ OR blind (married filing jointly or separately)||$1,500 (per qualifying individual)||$1,400 (per qualifying individual)|
|65+ AND blind (married filing jointly or separately)||$3,000 (per qualifying individual)||$2,800 (per qualifying individual)|
If you’re eligible to be claimed as a dependent in 2023, your standard deduction limit is either $1,250 or your earned income plus $400, whichever is higher.
Are the federal tax rates different in 2023?
Is the federal tax rate changing in 2023? No, the top tax rate for individuals making over $578,125 (or $693,750 for married couples filing jointly) remains at 37%.
Here are the tax rates for this year:
- 35% for incomes over $231,250 (or $462,500 for joint filers)
- 32% for incomes over $182,100 (or $364,200 for joint filers)
- 24% for incomes over $95,375 (or $190,750 for joint filers)
- 22% for incomes over $44,725 (or $89,450 for joint filers)
- 12% for incomes over $11,000 (or $22,000 for joint filers).
No major changes, just some adjustments for inflation to keep up with the rising cost of living.
What are the 2023 tax brackets?
Here are the tax brackets for 2023:
|Tax Rate||Single Filer||Joint Filers||Married Filing Separately||Head of Household|
|10%||$0 to $11,000||$0 to $22,000||$0 to $11,000||$0 to $15,700|
|12%||$11,001 to $44,725||$22,001 to $89,450||$11,001 to $44,725||$15,701 to $59,850|
|22%||$44,726 to $95,375||$89,451 to $190,750||$44,726 to $95,375||$59,851 to $95,350|
|24%||$95,376 to $182,100||$190,751 to $364,200||$95,376 to $182,100||$95,351 to $182,100|
|32%||$182,101 to $231,250||$364,201 to $462,500||$182,101 to $231,250||$182,101 to $231,250|
|35%||$231,251 to $578,125||$462,501 to $693,750||$231,251 to $346,875||$231,251 to $578,100|
|37%||$578,126 or more||$693,751 or more||$346,876 or more||$578,101 or more|
What Are the Capital Gain Tax Rates for 2023?
If you sold assets and investments in 2023, you’ll need to pay taxes on the profits you made. This tax, known as the capital gains tax, applies to things like stocks, bonds, real estate, and even cryptocurrency.
When it comes to short-term gains, they are taxed just like your regular income. You can find your specific tax rate in the tax bracket table above. Short-term gains are for assets you sold within a year of acquiring them.
Now, for long-term gains, these rates kick in when you’ve held onto your assets for more than a year before selling. The maximum rate you’ll pay for long-term gains in 2023 is 20%.
Here’s a quick rundown of the long-term rates for this year:
|Tax Rate||Single||Married Filing Jointly||Married Filing Separately||Head of Household|
|0%||$0 to $44,625||$0 to $89,250||$0 to $44,625||$0 to $59,750|
|15%||$44,626 to $492,300||$89,251 to $553,850||$44,626 to $276,900||$59,751 to $523,050|
|20%||$492,301 or more||$553,851 or more||$276,901 or more||$523,051 or more|
How Much Can You Get from the Earned Income Tax Credit in 2023?
The Earned Income Tax Credit (EITC) helps people with lower to moderate incomes who are working. The amount you get depends on your income, how you file your taxes, and how many children you have.
In 2023, the most you can get from EITC is $7,430. To see if you qualify for this credit in the tax year 2023, take a look at these income limits:
|Number of Children Living with You||Maximum Adjusted Gross Income (Single)||Maximum Adjusted Gross Income (Married Filing Jointly)|
|3 or more||$56,838||$63,698|
What’s New for Tax Year 2023?
Let’s talk about the changes to contribution amounts for 2023:
- 401(k) Contributions:
If you have a 401(k) retirement plan, you can now put in up to $22,500 in 2023, which is an increase from the $20,500 limit in 2022. And if you’re 50 or older, you can contribute even more – up to $30,000 (compared to $29,000 in 2022).
- IRA Contributions:
For Individual Retirement Accounts (IRAs), the annual contribution limit has gone up to $6,500 in 2023, up from $6,000 in 2022. If you’re 50 or older, you can contribute up to $7,500. If you have a SIMPLE IRA, you can now put in up to $15,500 in 2023, compared to $14,000 in 2022. The IRS has also made changes to the income limits for deducting IRA contributions, which you can find in their official announcement.
- Health Flexible Spending Accounts:
If you have a health flexible spending account, you can set aside up to $3,050 from your salary to fund it in 2023.
- Medical Savings Accounts
There are some adjustments here too. For individuals with self-only coverage, your plan’s annual deductible must be at least $2,650 but no more than $3,950, with an out-of-pocket expense limit of $5,300. For families, the annual deductible should be at least $5,300 but no more than $7,900, and the out-of-pocket expense limit is $9,650.
These changes are important to be aware of, as they can affect your financial planning for the year. Make sure to take advantage of these updated contribution limits to secure your financial future.
What’s extra changing for 2023?
Let’s break it down for you.
1. Social Security tax limit:
In 2023, there’s a cap on how much of your income is subject to Social Security tax. It’s gone up to $160,200 from $147,000 in 2022. So, if you earn more than $160,200, you won’t pay Social Security tax on that extra amount. The most you’ll see withheld from your paycheck for Social Security tax in 2023 is $9,932.
2. Fringe benefits:
If your employer provides you with tax-free qualified transportation and parking fringe benefits, you’ll be happy to know that the monthly limit has increased to $300, up from $280 in 2022. That means you can get more tax-free benefits for your commute or parking expenses.
3. Gift tax exclusions:
If you’re in a generous mood and want to give someone a gift, you can now give up to $17,000 without having to file a gift tax return. This is up from $16,000 in 2022. Also, the lifetime exclusion has gone up to $12.92 million, so you can give even more over your lifetime without worrying about gift taxes.
4. Qualified adoption expenses:
If you’re adopting a child, there’s good news. The maximum credit for adoption expenses has increased to $15,950, up from $14,890 in 2022. This can help offset some of the costs associated with adoption.
5. Foreign earned income exclusion:
For those earning income abroad, the foreign earned income exclusion has risen to $120,000 in 2023, up from $112,000 in 2022. If you qualify, you can exclude foreign earnings from your income up to this amount, potentially saving on your taxes.
These changes for 2023 can have an impact on your financial situation, so it’s essential to be aware of them as you plan your finances for the year.
What’s Staying the Same in 2023?
Good news, folks! Some things haven’t changed for the tax year 2023:
- No limit on itemized deductions.
- The personal exemption is still at 0.
- If you’re filing jointly, the modified adjusted gross income (MAGI) used to determine the Lifetime Learning Credit (LLC) reduction hasn’t been adjusted for inflation. The LLC starts to phase out once your MAGI crosses $80,000 ($160,000 for joint filers).
Remember, this article provides information, not legal or financial advice. If you want expert guidance, consider booking a free consultation call with BSE Accounting. Our team of experts can help you grow your business and work towards financial freedom.