The IRS typically announces inflation adjustments for the upcoming tax year in October or November. The agency announced more than 60 tax provisions for the 2023 tax year (the return you’ll file in 2024) on Oct. 18, 2022. Knowing what they are and how they work can help you plan your tax strategies and your spending in 2023.
The 2023 Tax Brackets
The U.S. tax system is progressive. You pay a higher percentage in taxes as you earn more. The tax system is based on marginal tax rates and brackets. This means you won’t pay 24% on all your income if you’re in the 24% tax bracket. You’ll only pay this rate on the portion of your income that falls into the parameters for that 24% bracket. You’ll pay 10%, 12%, and 22% on the rest of your income below that threshold. Inflation adjustments don’t affect the tax rates (the percentage you pay); they only change the income brackets to which the percentages apply.
2023 Tax Rates and Brackets for Single and Married Filing Separately
The table below shows the income brackets and the corresponding rates for tax year 2023 for single filers and for those who are married but filing separate returns. Gains are taxed at ordinary tax rates along with the rest of your income if you owned the asset for one year or less. Long-term capital gains rates apply to income from assets you held for more than one year.
Single
The AMT adds back certain deductions and income exclusions that you might claim under the usual rules to bring down your taxable income. You would then pay whichever method results in a higher tax. The AMT excludes income up to certain thresholds based on your filing status. You only need to calculate the AMT if you earn more than $81,300 as a single filer in tax year 2023. It begins to phase out at $578,150. Married taxpayers filing jointly must calculate the AMT if they earn $126,500 or more. It begins to phase out at $1,156,300.
Tax Credits and Other Increases for 2023
Deductions, such as the standard deduction, subtract from your income to arrive at the amount that’s taxed, but tax credits are better. They subtract directly from what you owe the IRS. Inflation adjustments apply to many of these, too, as well as to some other tax perks.
Earned Income Tax Credit
The maximum earned income tax credit for those who meet the income requirements and who have three or more dependent children increases to $7,430 in 2023.
The Child Tax Credit
The amount of the child tax credit isn’t adjusted for inflation, but the portion of the credit that can be claimed as a tax refund is. That amount is $1,600 for the 2023 tax year.
The Adoption Tax Credit
The maximum credit for adoption expenses increases to $15,950 in 2023.
Flexible Spending Accounts
Inflation-adjusted limits also apply to the amounts that you can save for various retirement plans and other advantageous savings plans, and they exclude those contributions from taxation. You can contribute up to $3,050 to a health flexible spending arrangement (also known as a flexible spending account, or FSA) in 2023.
Estate Taxes
Very large estates must pay a federal estate tax on the portion of their values over certain thresholds, and these thresholds are also indexed for inflation. The first $12.92 million will be tax-free in 2023.
Gift Taxes
The federal gift tax applies to gifts you make to individuals (not to charities) over a certain amount each year. This amount is referred to as the annual exclusion, and it’s per person, per year. It increases to $17,0000 in tax year 2023.
