Watch CBS News By Aimee Picchi October 21, 2022 / 10:51 AM / MoneyWatch The IRS said it is adjusting many of its rules to account for the impact of inflation, ranging from individual income tax brackets for 2023 to the standard deduction.
The changes could mean tax savings for some taxpayers next year.
The higher limits are aimed at avoiding "bracket creep" due to inflation, which can push workers who received annual cost-of-living pay increases into higher tax brackets even though their standard of living hasn't changed.
The IRS makes such adjustments annually, but this year's hot inflation means that many of the changes are more significant than in a typical year.
Americans are struggling with stubbornly high inflation, which is eating into their purchasing power as average wage gains lag the sharp rise in prices.
The higher provision thresholds could provide relief to some taxpayers who fall into lower tax brackets as a result, said Tim Steffen, director of tax planning with Baird, in an email.
For instance, Steffen noted that a married couple earning 0,000 in both 2022 and 2023 would save 0 in taxes next year because more of their income would be taxed at a lower rate.
Here are the changes announced by the IRS on October 18, with the inflation-adjusted provisions taking effect for the 2023 tax year.
Taxpayers will file their 2023 tax returns in early 2024.
The standard deduction is used by people who don't itemize their taxes, and it reduces the amount of income you must pay taxes on. "The flip side of this, though, is that it's going to be harder to itemize your deductions in 2023," Steffen said. "That means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit next year." Most taxpayers take the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction.
Only about 14% of taxpayers itemized their taxes after the passage of the tax overhaul, or a 17 percentage-point drop compared with prior to the law, according to the Tax Foundation.
The IRS is boosting tax brackets by about 7% for each type of tax filer, such as those filing separately or as married couples.
The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above 8,125 or for married couples with income higher than 3,750.
The lowest rate remains 10%, which will impact individuals with incomes of ,000 or less and married couples earning ,000 or less.
Below are charts with the new tax brackets.
Tax brackets show the percentage you'll pay in taxes on each portion of your income.
A common misconception is that the highest rate is what you'll pay on all of your income, but that is incorrect.
Take a single taxpayer who earns 0,000.
In 2023, she will take a standard deduction of ,850, reducing her taxable income to ,150.
She'll pay: Together, she'll pay the IRS ,063 in taxes, which gives her an effective tax rate of 17.7% on her taxable income.
Flexible spending accounts allow workers to put money, up to the limit allowed by the IRS, in an account that can be used to pay for medical expenses.
Because the funds are taken from their accounts on a pre-tax basis, it offers tax savings for many workers.