The Internal Revenue Service (IRS) is increasing its inflation adjustments for tax year 2023 after prices for gas, groceries, and rent reached levels not seen in the last 40 years. The announcement for adjustments is an annual occurrence. However, in a year of high inflation, the move to increase income thresholds and standard deductions may mean savings for people across income brackets. Continue reading to know the details.
The standard deduction for jointly-filing spouses for tax year 2023 has increased to $27,000 (up a total of $1,800 from last year). For married individuals filing separately and single taxpayers, the standard deduction has increased to $13,850 (up $900 from last year). For heads of households, the standard deduction will be $20,800 (up $1,400 from last year).
For the upcoming tax year, the top tax rate continues to remain at 37% for individual single taxpayers who earn an income of more than $578,125. For married couples filing jointly, the top tax rate is applicable on incomes higher than $693,750).
Apart from the top tax rate, the other rates are as follows:
- 35% for individual single taxpayers with incomes over $231,250 ($462,500 for jointly-filing spouses)
- 32% for individual single taxpayers with incomes over $182,100 ($364,200 for jointly-filing spouses)
- 24% for individual single taxpayers with incomes over $95,375 ($190,750 for jointly-filing spouses)
- 22% for individual single taxpayers with incomes over $44,725 ($89,450 for jointly-filing spouses)
- 12% for individual single taxpayers with incomes over $11,000 ($22,000 for jointly-filing spouses)
- 10% for individual single taxpayers with incomes of $11,000 or less ($22,000 or less for jointly-filing spouses)
Alternative Minimum Tax
The Alternative Minimum Tax exemption amount for 2023 is fixed at $81,300 and will start to phase out at $578,150. For married couples filing jointly, the Alternative Minimum Tax exemption is $126,500, and the exemption will start to phase out at $1,156,300. In comparison, the exemption amount was $75,900 ($118,100 for married couples) and began to phase out at $539,900 ($1,079,800 for married couples) in tax year 2022.
Earned Income Tax Credit
The Earned Income Tax Credit is essentially a type of work credit that may qualify you to receive money back when filing your taxes. The credit could also help lower the amount of federal income taxes you owe. For tax year 2023, the maximum Earned Income Tax Credit amount for qualifying taxpayers who have three or more children is $7430. In comparison, the maximum for qualifying individuals was $6,935 in tax year 2022.
Qualified Transportation Fringe Benefit
For tax year 2023, the per-month limitation for the qualified transportation fringe benefit, as well as the monthly limitation for qualified parking, has been increased to $300. The limit has been increased by $20 compared to the limit for 2022.
Dollar Limitation on Employee Compensation
For taxable years starting in 2023, the dollar limitation on employee salary reductions for contributions that go towards a health flexible spending arrangement has been increased to $3,050. For plans that allow the carryover of unused amounts, the maximum carryover has been increased to $610.