Inflation Boosted The 2023 Federal Income Tax Brackets. Here’s How Your Taxes May Compare To 2022

After a year of soaring prices, the IRS made annual inflation adjustments for dozens of tax provisions, including the federal income tax brackets for 2023, which may affect next year’s taxes, experts say.

While the rates didn’t change, the brackets show the federal income taxes you’ll owe on each portion of your taxable income, which is calculated by subtracting the greater of the standard or itemized deductions from your adjusted gross income.

“This year’s annual adjustments are more significant than usual,” said Mark Steber, chief tax information officer at Jackson Hewitt, noting that “record-setting high inflation contributed to the change.”

Steber said you’re likely to notice a difference on next year’s tax return.

“The goal of yearly inflation adjustments is to offset ax rate bracket creep, which happens when you owe more income taxes after wage increases without economic benefit due to inflation,” Steber said.

There was roughly a 7% change in the federal income tax brackets from 2022 to 2023, said Kyle Pomerleau, senior fellow and federal tax expert with the American Enterprise Institute.

“That was a larger increase than usual,” Pomerleau said. “And that is because inflation has been higher than usual,” explaining that inflation was “very modest the decade prior to the pandemic.”

The standard deduction also increased by nearly 7% for 2023, rising to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers may claim $13,850, an increase from $12,950.

“With roughly 90% of Americans claiming the standard deduction rather than itemized deductions, the change may have a large impact on taxpayers’ bottom line in 2023,” Steber said.

There were also boosts for dozens of other tax provisions, including the 401(k) and individual retirement account contribution limits, federal estate tax exemptions and more. Of course, the impact of these shifts may vary by individual.

“Each taxpayer situation is unique and any changes or adjustments can impact taxpayers very differently, depending on their facts and circumstances,” Steber said. “Overall, it can be good for some, but not as favorable to others.”

“With tax law changes going into effect and others being proposed, 2023 may be another year for the record books in terms of tax complexity and tax refund volatility,” Steber said.

To prepare, he urges taxpayers to “pay close attention to their taxes throughout the year,” including a mid-year check-up and another in December to avoid “refund shock” or a possible surprise balance at tax time.

Source: CNBC