With the cost of food and gas higher than it’s been in decades, the IRS has announced significant changes to inflation-based amounts embedded in the tax code. Revenue Procedure 2022-38 was released on October 18, 2022 and addresses over 60 items tied to the cost of living.
The annual adjustments are tied to a formula that tracks inflation, so the 2023 changes are some of the largest in recent history. For many households, the increase to these inflation-adjusted items will mean more take-home pay in 2023. This article highlights five notable inflation adjustment items.
1. Tax tables
The percentages for the individual income tax brackets will remain the same, but the earnings threshold that bumps you into the next bracket will be about 7% higher than 2022. This will be welcome news to many taxpayers who haven’t seen their paycheck grow at the same rate as inflation. The formula is intended to prevent “bracket creep,” which occurs when income rises faster than the bracket thresholds.
Single taxpayers
|
Tax bracket |
2022 |
2023 |
|
10% |
$0 |
$0 |
|
12% |
$10,275 |
$11,000 |
|
22% |
$41,775 |
$44,725 |
|
24% |
$89,075 |
$95,375 |
|
32% |
$170,050 |
$182,100 |
|
35% |
$215,950 |
$231,250 |
|
37% |
$539,900 |
$578,125 |
(IRS)
Married filing jointly
|
Tax Bracket |
2022 |
2023 |
|
10% |
$0 |
$0 |
|
12% |
$20,550 |
$22,000 |
|
22% |
$83,550 |
$89,450 |
|
24% |
$178,150 |
$190,750 |
|
32% |
$340,100 |
$364,200 |
|
35% |
$431,900 |
$462,500 |
|
37% |
$647,850 |
$693,750 |
(IRS)
2. Standard deduction
For taxable years beginning in 2023, the standard deduction amount will increase $1,800 for married filing jointly taxpayers, $1,400 for heads of households and $900 for single individuals and married individuals filing jointly. The 2023 amounts are as follows:
Married Filing Jointly $27,700
and Surviving Spouses (§ 1(j)(2)(A))
Heads of Households (§ 1(j)(2)(B)) $20,800
Single individuals (§ 1(j)(2)(C)) $13,850
and Married Filing Separately (§ 1(j)(2)(D))
The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of (1) $1,250, or (2) the sum of $400 and the individual’s earned income.
The additional standard deduction amount for the aged or the blind is $1,500. The additional standard deduction amount is increased to $1,850 if the individual is also unmarried and not a surviving spouse.
3. Qualified transportation fringe benefit
The monthly limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $300. The monthly limitation under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $300. This is an increase of $20 from 2022.
4. Earned income credit
The following amounts are used to determine the earned income credit under § 32(b). The “earned income amount” is the amount of earned income at or above which the maximum amount of the earned income credit is allowed.
The “threshold phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) above which the maximum amount of the credit begins to phase out.
The “completed phaseout amount” is the amount of adjusted gross income (or, if greater, earned income) at or above which no credit is allowed.
The threshold phaseout amounts and the completed phaseout amounts shown in the table below for married taxpayers filing a joint return include the increase provided in §32(b)(2)(B), as adjusted for inflation for taxable years beginning in 2023.
The threshold phaseout amounts and the completed phaseout amounts shown in the table below for single, surviving spouse, or head of household taxpayers also apply to married taxpayers who are not filing a joint return and satisfy the special rules for separated spouses in § 32(d).
Number of Qualifying Children
Item One Two Three or More None
Earned Income
Amount $11,750 $16,510 $16,510 $7,840
Maximum Amount
of Credit $3,995 $6,604 $7,430 $600
Threshold Phaseout $21,560 $21,560 $21,560 $9,800
Amount (Single,
Surviving Spouse, or
Head of Household)
Completed Phaseout $46,560 $52,918 $56,838 $17,640
Amount (Single,
Surviving Spouse, or
Head of Household)
Threshold Phaseout $28,120 $28,120 $28,120 $16,370
Amount (Married Filing
Jointly)
Completed Phaseout $53,120 $59,478 $63,398 $24,210
Amount (Married Filing
Jointly)
5. Annual exclusion for gifts
(1) For calendar year 2023, the first $17,000 of gifts to any person (other than gifts of future interests in property) are not included in the total amount of taxable gifts under § 2503 made during that year.
(2) For calendar year 2023, the first $175,000 of gifts to a spouse who is not a citizen of the United States (other than gifts of future interests in property) are not included in the total amount of taxable gifts under §§ 2503 and 2523(i)(2) made during that year.
The IRS’s recent inflation adjustments are significant for individual taxpayers and accountants. As tax season approaches, this is a reminder of the importance of staying informed of impending tax revisions.
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The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
