On Tuesday, the IRS announced several adjustments for the 2023 tax year to account for the impact of inflation. For many taxpayers, the changes could lead to tax savings: More of your 2023 wages may benefit from lower tax rates compared to this year, and you may be able to claim a greater standard deduction. Here are the changes announced by the IRS and what they mean for your wallet next year.
Standard deduction
The standard deduction is the dollar amount that most taxpayers can deduct from their taxable income. So long as you don’t itemize your deductions, you can subtract the standard deduction set by the IRS to reduce your overall tax bill.
The IRS inflation adjustments include a higher standard deduction in 2023. It will be $13,850 (up by $900) for single people and $27,700 (up by $1,800) for married couples filing jointly.
Income tax brackets
The IRS also boosted the income thresholds for each tax bracket. Your tax bracket shows the rate you’ll pay in taxes on each portion of your income. (CBS explains that although many believe the highest rate is what you’ll pay on all of your income, that’s a misconception.)
The 2023 IRS adjustments mean there’s about a 7% increase in each bracket to account for inflation:
10% applies to the first $11,000 of income for single filers ($22,000 for married couples filing jointly).
12% applies to income over $11,000 ($22,000 for joint filers)
22% applies to income over $44,725 ($89,450 for joint filers)
24% applies to incomes over $95,375 ($190,750 for joint filers)
32% applies to incomes over $182,100 ($364,200 for joint filers)
37% applies to incomes over $578,125 ($693,750 for joint filers)
FSA contribution limits
Flexible spending accounts offer tax savings for many workers setting aside money for medical expenses. The 2022 tax year’s threshold for FSA contributions is $2,850, and in 2023 the new IRS limit is up to $3,050.
This adjustment might be relevant for you right now, since employees often set their FSA limits in the fall. You can use the increased threshold to determine your FSA contribution in the new year.
If you’re able to carry over unused portions of your FSA amount, the maximum permitted will be $610 ($40 higher than this year’s maximum).
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) allows low-income workers to hold onto more of their paycheck. The maximum amount for households who claim the EITC is up about 7% next year. Qualifying taxpayers who have at least three children will be able to claim up to $7,430 (compared to $6,935 in the current tax year). Here’s how to check if you qualify for the EITC.
Finally, to reiterate, all the changes above don’t apply until the 2023 tax year. They won’t have any affect on your 2022 tax return, which you’ll file by mid-April 2023.