The Internal Revenue Service has raised tax brackets and the standard deduction by about 7% for 2023 as the soaring cost of food, energy and housing continues to batter Americans.
That’s the largest increase to the standard deduction since the tax system was first indexed to inflation in 1985, and will reduce the amount of income subject to taxes for most people.
The IRS adjusts the tax code annually to shield Americans from paying higher taxes as rising prices erode the value of the dollar. While changes have been fairly incremental in the last few years, decades-high inflation prompted an unusually big tweak for 2023, according to Tom O’Saben, government relations director for the National Association of Tax Professionals.
“The tax adjustments for 2023 are keeping up with the increase in everything we consume on a daily basis and are an accurate reflection of our economic reality,” he said.
As a result, employees can expect to see less tax withheld from paychecks as soon as January. Here are the key takeaways, according to experts.
Automatic Adjustments
The automatic adjustments to standard deductions and tax brackets will help a majority of US workers whose wages have not kept up with ballooning inflation, allowing them to shield more of their earnings from income taxes.
However, the higher the income bracket, the higher the savings will be in dollar terms, said Annette Nellen, a tax attorney and professor at San Jose State University.
The standard deduction will rise to $13,850 for single filers, an increase of $900 from 2022, and to $27,700 for married couples filing jointly, an $1,800 boost.
Meanwhile, all tax brackets will kick in at a higher income threshold in 2023. For example, the 24% tax rate will apply to income over $95,375 for single taxpayers and $190,750 for couples, up from $89,075 and $178,150 in 2022. That means a couple with $200,000 of taxable income would pay about $1,300 less next year due to the inflation adjustments, Nellen said.