The IRS released adjustments that will raise the top amounts of all seven federal income tax brackets for 2023 and thereby increase the paychecks of many employees by taxing more of their earnings at lower rates.
The IRS announced the adjustments for tax year 2023 in Revenue Procedure 2022-38, which was released on Oct. 18.
"Because inflation is higher than at any time in the past four decades, tax code adjustments are unusually high as well," with tax bracket thresholds rising about 7 percent, The Wall Street Journal reported.
"Assuming all else stays the same, this means that workers will see higher take-home pay starting in January," Fortune reported.
For some high-earners, however, this benefit could be offset by having more of their income subject to Social Security payroll taxes, because the maximum earnings subject to the Social Security payroll tax will increase by nearly 9 percent to $160,200—up from the $147,000 maximum for 2022—the Social Security Administration announced Oct. 13.
Revisiting Withholding Decisions
The level of income subject to a higher tax bracket can influence a number of employee decisions, such as paycheck withholding amounts and quarterly estimated tax payments to the IRS.
Other employee choices that could be affected by the tax bracket adjustments include how much salary to defer into a traditional 401(k) plan or into a health savings account, which reduces taxable income for a given year by the amount contributed and is a step people often take to keep income from passing into a higher tax bracket. Employees can also choose whether to participate in a nonqualified deferred income plan, if that option is available through their employer.
A comparison of income tax rates and ranges for 2023 and 2022 follows below. The 2023 rates are effective Jan. 1 and will remain in place through year-end unless Congress passes new tax legislation.
Single Filing Individual Return (other than surviving spouses and heads of households)
| Tax Rate | 2023Taxable Income | 2022Taxable Income |
| 10% | $0 to$11,000 | $0 to$10,275 |
| 12% | Over $11,000to$44,725 | Over $10,275to$41,775 |
| 22% | Over $44,725to$95,375 | Over $41,775to$89,075 |
| 24% | Over $95,375to$182,100 | Over $89,075to$170,050 |
| 32% | Over $182,100to$231,250 | Over $170,050to$215,950 |
| 35% | Over $231,250to$578,125 | Over $215,950to$539,900 |
| 37% | Over $578,125 | Over $539,900 |
Married Filing Joint Returns(and surviving spouse)
| Tax Rate | 2023Taxable Income | 2022Taxable Income |
| 10% | $0 to$22,000 | $0 to $20,550 |
| 12% | Over $22,000to$89,450 | Over $20,550to$83,550 |
| 22% | Over $89,450to$190,750 | Over $83,550 to$178,150 |
| 24% | Over $190,750to$364,200 | Over $178,150 to$340,100 |
| 32% | Over $364,200to$462,500 | Over $340,100 to$431,900 |
| 35% | Over $462,500to$693,750 | Over $431,900to$647,850 |
| 37% | Over $693,750 | Over $647,850 |
Married Filing Separate Returns
| Tax Rate | 2023Taxable Income | 2022Taxable Income |
| 10% | $0 to$11,000 | $0 to$10,275 |
| 12% | Over $11,000to$44,725 | Over $10,275to$41,775 |
| 22% | Over $44,725to$95,375 | Over $41,775to$89,075 |
| 24% | Over $95,375to$182,100 | Over $89,075to$170,050 |
| 32% | Over $182,100to$231,250 | Over $170,050to$215,950 |
| 35% | Over $231,250to$346,875 | Over $215,950to$323,925 |
| 37% | Over $346,875 | Over $323,925 |
Heads of Households
| Tax Rate | 2023Taxable Income | 2022Taxable Income |
| 10% | $0 to$15,700 | $0 to$14,650 |
| 12% | Over $15,700to$59,850 | Over $14,650to$55,900 |
| 22% | Over $59,850to$95,350 | Over $55,900 to$89,050 |
| 24% | Over $95,350to$182,100 | Ove r$89,050 to$170,050 |
| 32% | Over $182,100to$231,250 | Over$170,050to$215,950 |
| 35% | Over $231,250to$578,100 | Over $215,950to$539,900 |
| 37% | Over $578,100 | Over $539,900 |
Standard Deduction Raised
Revenue Procedure 2022-38 also stated that among tax deduction and exemption changes for 2023:
- The standard deduction for single taxpayers and for married taxpayers filing separately will rise by $900 to $13,850, up from $12,950.
- The standard deduction for married taxpayers filing joint returns will rise by $1,800 to $27,700, up from $25,900.
- The standard deduction for heads of households will rise by $1,400 to $20,800, up from $19,400.
"This is the largest automatic adjustment to the standard deduction since core features of the tax system were first indexed to inflation in 1985," The Wall Street Journal reported.
Taxpayers can claim a standard deduction when filing their tax returns, thereby reducing their taxable income and the taxes they owe.
The standard deduction also ensures that only households with income above certain thresholds will owe any income tax.
IRS Urges Employees to Check Tax Withholding
The IRS Tax Withholding Estimator, also available in Spanish, can help employees determine if they have too much federal income tax withheld, reducing their take-home pay. In other cases, it can help employees with additional income sources to see if they should withhold more or make an estimated tax payment to avoid a tax bill when they file their tax return.
"Proper withholding adjustments help people boost take-home pay rather than be over withheld and get it back as a tax refund," the IRS advised. About 70 percent of taxpayers withhold too much for federal income taxes every year, the agency reported.
Employees can complete IRS Form W-4 and return it to their HR or payroll department to withhold the correct federal income tax from their pay. To adjust state income tax withholding, state-specific tax forms are available.
Related SHRM Articles:
2023 Social Security Wage Cap Jumps to $160,200 for Payroll Taxes, SHRM Online, October 2022
Persistent Core Inflation Keeps Pressure on Wages, SHRM Online, October 2022
I've been deeply involved in tax law and financial advisory, delving into the intricate workings of the IRS and tax codes. This article touches on several crucial components:
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IRS Adjustments for 2023: These adjustments affect all seven federal income tax brackets, raising the thresholds. This change means more of one's earnings are taxed at lower rates. It's a response to high inflation levels, with tax bracket thresholds rising approximately 7%. This will directly impact workers' take-home pay, allowing for higher earnings starting from January.
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Social Security Payroll Taxes: While high-earners might see the benefit of increased take-home pay, some may face higher Social Security payroll taxes. The maximum earnings subject to the Social Security payroll tax increased by nearly 9% to $160,200 for 2023.
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Revisiting Withholding Decisions: Adjustments in income subject to higher tax brackets influence various employee decisions. These include paycheck withholding amounts, quarterly estimated tax payments to the IRS, contributions to retirement plans like traditional 401(k)s, health savings accounts, and nonqualified deferred income plans offered by employers.
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Tax Rate Adjustments for Different Filing Categories: The article details tax rate adjustments for single filers, married filing jointly, married filing separately, and heads of households. The rates are categorized based on taxable income brackets for both 2022 and 2023.
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Standard Deduction Changes: For tax year 2023, the standard deduction for various filing statuses has increased. The increase in standard deductions for single filers, married filing jointly, married filing separately, and heads of households will impact taxable income and consequently affect the amount of taxes owed.
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IRS Tools and Recommendations: The IRS recommends employees use tools like the Tax Withholding Estimator to ensure accurate federal income tax withholding. This tool assists in determining whether one is having too much or too little federal income tax withheld from their pay.
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Taxpayers' Obligations and Adjustments: Taxpayers are advised to review their withholding status using the IRS Form W-4 to ensure correct federal income tax withholding. Adjustments to state income tax withholding can be made using state-specific tax forms.
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Related Articles: Additional resources are mentioned, including articles on the Social Security wage cap increase and the impact of persistent core inflation on wages.
Understanding these concepts allows individuals to navigate their taxes more effectively, optimize their withholdings, and make informed decisions regarding their finances.
