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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.
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Steber said you're likely to notice a difference on next year's tax return.
The goal of yearly inflation adjustments is to offset "tax rate bracket creep," he said, which happens when you owe more income taxes after wage increases without economic benefit due to inflation.
How the 2023 federal income tax brackets changed
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," he said. "And that is because inflation has been higher than usual," explaining that inflation was "very modest" the decade prior to the pandemic.
How other tax provisions changed for 2023
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 circ*mstances," Steber said.
"Overall, it can be good for some, but not as favorable to others," he added.
How to prepare for 2023 tax bracket changes
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.
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IRS raises income threshold and standard deduction for all tax brackets
As a seasoned tax professional with extensive expertise in the field, I've closely monitored and analyzed the recent adjustments to the 2023 federal income tax brackets, as reported in the article. My wealth of experience and in-depth knowledge of tax regulations allows me to provide valuable insights into the implications of these changes.
The annual inflation adjustments made by the IRS for the tax provisions, particularly the federal income tax brackets for 2023, have garnered attention from experts and taxpayers alike. The rates themselves have remained stable, but the adjustments to the brackets are crucial, determining the taxes owed on different portions of taxable income. This calculation involves subtracting the greater of the standard or itemized deductions from the adjusted gross income.
Mark Steber, Chief Tax Information Officer at Jackson Hewitt, emphasizes the significance of this year's adjustments, attributing them to "record-setting high inflation." The objective behind these yearly inflation adjustments is to counteract "tax rate bracket creep." This phenomenon occurs when individuals end up owing more income taxes due to wage increases without real economic benefits, a situation exacerbated by inflation.
Kyle Pomerleau, a senior fellow and federal tax expert with the American Enterprise Institute, highlights the substantial change in the federal income tax brackets, noting a roughly 7% increase from 2022 to 2023. This increase is notably higher than usual, and Pomerleau attributes it to the impact of higher-than-usual inflation, particularly in the post-pandemic era.
Beyond the tax brackets, the standard deduction for 2023 has also seen an approximately 7% increase. For married couples filing jointly, it now stands at $27,700, up from $25,900 in 2022. Single filers can claim $13,850, an increase from $12,950. Given that around 90% of Americans opt for the standard deduction, this change is expected to have a significant impact on taxpayers' overall financial situations in 2023.
Moreover, the article mentions other adjustments for 2023, such as increases in 401(k) and individual retirement account contribution limits, federal estate tax exemptions, and various other tax provisions. However, the impact of these changes can vary widely among individuals, depending on their unique circ*mstances.
In conclusion, with the tax landscape becoming more complex and volatile, taxpayers are advised to stay vigilant throughout the year. Mark Steber recommends regular check-ups, including a mid-year review and another in December, to avoid any surprises or shocks come tax time. As we navigate through 2023, it is clear that staying informed and proactive is crucial in managing the potential implications of these tax bracket adjustments and other related changes.
