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The Internal Revenue Service will allow Americans to shield more of their income from taxes in 2023 because of higher inflation, the agency announced Tuesday, raising income thresholds for all tax brackets and increasing the standard deduction.
The top tax rate of 37 percent will apply to individuals with income exceeding $578,125 and married couples filing jointly with income more than $693,750. Both of those amounts are up 7 percent from 2022 to track with increases in the consumer price index.
The standard deduction — the baseline amount of income that filers can collect tax free — will increase to $13,850 for individuals and $27,700 for married couples. It is the largest adjustment to deductions since 1985, when the IRS began annual automatic inflationary adjustments.
Certain parts of the tax code are tied to inflation to prevent rising prices from causing higher taxes. Taxpayers will see the new figures reflected in withholding statements on paychecks beginning in January, with workers securing more take-home pay.
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The tax system changes follow a large cost of living adjustment, or COLA, announced by the Social Security Administration last week to compensate for inflation. Social Security benefits are set to jump 8.7 percent in 2023, the greatest such increase in four decades.
Several other elements of the tax code also are indexed to inflation. The maximum 2023 Earned Income Tax Credit, one of the federal government’s main anti-poverty measures, will be $7,430, up from $6,935 in 2022.
The annual gift tax exclusion — the maximum amount one person can give another without incurring a tax penalty — will rise to $17,000 from $16,000. The estate tax threshold, often used by the wealthiest Americans to shield inherited assets from levies, will jump to $12.9 million from $12.1 million.
The IRS will also allow parents adopting a child to shield $15,950 per child from taxes, up from $14,890 in 2022.
As an expert in tax policy and financial matters, my comprehensive knowledge allows me to provide insights into the recent announcement by the Internal Revenue Service (IRS) regarding changes in tax brackets, deductions, and various aspects of the tax code for the year 2023.
The IRS has adjusted income thresholds for all tax brackets in response to higher inflation. The top tax rate, set at 37 percent, now applies to individuals with income exceeding $578,125 and married couples filing jointly with income more than $693,750. These figures represent a 7 percent increase from the previous year, aligning with the consumer price index.
One significant change is the increase in the standard deduction, the baseline amount of income that filers can collect tax-free. In 2023, the standard deduction will rise to $13,850 for individuals and $27,700 for married couples. This adjustment is the most substantial since 1985, marking a crucial development in tax policy.
It's essential to note that certain elements of the tax code are linked to inflation to prevent higher taxes caused by rising prices. Taxpayers will observe these adjustments in their withholding statements on paychecks starting in January, resulting in increased take-home pay for workers.
In addition to changes in tax brackets and deductions, other components of the tax code are also subject to inflationary adjustments. The maximum Earned Income Tax Credit (EITC), a crucial anti-poverty measure, will be $7,430 in 2023, up from $6,935 in 2022. This change reflects the government's commitment to addressing economic disparities.
Furthermore, the annual gift tax exclusion, representing the maximum amount one person can give another without incurring a tax penalty, will increase to $17,000 from $16,000. The estate tax threshold, utilized by wealthy individuals to shield inherited assets from levies, will see an increase to $12.9 million from $12.1 million.
Parents adopting a child will benefit from the IRS's decision to raise the amount that can be shielded from taxes per child. In 2023, the figure will be $15,950, up from $14,890 in 2022.
These adjustments in the tax system are crucial for individuals and families, ensuring that the tax code remains responsive to economic changes and inflationary pressures. The updates not only impact income tax but also touch upon significant anti-poverty measures and provisions related to gifts, estates, and adoption.
