On Tuesday the IRS announced its annual adjustments to the standard deduction and tax brackets for the 2023 tax year. They are a considerable increase over 2022. This is a response to ongoing inflation, which has the effect of eroding spending power even as it increases some workers’ take home pay.
As with all things taxes, this can raise some questions. Below, we’ll provide answers.
For more info on how these changes will affect your personal tax bill, consider matching with a financial advisor.
What Is The New Standard Deduction For 2023?
The new standard deductions for personal income taxes apply as follows:
- Individuals: $13,850 in 2023, a $900 increase
- Head of Household: $20,800, a $1,400 increase
- Married Filing Jointly: $27,700, an $1,800 increase
What Are The New Tax Brackets For 2023?
The new tax brackets for personal income taxes apply as follows:
- 10%: All income below $11,000 Individual / $22,000 Married
- 12%: $11,000 Individual / $22,000 Married, an increase of $725/$1,450
- 22%: $44,725 Individual / $89,450 Married, an increase of $2,950/$5,900
- 24%: $95,375 Individual / $190,750 Married, an increase of $6,300/$12,600
- 32%: $182,100 Individual / $364,200 Married, an increase of $12,050/$24,100
- 35%: $231,250 Individual / $462,500 Married, an increase of $15,300/$30,600
- 37%: All income above $578,125 Individual / $693,750 Married, an increase of $38,225/$45,900
Capital gains taxes have also been adjusted. The 2023 capital gains brackets are:
- 0%: All earnings below $44,625 Individual/$89,250 Married
- 15%: $44,625 Individual/$89,250 Married, an increase of $2,950/$5,900
- 20%: $492,300 Individual/$553,850 Married, an increase of $32,550/$36,650
Does The IRS Ordinarily Do This?
The IRS automatically adjusts income tax brackets and the standard deduction every year in response to annual inflation. If it didn’t, Americans would pay 30% on every dollar over $6,000. Adjusted for inflation, this would come to a 30% tax bracket on all income over $75,800, indicating how little Americans pay in taxes compared with past decades.
What is noteworthy in 2023 is the scale of these adjustments. Since the 1980’s, U.S. inflation has stayed around the Federal Reserve’s target 2% rate, fluctuating between 0% and 4% most years. This has led to relatively minor annual tax adjustments.
The high inflation of 2022 caused outsized results in this otherwise routine practice, with most adjustments between 6.5% and 8%. For example, between 2021 and 2022 the IRS adjusted the 12% individual bracket by $325, an increase of roughly 3.2%. For tax year 2023 the IRS adjusted that same 12% bracket by $725, an increase of 6.5%.
What Is The Impact of the New Brackets?
Any upward adjustment to the standard deduction or tax brackets is an effective income tax cut. It means that taxes apply to less of your income and that you pay less on the income that is taxed.
The question is whether any given taxpayer ends up with more spending power. The IRS doesn’t adjust its rates to give people tax relief, but rather to reflect the new value of money based on inflation/deflation cycles. If prices have gone up by 10%, but you keep 7% more from your taxes, then as a consumer you’re still effectively a little bit less wealthy than when you started.
What makes this more confusing is the degree to which sector-specific and region-specific inflation have muddled the economic picture as, contrary to general reporting, prices have stabilized in many areas but are skyrocketing in a few others. The result is that some taxpayers will, in fact, end up wealthier from these rate changes based on their spending patterns.
For example, if you already own your own home you’re largely insulated from the housing costs that are driving a lot of current inflation. With gas prices back to normal, and inflation currently flat for food and consumer goods, you may end up wealthier from these bracket changes. By contrast, median rents have increased between 12.5% and 16% since 2021. If you rent an apartment, particularly in a city, these tax changes won’t even cover half of your cost of living increase.
Who Does This Tax Change Apply To?
This applies to all U.S. income tax payers. If you file and pay income taxes to the IRS in 2023, you will do so using the new brackets.
What Income Does This Affect?
The new tax brackets will apply to all earnings starting on January 1, 2023. It does not apply retroactively, meaning that you can’t apply the new standard deduction or tax rates to income on or before December 31, 2022.
Can I Apply This to Current Earnings?
As above, you cannot apply the new tax brackets to any income that you earn on or before December 31, 2022. In IRS-speak, this means that if you trigger a tax event in 2022 the current tax brackets apply, not the new ones.
But you might apply the new tax brackets if you can defer earnings until 2023. The key is in that term “tax event.” This is a technical term for the IRS which means any event that causes you to owe taxes on income, earnings or other wealth. It means different things under different circumstances, but for individuals a tax event usually occurs when you take possession of new wealth. For example, when you receive your paycheck this is considered a tax event. The same goes for when you collect the earnings on a stock sale or when you receive payment after billing a client.
- Business Earnings – It’s important to note that businesses can us two different methods of bookkeeping. One considers it a tax event when you are owed money. The other considers it a tax event when you collect that money. Make sure you understand which method you use and apply it consistently.
The common theme is that, in most cases, you trigger a tax event when the new wealth is received, not when it’s owed. In other words, you pay 2022 tax rates on all money that you collected in 2022. You will pay 2023 tax rates on all money that you collect in 2023.
So, if you can defer income or earnings until 2023 you might be able to take advantage of the new rates. For example, some employers will allow you to defer your paycheck. Employees who do this can push their earnings to the new tax year. Self-employed individuals may be able to hold off on invoicing clients until January 1, 2023, collecting under the new brackets rather than the old. Selling investments assets is a little more complicated, since price changes may obviate any tax gains, but the same rules would apply to selling in 2022 vs. 2023.
It’s important to note that all of this is theoretical and absolutely should not be taken as individual tax planning advice. The rules for your personal situation may vary, as tax laws are highly situation-specific and can depend on your employer’s method of bookkeeping. Consult an accountant or financial advisor before making any plans.
Do I Have To Do Anything?
No. While outsized, this is a standard change. It does not affect your rights or responsibilities differently than any other tax year. You will pay your taxes as normal, simply applying the new numbers as appropriate.
The IRS has announced its new tax brackets for 2023, and they’re a considerable change over previous years.
Tips for Tax Payers
- Tax brackets might be the most misunderstood part of all tax law. Just because you’re in the 22% bracket does not mean you pay 22% of your income to the IRS. Here’s why.
- Tax planning can be complicated, and you absolutely shouldn’t go it alone. With SmartAsset’s matching tool you can find a financial advisor near you to help you plan your taxes so that you can maximize both your deductions and your compliance in one go.
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