Every year, the IRS makes inflation adjustments. With consistently high inflation in 2022, some experts are predicting larger adjustments than normal that can affect tax brackets in 2023.
What is Inflation?
Put simply, inflation is the overall increase in prices of goods and services over a given period of time. Inflation is the reason a gallon of milk costs about $4.33 today but only $2.72 in 2002. The increase can come from a rise in demand, like when a tech giant charges increasingly high prices for a new product because of growing popularity. The increase can also result from a decrease in supply, usually because of an increase in cost of production, materials or labor.
Does Inflation Always Affect Taxes?
Inflation does always affect taxes. In fact, the IRS automatically adjusts income tax brackets and the standard deduction each year according to inflation rates. Since the 1980s, the U.S. inflation rate has staggered around 2%, which is considered a healthy rate by the Federal Reserve’s standards. In some years when inflation has been relatively higher or lower, the rate has fluctuated between 0% and 4%.
How is Inflation Affecting Income Tax Brackets in 2023?
The consistently high inflation in 2022 has resulted in higher-than-expected inflation adjustments for income tax brackets, with most sitting between 6.5% and 8%. This essentially means that taxes will apply to less of your earnings beginning on January 1, 2023, to reflect the newest value of money based on inflation. The most notable changes are as follows:
- 12% Tax Bracket: Taxable earnings up to $11,001 for single filers and $22,001 for joint filers
- 22% Tax Bracket: Taxable earnings up to $44,726 for single filers and $89,451 for joint filers
- 24% Tax Bracket: Taxable earnings up to $95,376 for single filers and $190,751 for joint filers
- 32% Tax Bracket: Taxable earnings up to $182,101 for single filers and $364,201 for joint filers
- 35% Tax Bracket: Taxable earnings up to $231,251 for single filers and $462,501 for joint filers
- 37% Tax Bracket: Taxable earnings up to $578,126 for single filers and $693,751 for joint filers
How is Inflation Affecting the Standard Deduction in 2023?
The standard deduction will also increase.
- Single Filers: $13,850
- Married Individuals Filing Separately: $13,850
- Married Couples Filing Jointly: $27,700
- Heads of Households: $20,800
Tips for Taxpayers
Tax planning can be very complicated and sometimes it’s best to seek help from professionals in the industry. Give us a call at 800-536-0734 for a free consultation with one of our knowledgeable tax professionals.