Tax brackets will rise sharply in 2023 due to record-high inflation, meaning that some taxpayers will get relief.
The Internal Revenue Service this week, as part of its annual inflation adjustments, announced record increases in parameters tied to price levels, such as the standard deduction and income tax brackets, a reflection of the decades-high inflation that has wracked the economy. Annual inflation stood at 8.2% in September, according to the consumer price index.
The standard deduction will rise by approximately 7% next year, meaning that taxpayers will be able to protect more money from income taxation. The standard deduction will go up to $27,000 for married joint filers, up $1,800 from this year. For those filing separately (single or married), the deduction will increase to $13,850, up $900.
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As a result, fewer taxes will be withheld from paychecks, providing people with more take-home pay.
Next year’s seven tax brackets, the lowest at 10% and the highest at 37%, will all be adjusted for inflation. The top bracket of 37% will apply above $693,750 for married joint filers and $578,125 for single or married people filing separately.
The earned income tax credit, which benefits very low income-earning households, will increase from $6,935 in 2022 to $7,430.
These tax bracket increases are the largest automatic adjustment since 1985, when the tax system’s core features were first indexed to inflation.
Not all features of the tax code are indexed to inflation, though. Households in some tax situations might not be protected from the effects of inflation.
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For example, the child tax credit is not indexed for inflation, so its value is declining in inflation-adjusted terms. The maximum child tax credit will stay at $2,000. It phases out when income reaches $200,000 for individual filers and $400,000 for married couples.
Similarly, the $10,000 cap on state and local tax deductions imposed in the 2017 Republican tax overhaul is not tied to a price index. High inflation means that taxpayers in high-tax states, such as New Jersey, are able to save less, in real terms, through SALT deductions.
