The income thresholds for seven federal tax brackets have been increased by a larger-than-normal amount for the 2023 tax year to reflect the runaway inflation seen last year.
“They’re just normal changes due to inflation,” Jon Whitten of the Institute on Taxation and Economic Policy told Yahoo Finance. “These years are more dramatic because inflation has also been dramatic.”
The inflation-adjusted amounts have jumped more than 7% since 2022, according to the Tax Policy Center, compared with last year’s 3% increase. The changes themselves are not a new development — the IRS adjusts its tax brackets for inflation every year.
One positive outcome: Taxpayers whose incomes did not rise relative to inflation last year are likely to avoid an increase in their tax bracket in 2023 and end up paying lower taxes.
Federal income tax changes in 2023
For the 2023 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your tax bracket is determined by your taxable income and filing status, and shows what tax rate you’ll pay on each part of your income.
According to the IRS, the income thresholds for all categories will increase as follows:
Remember: these are progressive marginal rates. This does not mean that if you have $100,000 of taxable income as a single taxpayer, you are taxed at 24% on the entire amount.
Instead, the first $11,000 is taxed at 10% in 2023, the next dollars up to $44,725 are taxed at 12%, the next dollars up to $95,375 are taxed at 22%, and the last dollars over $95,375 are taxed at a rate of 24%. .
What these increases mean for you
According to the latest data from the Bureau of Labor Statistics, wages rose just 4.4% for the 12-month period ending in September 2022, up just 2.4% from a year earlier. Although some people saw a jump in their wages last year, most of those gains still lagged behind rising inflation levels.
“The purpose of adjusting tax brackets for inflation is to reduce the impact or mitigate the impact of inflation,” Eric Bronenkant, head of tax at Betterment, told Yahoo Finance. “Let’s say some people got a 10% raise last year, while others may not have got any raise at all.” It is possible that people whose income has outstripped the estimated 7% increase in inflation may now be paying more tax because their tax bracket is higher, while those on wages with little growth may be paying less.
This means that taxpayers whose wages have not kept up with inflation can bypass the limit. According to the Tax Foundation, this happens when inflation pushes you into a higher income tax bracket, which will reduce the value of credits, deductions and exemptions.
“You still have to remember that the 7% increase in the tax bracket is still a rough estimate of inflation and it’s never about any person’s individual situation,” Bronenkant said. “Inflation may have been low, but you lived somewhere where your landlord raised your rent by 10% and your personal expenses may have gone up a lot.” It’s not perfect for everyone, but it’s the best the IRS can do to average inflation for a lot of people.”
Gabriela is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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