On October 18, 2022, the IRS announced higher federal income tax rates and basic deductions for 2023 amid skyrocketing inflation.
The agency raised the income criteria for each bracket, taking effect for the tax year 2023 and tax returns in 2024.
The tax brackets show how much federal income tax you will have to pay on each part of your “taxable income.” Your “taxable income” is found by subtracting your itemized deductions or basic deductions from your gross pay, whichever is higher.
What’s new for 2023
The fuel-efficient commercial buildings deductions will be adjusted for inflation starting with the tax year 2023 according to the Inflation Reduction Act, which also extended other tax advantages connected to energy.
For the tax year 2023, the appropriate dollar amount used to calculate the maximum deduction is $0.54 raised (but not beyond $1.07) by $0.02 for every percent that the total yearly energy and power expenses for the property are certified to have decreased by a percentage of more than 25%.
Suppose the total yearly energy and power expenditures for the building are confirmed to have decreased by a percentage of more than 25%.
In that case, the appropriate dollar value used to calculate the enhanced deduction amount for that building is an increase of $2.68 (but not over $5.36).
Revenue procedure changes in 2023
The tax records filed in 2024 generally must make the modifications listed below for 2023.
The following totals represent the tax components for the fiscal year 2023 that most taxpayers will find most interesting:
- For married people filing jointly in the tax year 2023, the standard deduction increases to $27,700, an increase of $1,800 over the previous year. In addition, the tax deduction will increase by $900 for single filers and married taxpayers filing separately to $13,850 for the tax year 2023. For heads of households, the tax deduction will increase by $1,400 to $20,800 for the fiscal year 2023.
- Marginal Rates: For the tax year 2023, the highest tax rate for single taxpayers who make more than $578,125 or $693,750 if they are married and file jointly will stay at 37%.
- Other rates include:
- Earnings exceeding $231,250 are subject to a 35% tax ($462,500 for married people filing jointly).
- Earnings exceeding $182,100, or $364,200 for married people filing jointly, are subject to a 32% tax.
- Over $95,375 in income is subject to a 24% tax rate ($190,750 for married people filing jointly).
- Earnings exceeding $44,725 are subject to a 22% tax (or $89,450 for married people filing jointly).
- Earnings exceeding $11,000 are subject to a 12% tax rate ($22,000 for married people filing jointly).
- The lowest percentage for single people with $11,000 or lower earnings is 10% ($22,000 for married people filing jointly).
- Other rates include:
- For the 2023 tax year, the Alternative Minimum Tax break is set at $81,300 and phases out starting at $578,150 ($126,500 for married people combined income for whom the exemption phases out starting at $1,156,300). The exemption threshold for 2022 was $75,900, gradually decreasing to $539,900 ($118,100 for married people filing jointly, for whom the exemption gradually decreased to $1,079,800).
- For qualified taxpayers with three or more eligible children, the highest Earned Income Tax Credit limit for 2023 is $7,430, up from $6,935 for the previous year. The revenue procedure shows a table that shows the maximum EITC amount, income thresholds, and phase-outs.
- For the tax year 2023, the monthly limit for qualifying parking and qualified transportation fringe benefits goes up to $300. This is $20 more than the limit for the tax year 2022.
- The cash cap on employee pay cuts for payments to health flexible spending accounts rises to $3,050 for the tax years starting in 2023. The highest carryover amount for cafeteria programs that allow the carrying over of excess amounts is now $610, a rise of $40 from the tax period starting in 2022.
- The plan’s annual deductible must be at least $2,650 for the tax year 2023 (an increase of $200 from the tax year 2022) and at most $3,950 (a rise of $250 from the tax year 2022) for individuals with self-only insurance in a Medical Savings Account. The maximum out-of-pocket cost for self-only coverage is $5,300, an increase of $350 from 2022. A family coverage’s yearly deductible for the tax period 2023 is $5,300, rising from $4,950 for the tax period 2022. It cannot exceed $7,900, an increase of $500 from the cap for the tax period 2022. The out-of-pocket expenditure cap for family coverage is $9,650 for tax period 2023, up $600 from tax period 2022.
- The international earned income exclusion has been raised to $120,000 for the tax year 2023, up from $112,000 in the previous year.
- The basic exclusion amount for estates of decedents who pass away in 2023 is $12,920,000, up from $12,060,000 for those who passed away in 2022.
- For the calendar year 2023, the yearly exclusion for gifts rises to $17,000 from $16,000 for the previous year.
- For the tax year 2023, the most credit that adoptive families can get is up to $15,950, which is up from $14,890 for the tax year 2022.
Unaffected items
Once indexed for inflation, some items are presently not updated by legislation.
- This removal of the standard deduction was a provision of the Tax Cuts and Jobs Act, and it will remain at zero for the tax year 2023 as it did for 2022.
- There is no itemized deduction cap for 2023, as in previous years. This is because the Tax Cuts and Jobs Act removed the cap on itemized deductions.
- For the tax period beginning after December 31, 2020, joint filers modified gross income amount to calculate the decrease in the Lifetime Learning Credit given in section 25A(d)(2) is not adjusted for inflation. Therefore, the Lifetime Learning Credit is scaled off for taxpayers whose modified adjusted gross income exceeds $80,000 ($160,000 for joint returns).
Image by: [Steve Buissine]