2023 Tax Changes: IRS Issues Inflation Adjustments
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On Oct. 18, 2022, the IRS announced the annual inflation adjustments for the 2023 tax year. As a result, many key tax provisions — including the income thresholds for the federal tax brackets — will increase by roughly 7% to account for the sky-high inflation Americans have seen throughout 2022. This larger-than-usual adjustment could mean many folks may stay in a lower tax bracket; some may even see a smaller tax bill in 2024.
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Based on the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U, these annual tweaks are a critical part of the tax code. They help to prevent the phenomenon known as "bracket creep," where inflation pushes a taxpayer into a higher tax bracket. Though some taxpayers may not see the effects of these adjustments until they file in April 2024, these changes impact the income they earn in 2023. Knowing all the details now could help folks to plan.
Here's a look at how certain tax thresholds and credits will shift for the 2023 tax year, plus a comparison to 2022.
Federal tax brackets and tax rates
In the U.S., there are seven federal tax brackets. The marginal rates — 10%, 12%, 22%, 24%, 32%, 35% and 37% — remain unchanged from 2022. However, for the 2023 tax year, the IRS is making significant adjustments to many of the income thresholds that inform these brackets.
This means that some folks may be able to stay in a lower tax bracket and those who received a cost-of-living raise may avoid getting a portion of their income pushed into a higher bracket. For example, in 2023, a married couple filing jointly can make a maximum of $89,450 to remain in the 12% bracket, compared with $83,550 in 2022. Toggle between the tabs in the chart below to explore how income thresholds will change across all filing statuses in 2023.
» MORE: The U.S has a progressive tax system. Learn what that means and how taxes are calculated.
Standard deduction
Each year, taxpayers can either itemize their tax return or take the standard deduction to lower their taxable income. For the 2023 tax year, the standard deduction will increase by $900 for single filers and those married filing separately, $1,800 for married couples, and $1,400 for heads of household.
The standard deduction is also $1,500 higher for those over 65 or blind (up from $1,400 in 2022) and $1,850 higher if also unmarried and not a surviving spouse (up from $1,750 in 2022).
Filing status | Standard deduction 2022 | Standard deduction 2023 |
|---|---|---|
Single | $12,950. | $13,850. |
Married, filing jointly | $25,900. | $27,700. |
Married, filing separately | $12,950. | $13,850. |
Head of household | $19,400. | $20,800. |
» Need help deciding whether to itemize or take the standard deduction? Learn about the differences.
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Capital gains tax
Taxes are generally assessed on the profits, or capital gains, generated from the sale of an asset such as a share of a stock or cryptocurrency. Short-term gains are taxed as ordinary income, while long-term gains are charged at either 0%, 15% or 20% based on filing status and taxable income. For the 2023 tax year, the IRS is also increasing the income thresholds for long-term gains. Flip between the years below to compare the thresholds.
What else will change for tax year 2023?
Also included in the IRS' 28-page inflation release are various changes to several tax provisions beyond the federal tax brackets:
The earned income tax credit, a refundable tax credit for low- and moderate-income workers, will also see a bump in 2023. The total credit amount depends on income and the number of children — people without kids can still qualify. For tax year 2022, the earned income credit ranges from $560 to a maximum of $6,935. In 2023, the credit will increase to a maximum of $7,430 for qualifying taxpayers with three or more children.
The annual exclusion for gifts, which limits how much taxpayers can give an individual without filing a gift tax return on certain gifts, will increase to $17,000 per person in 2023, up $1,000 from 2022.
The lifetime estate tax exclusion establishes a threshold for the taxation of estates upon a wealthy person's death. In 2023, estates valued at or below $12.92 million will not be subject to estate tax, up from $12.06 million in 2022.
Starting in 2023, taxpayers who contribute to a health flexible spending account, or FSA, can contribute up to $3,050 and, if permissible by their plan, will be able to carry over up to $610 into the next tax year.
The adoption credit, a tax benefit for folks with qualified adoption expenses, will increase to a maximum of $15,950 in 2022, up from $14,890 in 2022.
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