Inflation may be pushing prices up, but it also may help push up your take-home pay starting next year.
Thanks to inflation adjustments to 2023 federal income tax brackets and other provisions announced by the Internal Revenue Service this week, more of your 2023 wages may be subject to lower tax rates than they were this year, and you may be able to deduct higher amounts of income.
“It is very likely that you would see more in your paycheck starting in January [due to the IRS inflation adjustments, which] tend to result in lower withholding for a given level of income,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting.
Since the changes don’t apply until 2023, they won’t have any affect on your 2022 tax return that you must file by mid-April of next year.
Here are some of the big changes the IRS is making:
There are seven different federal income tax rates at which earned income is taxed: 10%, 12%, 22%, 24%, 32%, 35% and 37%. And the range of income subject to each of those rates is called a tax bracket.
The more you earn, the higher your “top” rate – that’s the rate at which your last dollar is taxed.
The IRS inflation adjustments amount to a roughly 7% increase in each bracket.
Starting next year, here are the amounts of income that will apply to each rate:
10% applies to the first $11,000 of income for single filers ($22,000 for married couples filing jointly).
12% applies to income over $11,000 ($22,000 for joint filers)
22% applies to income over $44,725 ($89,450 for joint filers)
24% applies to incomes over $95,375 ($190,750 for joint filers)
32% applies to incomes over $182,100 ($364,200 for joint filers)
37% applies to incomes over $578,125 ($693,750 for joint filers)
The standard deduction, which most filers claim, will go up by $900 to $13,850 for single people and by $1,800 to $27,700 for married couples filing jointly.
The standard deduction is the dollar amount that those who don’t itemize deductions can subtract from their adjustable gross income before federal income tax is applied.
Next year, you will be allowed to contribute up to $3,050 to a flexible spending account, which can cover some out-of-pocket healthcare costs not covered by health insurance. That money is deductible so it will reduce the amount of tax taken out of your paycheck. If your employer’s plan also allows you to carry over unused portions of your FSA amount, the maximum carryover permitted will be $610, $40 higher than this year’s maximum.
The Earned Income Tax Credit (EITC) enables low-income workers to keep more of their paycheck. However, they will not get paid the money until they file their 2023 taxes in early 2024.
The IRS raised the maximum amounts one can claim for the EITC by about 7%.
For example, a qualifying taxpayer with three or more qualifying children could get an EITC of up to $7,430 in 2023, up from $6,935 this year.