To combat inflation (opens in new tab), taxpayer’s take-home pay could increase due to adjustments to standard deductions and all seven federal income tax bracket levels. These changes are significant, as they’ll let taxpayers save more money on taxes while rising prices and inflation continues to eat away at their purchasing power.
This move by the IRS should offset the strain on taxpayers who received cost-of-living pay increases that put them in a new tax bracket while their standard of living remained the same.
These changes will apply in 2023.
Adjusted Tax Brackets
There are seven federal income tax brackets, each with a different rate of taxation. Due to the new rules laid out by the IRS, each bracket will have a 7% increase. Here are the income ranges for each rate (opens in new tab).
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 IRS also announced changes to standard deductions in 2023 as well. Standard deductions are a specific dollar amount that reduces the amount of income on which you're taxed.
- For single filers, standard deductions will be increased from $900 to $13,850.
- For married filers, standard deductions will be increased from $1,800 to $27,700.
- For heads of household, standard deductions will increase from $19,400 to $20,800.
Flexible spending accounts
Flexible spending accounts allow you to sock away money up to a limit designated by the IRS to pay for future medical expenses not covered by insurance. Since the funds are taken out on a pre-tax basis, it reduces the amount of taxes that are taken from your paycheck.
Next year, the contribution maximize will be raised to $3,050, which is 7% higher than the current limit of $2,850. Plus, if you're allowed to carry over unused portions of your FSA total, the maximum for these carryovers will be raised $40 next year, equaling $610.
Earned Income Tax Credit
The Earned Income Tax Credit, geared toward families with low to moderate income will also have an increase next year, meaning more money for you and your family. The IRS is raising the credit for families with more than three children from $6,935 to $7,430, a 7% increase.