Inflation has caused the IRS to revise its income tax brackets, meaning that most individuals will likely see a reduction in how much their paychecks are taxed.
As inflation in the United States continues to climb, the IRS has taken action by adjusting income tax brackets and standard deductions. This is good news for filers, who have felt the impact of the rising costs of food, housing, and energy. Each year the IRS adjusts for inflation, but this year, adjustments were highly anticipated as rates have grown by nearly 7 percent.
The shifts will help reduce tax liability for all income tax brackets, although the biggest difference is most notable for single filers that make over $578,125 and married couples filing jointly who make over $693,750 annually. The difference is nearly $40,000 compared to tax brackets this year. The new adjustments won’t take effect until 2023, which means that filers won’t see the changes until they file their tax returns in 2024 for the year prior.
In addition to income tax brackets, standard deductions that tax filers can claim will also be adjusted. For married couples, “the standard deduction will increase by $1,800” and “by $1,400 for heads of household,” reported The Hill. Single taxpayers will see an increase of $900 for their standard deduction.
The income tax brackets are what concerns taxpayers the most, as they determine what percentage of income filers are responsible for. The rates themselves did not change, and are still anywhere from 10 percent to 37 percent. The change is in the income limits, which means that taxpayers could be provided more room income at a lower tax rate.
For those single taxpayers that make under $11,000 per year, their tax rate falls under 10 percent. Last year, the 10 percent income tax bracket cutoff was $10,275. For married couples filing jointly, the 10 percent income tax bracket went up from $20,550 to $22,000.
The 2022 income tax bracket for single taxpayers that make $90,000 holds a 24 percent tax rate. In 2023, that income would fall under a different tax bracket that would hold a 22 percent tax rate. The difference would reduce some tax liability for those single taxpayers when they file their taxes in 2024.
Taxpayers in 2023 who fall under middle-class will also see a difference in tax rates, as the 32 percent rate kicks in after an annual income of $182,100 for individuals and $364,200 for married couples filing jointly. A 35 percent rate income tax bracket will start at over $231,250 and $462,500 for single and married couples, respectively. For taxpayers whose jobs have adjusted pay to account for inflation, the benefits of the tax changes won’t make a difference.
However, for most workers, companies have not adjusted salaries to keep up with inflation. In fact, the Labor Department said that “weekly earnings declined” by 4 percent last week, reported The New York Times. For those taxpayers, the income tax bracket shifts can make a significant impact on the amount of money they can keep when they file their taxes in 2024.
In addition to the changes in income tax brackets, the Earned Income Credit, or EIC, is another welcome adjustment for 2023. The credit is available for low-income workers and currently provides a credit of up to $6,935. Next year, the EIC will be worth up to $7,430.
The IRS’ income tax bracket adjustment is just one example of how government institutions are making changes to try and keep up with inflation. Since the cost of living has risen, Social Security payroll taxes will be subject to earnings of up to $160,200 in 2023, where previously the cap was at $147,000. The move comes after an 8.7 increase in Social Security benefits was announced last week.