December 4, 2022

The IRS on Tuesday said it is adjusting many of its rules to account for the impact of inflation, ranging from individual income tax brackets for 2023 to the standard deduction.

The higher limits are aimed at avoiding “bracket creep” due to inflation, which can push workers who received annual cost-of-living pay increases into higher tax brackets even though their standard of living hasn’t changed. 

The IRS makes such adjustments annually, but this year’s hot inflation means that many of the changes are more significant than in a typical year. Americans are struggling with stubbornly high inflation, which is eating into their purchasing power as average wage gains lag the sharp rise in prices. The higher provision thresholds could provide relief to some taxpayers who fall into lower tax brackets as a result. 

Here are the changes announced by the IRS on Tuesday, with the inflation-adjusted provisions taking effect for the 2023 tax year. Taxpayers will file their 2023 tax returns in early 2024. 

Standard deduction

The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on. 

  • For married couples filing jointly, the standard deduction will rise to $27,700, up from $25,900 in the current tax year. That’s an increase of $1,800, or a 7% bump. 
  • For single taxpayers and married individuals filing separately, the standard deduction will rise to $13,850 in 2023 from $12,950 currently. That’s an increase of about 6.9%.
  • Heads of households will see their standard deduction in 2023 jump to $20,800 from $19,400 this year. That’s an increase of 7.2%. 

Tax brackets

The IRS is boosting tax brackets by about 7% for each type of tax filer, such as those filing separately or as married couples. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above $578,125 or for married couples with income higher than $693,750. 

The lowest rate remains 10%, which will impact individuals with incomes of $11,000 or less and married couples earning $22,000 or less. Below are charts with the new tax brackets.

Flexible spending accounts

Flexible spending accounts allow workers to put money, up to the limit allowed by the IRS, in an account that can be used to pay for medical expenses. Because the funds are taken from their accounts on a pre-tax basis, it offers tax savings for many workers. 

The new IRS limit for FSA contributions for 2023 is $3,050, an increase of about 7% from the current tax year’s threshold of $2,850. 

Because employees set their FSA limits in the fall, ahead of the new calendar year, people will be using this new IRS threshold to decide on their contributions within the next few weeks.

Earned Income Tax Credit

The maximum amount for households who claim the Earned Income Tax Credit will be $7,430 for those who have at least three children, compared with $6,935 in the current tax year, the IRS said.

Bigger gift exclusion

People can also give up to $17,000 in gifts in 2023 without paying taxes on the money, up from $16,000 in the current year.

Estate tax limit

The estates of wealthy Americans will also get a bigger break in 2023. The IRS will exempt up to $12.92 million from the estate tax, up from $12.06 million for people who died in 2022 — an increase of 7.1%.

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