The Internal Revenue Service (IRS) announced inflation adjustments for the tax year 2023, despite the fact that inflation rates are at their highest in several decades. These inflation adjustments are among the largest in history, and they will change individual income tax brackets as well as increase some key tax deductions and credits for the tax year 2023. (the taxes you will file in 2024).
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Every year, the IRS announces incremental adjustments to tax benefits that are tied to inflation. However, following a year of the highest inflation growth in four decades, this year’s adjustments are more significant than in previous years. For the tax year 2023, the most notable increases are around 7% for standard deduction amounts, income tax brackets, and the Earned Income Tax Credit. Separately, the IRS announced a record increase in retirement contribution limits for 2023.
“What are the inflation adjustments?” you may be wondering, “What tax benefits are increased by inflation adjustments?” “What are the inflation adjustment amounts for the standard deduction, Earned Income Tax Credit, and income tax brackets?” and “What are the increased retirement contribution limits?”
The standard deduction is a specific deduction that the IRS allows each year and adjusts for inflation. The standard deduction is determined by filing status, and you can receive an additional amount if you are 65 or older or blind. According to the IRS, nearly 90% of taxpayers now take the standard deduction rather than itemizing their deductions as a result of tax reform. With the recently announced inflation adjustments, even more people may opt for the standard deduction rather than itemizing their deductions because their standard deductions may be higher.
The standard deduction for single taxpayers (and those married filing separately) increases to $13,850 in 2023 (up $900 from $12,950 in tax year 2022). The 2023 standard deduction for couples married filing jointly is $27,700 (up $1,800 from $25,900 in tax year 2022). For those filing head of household, the standard deduction will be $20,800 for the tax year 2023 (up $1,400 from $19,400 amount for the tax year 2022).
Taxpayers who are blind or over the age of 65 can claim an additional standard deduction of $1,500 per person in 2023 (up from $1,400 in 2022), or $1,850 if they are unmarried and do not have a surviving spouse. The additional deduction amount is doubled if you are both 65 or older and blind (totaling $3,000 in 2023).
If you can be claimed as a dependent on another person’s tax return beginning in tax year 2023, your standard deduction is limited to the greater of $1,250 or your earned income plus $400.
Capital gains are generally profits made from the sale of assets and investments such as stocks, bonds, cryptocurrency, and real estate. The taxation of an asset is determined by how long you have held it (short term vs long term). Most net capital gains are taxed at 15% or less for the majority of people, and some or all net capital gains may be taxed at 0% depending on your income.
For the tax year 2023, if your taxable income is more than $44,625 but less than or equal to $492,300 for a single filer (or more than $89,250 up to $553,850 for those married filing joint returns), a capital gains rate of 15% applies.
The top rate of 20% will not apply until a single filer’s income exceeds $492,300 or a married filing joint filer’s income exceeds $553,850.