Tax season is still months away, but knowing what to expect in terms of potential refunds is never too early — especially when inflation is wreaking havoc on household budgets.
The Internal Revenue Service announced how much certain inflation-indexed tax provisions would be adjusted for returns filed in 2023 just hours after data showed the rate of inflation hit a 31-year high in October.
The IRS has already announced the inflation adjustments for provisions such as the standard deduction that will be effective for returns filed in 2022. These routine adjustments were made in October of last year.
The most recent changes to more than 60 provisions were made prior to the release of the Consumer Price Index on Wednesday morning, IRS spokesman Anthony Burke said.
The inflation adjustments for tax years 2021 and 2022, taken together, sketch out what taxpayers can expect in the future. And if inflation isn’t “transitory,” the adjustments made now will be even more important when it comes time to file taxes in 2023. Here’s an example:
In 2022, the standard deduction increases to $25,100 for married couples filing jointly. This represents a $300 increase. It rises by $800 to $25,900 for 2023 returns.
The standard deduction for single filers and married individuals filing separately rises to $12,550 in 2021 returns, a $150 increase. The deduction rises to $12,950 the following year, a $400 increase.
The income levels that apply to each tax bracket rise and fall along the income scale. For example, the top 37 percent rate in 2021 applies to individuals earning $523,600, or $628,300 for married couples filing jointly. In 2022, the richest households will face the highest rate for incomes exceeding $539,900 or $647,850 for married couples filing jointly.
For the first time in several years, the annual exclusion from gift tax rises. According to the IRS, the threshold before taxes on gifts was $15,000 from 2018 to 2021. It will increase to $16,000 in 2022, with returns due in 2023.
The Earned Income Tax Credit, a credit for low- and middle-income families, is also being increased. For qualifying households with three or more eligible children, the maximum credit for 2021 returns is $6,728. The following year, households with three or more children will receive $6,935, according to the IRS. The American Rescue Plan, which was passed in March, broadened the EITC’s rules, qualifications, and potential payouts, especially for workers without children.
Of course, if the Biden administration’s social safety net bill passes, other taxes on the super-rich could be on the way. The president’s most recent tax increase proposal calls for a 5% surtax on households earning at least $10 million and an 8% surtax on households earning more than $25 million.
The Tax Cuts and Jobs Act of 2017 reduced the rates on the majority of income tax brackets. However, keep in mind that when certain provisions of the Tax Cuts and Jobs Act expire at the end of 2025, these rates, including the top rate, will revert to higher rates. According to the Tax Policy Center, one permanent change from Trump-era legislation is the method of indexing tax provisions for inflation.
Without getting too technical, the think tank stated that the new measure “generally increases at a slower rate” than the previous one, which may result in “individuals ending up in higher tax brackets.” It also means that tax credits indexed for inflation “will grow at a slower rate than they would have under the old indexing system,” according to the researchers. Slower increases in EITC payouts are one result of the new inflation indexing methods, according to the Tax Policy Center.