Inflation’s silver lining from an unlikely place

As Americans continue to adjust to increasing prices for housing, food, energy, and everyday necessities due to rising inflation, taxpayers may see relief from an unlikely source, the Internal Revenue Service. On Tuesday, Oct. 18, the IRS announced new inflation adjusted tax rates and deductions for 2023.

The Federal income tax rates don’t change from year to year, but thanks to a provision passed in 1981 (the country’s most recent period of high inflation), the brackets are automatically adjusted to account for changes in the Consumer Price Index. The provision is designed to keep taxpayers from being pushed into a higher tax bracket, also known as bracket creep, when their real (inflation adjusted) income is essentially unchanged from the previous year. Taxpayers whose income hasn’t kept pace with inflation could actually experience a tax cut.

The IRS also announced the largest one-year increase in retirement plan contribution limits for 2023. In addition, the Social Security Administration announced two changes for the upcoming year:

1. an 8.7% increase to benefits, the largest cost-of-living adjustment since 1981,
2. an increase in the maximum amount of earnings subject to FICA payroll tax, an increase to $160,200 from $147,000.

Marginal Rates

Single

37% for incomes over $539,900 (increases $38,225 to $578,125 in 2023);
35% for incomes over $215,950 (increases $15,300 to 231,250 in 2023);
32% for incomes over $170,050 (increases $12,050 to $182,100 in 2023);
24% for incomes over $89,075 (increases $6,300 to $95,375 in 2023);
22% for incomes over $41,775 (increases $2,950 to $44,725 in 2023);
12% for incomes over $10,275 (increases $725 to $11,000 in 2023);
10% for incomes up to $10,275 (increases $725 to $11,000 in 2023).

Married Filing Jointly

37% for incomes over $647,850 (increases $45,900 to $693,750 in 2023);
35% for incomes over $431,900 (increases $30,600 to $462,500 in 2023);
32% for incomes over $340,100 (increases $24,100 to $364,200 in 2023);
24% for incomes over $178,150 (increases $12,600 to $190,750 in 2023);
22% for incomes over $83,550 (increases $5,900 to $89,450 in 2023);
12% for incomes over $20,550 (increases $1,450 to $22,000 in 2023);
10% for incomes up to $20,550 (increases $1,450 to $22,000 in 2023).

Gift and Estate Taxes

Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.

Note: The full set of IRS adjustments to retirement plans limits for 2023 are available at https://www.irs.gov/pub/irs-drop/n-22-55.pdf.

Written by Jarrett E. Hindrew, CFP®, ChFC® Creative Financial Group