Inflation can require many things to be adjusted. This includes Social Security payments, but also tax brackets with the IRS. The worse inflation is, the more drastic changes will be, and the tax bracket projections are grim.
Why are tax brackets adjusted every year to keep up with inflation?
According to Oklahoma’s Own News Channel 9, the changes stop something called “bracket creep” from happening. The bracket creep happens within the IRS as the cost of living rises. This makes it so anyone that was given a raise or new salary to offset inflation isn’t thrown into a higher tax bracket. This is adjusted because despite the income boost, the standard of living is the same due to inflation.
The changes are made to tax brackets using a specific formula and the new rate of inflation. They won’t be announced until later this fall in October or November. With the highest rate of inflation since the 1980s, an expert working with the American Enterprise Institute has predicted a 7% increase.
These new numbers are important because taxpayers need to know them to plan ahead. Things like investments and withholdings are determined using how much someone plans to pay in taxes. Those who put money into their flexible spending accounts need to decide what to set aside for their 2023 accounts in October or November when open enrollment happens.
In addition to changes in tax brackets, there will likely be a higher standard deduction to help lower taxes. In addition to tax brackets changing and standard deductions likely increasing, the limit to what you can invest in an IRA will probably go up as well. Right now the limit is just $6,000 per year, so many people invest $500 per month. Should that limit increase, people may want to make higher deposits every month to get the biggest benefit they can.
The new tax bracket estimates for 2023
According to CPA Practice Advisor, the tax code increase is set to be about 7.1% for 2023. In 2022 that increase was just 3%.
Income tax rate brackets are predicted to change to the following
Married filing jointly
- 10% – $0 to $22,000
- 12% – $22,000 to $89,450
- 22% – $89,450 to $190,750
- 24% – $190,750 to $364,200
- 32% – $364,200 to $462,500
- 35% – $462,500 to $693,750
- 37% – $693,750 or more
Single filers
- 10% – $0 to $11,000
- 12% – $11,000 to $44,725
- 22% – $44,725 to $95,375
- 24% – $95,375 to $182,100
- 32% – $182,100 to $231,250
- 35% – $231,250 to $578,125
- 37% – $578,125 or more
Standard deduction changes
- Married filing jointly and surviving spouses: $27,700
- Head of household: $20,800
- Everyone else: $13,850
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Samantha edits our personal finance and consumer news section. Have a question or lead? Send it to [email protected].