Income thresholds for all seven federal tax brackets have increased by a larger than normal amount for the 2023 tax year to reflect runaway inflation seen last year.
“These are just the usual changes due to inflation,” said Jon Whiten, of the Institute for Tax and Economic Policy at Yahoo Finance. “More dramatic this year since inflation has also been dramatic.”
Inflation-adjusted amounts jumped more than 7% from 2022, according to the Tax Policy Center, compared to the 3% increase of last year. The changes themselves are not a new development – the Internal Revenue Service adjust its tax brackets each year to account for inflation.
One positive result: Taxpayers whose income did not keep pace with inflation last year are likely to avoid tax bracket creep in 2023 and ultimately pay less tax.
2023 Federal Income Tax Bracket Changes
For the 2023 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your tax bracket is determined by your taxable income and filing status and indicates the rate of tax you will pay on each part of your income.
According to the IRS, the income thresholds for all brackets will increase as follows:
Remember: these are progressive marginal rates. This does not mean that if you have $100,000 of taxable income as a single taxpayer, you are taxed at 24% on that entire amount.
Instead, the first $11,000 is taxed at 10% in 2023, the next dollars up to $44,725 are taxed at 12%, the next dollars up to $95,375 are taxed at 22%, and the last dollars above $95,375 are taxed at 24%.
What these increases mean for you
According to the latest statistics from the Bureau of Labor Statistics Data, wages rose just 4.4% for the 12 months to September 2022, up just 2.4% from a year earlier. Although some people saw their wages increase last year, most of those gains still fell short of rising inflation levels.
“The whole point of adjusting tax brackets to inflation is to reduce the impact or mitigate the impact of inflation,” said Eric Bronnenkant, head of tax at Improvement, told Yahoo Finance. “Let’s say some people got a 10% pay raise last year, while others may not have gotten a raise at all. Arguably, people whose incomes have exceeded the estimated 7% rise in inflation now pay more taxes because their tax bracket is higher, while those whose wages have risen little may be paying be less.
This means that taxpayers whose wages have not kept up with inflation are able to circumvent bracket creep. According to the Tax Foundation, this happens when inflation pushes you into a higher tax bracket, which will reduce the value of credits, deductions, and exemptions.
“You should always remember that a 7% tax bracket increase is always a rough estimate of inflation, and it’s never about a person’s individual situation,” said Bronnenkant. “It’s possible that inflation was low, but you lived somewhere where your landlord raised your rent by 10% and your personal expenses may have increased a lot. It’s not perfect for everyone, but it’s the best the IRS can do to average inflation for a lot of people.
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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