Back in October, the IRS released inflation adjustments for 2023 taxes. These provisions range from individual income tax brackets, to standard deductions, to gift and estate tax, among others. 

These limits were instilled in an effort to avoid “bracket creep;” a situation where inflation pushes income into higher tax brackets. While the IRS makes adjustments annually, this year’s record-breaking inflation means more significant adjustments as compared to past years. 

Keep reading to understand how some of your finances may change as the IRS releases inflation adjustments for 2023 taxes.

Standard Deduction

The standard deduction is used by those who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on. Here are some highlights from the IRS updates:

  • The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. 
  • For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900 from the prior year.
  • For heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the prior year.

How Standard Deduction Changes Could Affect You

Since deductions reduce taxable income, the amount that you owe in taxes should be reduced as well. 

Additionally, taxpayers will also see some changes in their marginal tax rate; this means that the amount of additional tax is paid for every additional dollar earned as income.

Tax Bracket Changes 

The IRS is boosting tax brackets by about 7% for tax filers—for both individuals and couples. The top marginal rate, or the highest tax-rate based on income, remains 37% for individual single taxpayers with incomes above $578,125. This also applies for married couples filing jointly with income higher than $693,750.

The lowest rate remains 10%, which will affect those with incomes of $11,000 or less and married couples earning $22,000 or less. 

How Tax Bracket Changes Could Affect You

If your income has increased due to inflation, you may end up saving money because of these changes. Why? Because higher income(s) will become subject to each tax bracket. 

Therefore, if your income stays the same in 2023, and your 2022 income was enough to fall within any of the six upper tax brackets, you’ll be in a lower bracket in 2023.

Flexible Spending Accounts (FSAs)

FSAs allow workers to deposit money in an account for medical expenses. Since funds are taken from their accounts before taxes, it offers savings for many workers. 

The new IRS limit for FSA contributions for 2023 is $3,050. This is a 7% increase from the current threshold of $2,850. 

How the New FSA Limit Could Affect You

If you don’t use all the money in your 2022 FSA by the end of the year, you may be able to roll over a portion or all of your unused funds. 

If your employer’s plan permits the carryover of unused health FSA amounts, the maximum carryover amount rises to $610, up from $570.

Estate and Gift Tax Limit

In 2023, the IRS will exempt up to $12.92 million from the estate tax for people who died in 2022; which is an increase of about 7.1%.

Additionally, the IRS grants a yearly gift tax exclusion. This allows you to make up to a certain amount of gifts to others without worrying about gift tax. In 2023, that amount will rise from $16,000 to $17,000.

How The New Estate And Gift Tax Limit Affects You

The estate tax update means that someone with a taxable estate of $12 million won’t pay any taxes. However, an estate of $13 million would pay 40% tax on the $80,000 amount over the $12.92 million exemption, or $32,000 in estate tax.

In addition, the gift tax exclusion means that you could give five people up to an amount of $17,000, without having to pay gift tax. 

More of the IRS updates in greater detail can be found on their website.

Let Us Guide You Through Your 2023 Taxes

Yearly tax adjustments can be confusing, and as the IRS releases inflation adjustments for 2023 taxes, it can get even more tricky. Luckily, the HAS team is here to help.

Contact us today to learn how our expert team can handle your taxes from start to finish.