While inflation continues to burden Americans with higher prices on what seems like everything, the IRS has released some good news for taxpayers. In October, the IRS unveiled its inflation adjustments for the 2023 tax year with many tax provisions increasing by approximately 7%. This means you could pay a smaller tax bill next year.
“The IRS makes these adjustments every year, however this year will see more significant changes because of the high rate of inflation.” Says Scott Miller, Pinion tax solution advisor, “We all feel it right now – at the pump, at the grocery store, it hits everyone. Hopefully this will provide a slight relief for many people.”
Although these changes won’t apply until next year’s tax season, it’s important to keep these changes in mind as you strategize investments this year. Here’s what you need to know:
Key Takeaways from Tax Inflation Adjustments
Income Tax Bracket
High-income taxpayers will see nearly $40,000 more in income that won’t be taxed in the highest income tax bracket.
The top income rate of 37% will is bumped up:
- For single taxpayers, the threshold will be $578,125, up from $539,000 in tax year 2022
- For married couples filing jointly, the threshold will be $693,750, up from $647,850 in 2022
The standard deduction increases to:
- $27,700 for married couples filing jointly (up $1,800 from 2022)
- $13,850 for single taxpayers and married couples filing separately (up $900 from 2022)
- $20,800 for head of household taxpayers (up $1,400 from 2022)
Alternate Minimum Tax Exemption
The alternative minimum tax exemption amount will also increase by 7%, from $75,900 in 2022 to $81,300 in 2023. The maximum amount of the earned income tax credit for eligible taxpayers will rise to $7,430.
Estate Tax Exemption
The estate tax exemption for 2023 will rise to $12.92 million per person, up from $12.06 million per person in 2022.
The annual exclusion for gifts will be $17,000 in 2023, up from $16,000 in the 2022 tax year.
Things to Consider
Aside from the income tax brackets, one of the biggest changes is the gift tax. For producers with an estate plan in place, you now have $860,000 more to gift with the higher exemption rates. If your worth has gone up, you could use the extra money to forgive notes, or you could simply put more money or property in the trust for the next generation.
It’s important to note that the doubled estate and gift tax exemption is scheduled to sunset January 1, 2026 and drop down to $5 million adjusted for inflation – or roughly $6.5 to $7 million. Talk to your advisor about your plans and how they may change in the coming years – it may be in your best interest to take advantage of the higher exemptions while they last.
Contact a Pinion tax expert with any questions on how these changes may impact your taxes next year and your business strategies this year.