On Tuesday, the IRS announced that it’s making adjustments to more than 60 tax provisions due to inflation. These changes could result in tax savings for many people next year. Below is a quick overview of the IRS inflation adjustments for 2023.
For tax year 2023, the standard deduction for married couples filing jointly rises to $27,700. This is up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, an increase of $900. The standard deduction for heads of households will be $20,800 for tax year 2023. This is an increase of $1,400 from tax year 2022.
Marginal Rates (Tax Brackets)
For tax year 2023, the top tax rate remains at 37% for individual single taxpayers with incomes greater than $578,125. For married couples filing jointly, it’s $693,750.
The other marginal rates are:
- 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
- 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
- 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
- 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
- 12% for incomes over $11,000 ($22,000 for married couples filing jointly).
The lowest rate is 10% for single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax exemption amount for single taxpayers will be $81,300 for tax year 2023. This phases out at $578,150. For married couples filing jointly, it’s $126,500 and starts to phase out at $1,156,300. The 2022 exemption amount for single filers was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly with phase-out starting at $1,079,800).
Earned Income Tax Credit
The maximum Earned Income Tax Credit amount for tax year 2023 will be $7,430 for qualifying taxpayers who have three or more qualifying children. That’s up $495 from the previous tax year.
Flexible Spending Accounts
The IRS is raising the limit for flexible spending account (FAS) contributions to $3,050 for tax year 2023. That’s a bump of about 7% from 2022’s threshold of $2,850.
Estate Tax Limit
Wealthy Americans will also get a bigger tax break. The IRS will exempt up to $12.92 million from estate tax. This is a 7.1% increase over the limit of $12.06 million for estates of decedents who died in 2022.
Gift Exclusion Amount
In 2023, taxpayers can give up to $17,000 in gifts without any tax consequences. This is an increase of $1,000 from 2022.
The maximum credit allowed for adoptions increases to $15,950 for tax year 2023, up from $14,890 for 2022.
Foreign Earned Income Exclusion
For tax year 2023, the foreign earned income exclusion is $120,000. That’s an $8,000 increase over the amount in tax year 2022.
By statute, certain items that were indexed for inflation in the past will not be adjusted for tax year 2023.
- Personal Exemption. The personal exemption remains at 0, as it was for 2022. The elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- Itemized Deductions. For 2023, as it has been for the past 5 years, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
- Lifetime Learning Credit Income Threshold. The modified adjusted gross income (MAGI) amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in § 25A(d)(2) is not adjusted for inflation for taxable years beginning after December 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).
For full details on these and all other IRS inflation adjustments, please refer to Revenue Procedure 2022-38.