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.
Standard Deduction
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.
Adoption Credit
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.
Unaffected Items
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.