IRS Raises Tax Brackets and Standard Deduction in Response to Inflation

In the largest automatic adjustment to the standard deduction since core features of the tax system were indexed to inflation in 1985, the IRS has increased key tax code parameters for 2023 to reflect high inflation rates.

The top 37% top marginal tax rate will apply to individual income above $578,125 and married couples’ income above $693,750 as thresholds increase 7%, according to a recent article from The Wall Street Journal, “Inflation Causes IRS to Raise Tax Brackets, Standard Deduction by 7%”

The standard deduction will also increase to $27,700 for married couples and $13,850 for individuals, up about 7% for 2023. The maximum contribution to a healthcare flexible spending account will increase too, from $2,850 in 2022 to $3,050 in 2023.

The tax code adjustments are unusually high because inflation is now higher than it has been for the past forty years.

The goal is to prevent inflation from causing tax increases. They will appear as lower tax withholdings from paychecks as early as January 2023 and create larger take-home pay early next year.

The six tax brackets are below the top 37% bracket, with thresholds for married couples (double the individual taxpayer thresholds). These rates apply to taxable income.

In 2023, for individuals in 2023, the rates will be:

  • 10% bracket goes up to $11,000,
  • 12% bracket goes up to $44,725,
  • 22% bracket goes up to $95,375,
  • 24% bracket goes up to $182,100,
  • 32% bracket goes up to $231,250,
  • 35% bracket goes up to the top-bracket threshold.

The federal estate and gift tax unified exemption increases in 2023 to $12.92 million, and the annual gift tax exclusion rises to $17,000. Those who have used their unified credit can make up to $900,000 in gifts tax-free.

Reference: The Wall Street Journal (October 18, 2022) “Inflation Causes IRS to Raise Tax Brackets, Standard Deduction by 7%”