According to an Internal Revenue Service tax attorney, the IRS has adjusted its key Internal Revenue Code (“IRC”) parameters to reflect higher inflation. These new parameters take effect in 2023. Some of the changes include a standard deduction raise as well as different income thresholds for each tax rate.
Starting in 2023, the 37 percent top tax rate applies to those whose income is over $578,125 annually. According to a tax attorney in San Jose, this figure is $693,750 for married couples. The announcement, which was made last Tuesday, indicates that these new thresholds are 7 percent higher than the 2022 thresholds.
These inflation adjustments also include an increase in the amount of the standard deduction, which will go to $13,850 for single individuals, and $27,700 for married couples. This increase is also about 7 percent higher than its 2022 counterpart. The new parameters also reflect a $200 increase in the maximum contribution to a healthcare flex spending account. This amount was $2,850 in 2022, but will climb to $3,050 beginning in 2023.
Highest Inflation in Four Decades
These recent changes are due to inflation reaching its highest point in four decades. The aforementioned adjustments are made automatically on a yearly basis, are indexed to inflation, and are based on guidelines set by Congress. Analysts predicted these changes fairly accurately, including the automatic adjustment to the standard deduction, which was the largest one since 1985. The goal of this strategy is to prevent an inflation-propelled federal tax increase.
Taxpayers may notice paycheck withholdings reflecting these changes as early as January 2023, at which point they will begin receiving higher percentages of take-home pay. The new standard deduction and wider parameters will be used to file returns in 2024.
Certain Tax Adjustments Not Yet Released
Six tax brackets exist beneath the top 37 percent bracket, and the rates apply to income after deductions, otherwise known as taxable income. Thresholds for married couples in all of these categories are twice as much as the individual taxpayer threshold for that category.
Some of the yearly adjustments for 2023 have not yet been released by the IRS. These include the maximum amount of 401(k) pretax contributions and income thresholds for retirement accounts.
Inflation Adjustment Made for Social Security Payroll Tax
The Social Security Administration published the inflation adjustment for Social Security payroll tax for 2023, and the new threshold for earnings rose from $147,000 to $160,200, with the latter threshold going into effect in 2023.
According to tax lawyers, most dollar figures in the IRC are adjusted for inflation on a yearly basis. This is because if inflation is high, deductions and credits lose their value more quickly if they are not automatically changed.
For instance, the maximum child tax credit stays at $2,000, but, when an individual’s income reaches $200,000, or a married couple’s income reaches $400,000, the credit begins to phase out. There is a $3,000 cap on the deduction for capital losses against ordinary income, and $10,000 is the limit on the local and state tax deduction. These changes can be confusing, leading some people to google “tax attorney near me” for additional information. This is also a good idea for anyone who needs the services of a back-taxes attorney. Only a tax professional is qualified to give advice or offer assistance regarding the filing of a return, claiming a refund, or navigating the new IRC parameters.