The IRS has announced new tax brackets for the year 2023. These brackets will be in effect when you file your federal 2023 annual income tax return in 2024. The upper limits of these new inflation-adjusted brackets have gone up about 7%, potentially providing financial relief as incomes may struggle to keep pace with inflation in today’s economy.
What is a tax bracket?
A tax bracket is a range of incomes taxed at a specific rate. In the U.S., the IRS uses a progressive tax rate to determine how much an individual or business will owe in yearly taxes. A progressive tax is when the tax rate you pay increases as your income rises.
Why do tax brackets change?
In 2017, President Trump signed new tax rates into law that overhauled the U.S. tax code. Tax rates changed from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% to the current rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates will expire in 2025, reverting to pre-2018 unless a new tax law is enacted.
While the IRS doesn’t change rates, it adjusts income levels, personal exemptions, standard deductions, and other tax credits each year due to changes in the cost of living. As inflation grows, the IRS typically adjusts income levels in each bracket to avoid “bracket creep” — an increase in income taxes without an increase in real income.
The IRS uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly. Before the 2017 new tax law, it used the Consumer Price Index (CPI). Investopedia says, “the C-CPI is an alternative measurement for the CPI that considers changes to consumer spending patterns to provide a more accurate picture of the cost of living based on the goods that consumers actually buy.”
The C-CPI does not take into consideration changes in wages due to inflation. These inflation-adjusted brackets do not address that your real income fell, which means that your income covered fewer goods and services due to inflation during the year.
The IRS uses C-CPI data from August of the previous year to September of the following year. So for 2022 tax brackets, C-CPI values from August 2020 to September 2021 were used, which did not reflect the high inflation that most Americans faced in 2022 as inflation was lower in 2021. This higher inflation will be reflected in the 2023 tax brackets, so even if inflation goes down in 2023, the tax brackets will remain higher.
New tax brackets for 2023 versus 2022
Below are charts showing 2022 tax brackets versus the 2023 tax brackets that will be used for filings in 2024. These new tax brackets were based on the average annual C-CPI values each month from August 2021 to September 2022.
For individual single taxpayers – taxable income: | ||||||||
---|---|---|---|---|---|---|---|---|
2022 | 2023 | |||||||
10% | up to $10,275 | up to $11,000 | ||||||
12% | between $10,275 and $41,775 | between $11.000 and $44,725 | ||||||
22% | between $41,775 and $89,075 | between $44,725 and $95,375 | ||||||
24% | between $89,075 and $170,050 | between $95,375 and $182,100 | ||||||
32% | between $170,050 and $215,950 | between $182,100 and $231,250 | ||||||
35% | between $215,950 and $539,900 | between $231,250 and $578,125 | ||||||
37% | over $539,900 | over $578,125 |
For married individuals filing jointly – taxable income: | ||||||||
---|---|---|---|---|---|---|---|---|
2022 | 2023 | |||||||
10% | up to $20,550 | up to $22,000 | ||||||
12% | between $20,550 and $83,550 | between $22,000 and $89,450 | ||||||
22% | between $83,550 and $178,150 | between $89,450 and $190,750 | ||||||
24% | between $178,150 and $340,100 | between $190,750 and $364,200 | ||||||
32% | between $340,100 and $431,900 | between $364,200 and $462,500 | ||||||
35% | between $431,900 and $647,850 | between $462,500 and $693,750 | ||||||
37% | over $647,850 | over $693,750 |
For head of household- taxable income: | ||||||||
---|---|---|---|---|---|---|---|---|
2022 | 2023 | |||||||
10% | up to $14,650 | up to $15,700 | ||||||
12% | between $14,650 and $55,900 | between $15,700 and $59,850 | ||||||
22% | between $55,900 and $89,050 | between $59,850 and $95,350 | ||||||
24% | between $89.050 and $170,050 | between $95,350 and $182,100 | ||||||
32% | between $170,050 and $215,950 | between $182,100 and $231,250 | ||||||
35% | between $215,950 and $539,900 | between $231,250 and $578,100 | ||||||
37% | over $539,900 | over $578,100 |
Is it possible to lower your tax bracket?
Lowering your tax bracket can be achieved through several strategies. Married couples may qualify for lower taxes by filing jointly, or you might find an individual return more beneficial depending on your income and circumstances. Another option is to contribute to retirement plans such as 401(k)s — which reduce taxable income – or traditional IRAs if employer-offered plans are not available.
Standard Deduction for 2023
According to the IRS, the standard deduction for married couples filing jointly for the tax year 2023 rises to $27,700, up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900. For heads of households, the standard deduction will be $20,800 for the tax year 2023, up $1,400 from the amount for the tax year 2022.
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