On October 18th the IRS issued Revenue Procedure 2022-38. This revenue procedure announced the inflation adjusted rates and thresholds for 2023. Like everything else in our current economic reality, inflation caused the IRS to increase amounts associated with the standard deduction, tax brackets, salary reduction for contributions to health flexible spending arrangements, and the annual exclusion for gifts among other things. The good news is that these increases ultimately result in less income being taxed at the federal level. Below is a brief sample for some of the most common tax items (for a complete list of adjustments, see the above link to the actual revenue procedure):
- The standard deduction for a married couple filing jointly increase from $25,900 to $27,700 for 2023. Single and married filingly separately filers had the standard deduction increase from $19,400 to $20,800.
- The individual tax rates have remained the same, but the brackets they apply to have been increased, meaning more income will be tax at lower rates. For example, the top rate of 37% begins to apply for incomes above $693,750 for a married couple filing jointly for 2023. The 37% rate for the same taxpayers began for incomes over $647,850 in 2022. These increases in the brackets are true for all the brackets, including the top rate bracket. Someone earning income equal to the top 2022 bracket ($647,850) will save $28,413 in federal taxes as a result of the inflation adjustment between 2022 and 2023.
- Salary reductions for health flexible spending arrangements increased to $3,050 for 2023.
- Foreign earned income exclusion increased from $112,000 to $120,000.
- The estate tax exemption increased from $12,060,000 to $12,920,000.
- The annual exclusion for gifts increased to $17,000.