Currently, inflation may raise the cost of goods and services you buy and pay for at the pump, but it may also raise your take-home income the next year.
The September inflation report released this week resulted in multiple cost-of-living increases, or COLAs, for 2023. Among them was the largest boost in Social Security payouts in 42 years.
What Inflation May Bring in 2023?
The federal income tax system will undergo significant changes in 2023 as a result of high inflation, including 7% increases to the standard deduction and the income cutoffs for tax brackets.
Since 1985, the IRS has updated the tax brackets every year to account for inflation. These COLA adjustments are intended to end tax bracket creep, which occurs when inflation raises income taxes without raising real income.
The IRS keeps tax credits, deductions, and exemptions at their genuine worth from year to year by making inflationary adjustments. If your income remains constant from 2022, you might pay a reduced federal income tax base rate in 2023.
This would result in less money being withheld from your paycheck, which would increase your take-home pay. You would then start receiving a larger paycheck as a result of the tax code changes in January 2023.
The kiddie tax limit, or the amount of unearned income a child can earn before it is taxed, as well as the annual and lifetime gift tax exemptions, are among the many tax exemptions and deductions that are increased in response to inflation. To find out about all the 2023 inflation-related tax adjustments, continue reading.
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Tax Brackets 2023
The minimum tax rates will increase by around 7% in 2023. For instance, the $20,550 threshold for the lowest tax bracket for married joint filers will rise to $22,000 in 2023, a 7.1% increase.
The top tax rate for married couples filing jointly will increase by 7.1% from $647,851 in 2022 to $693,750 in 2023.
The four main categories of federal income tax brackets are single filers, married joint filers, which also includes surviving spouses, married separate filers, and heads of household, which are unmarried filers who are responsible for more than half of the costs of the household and have qualifying dependents, such as children. The IRS also keeps distinct tax brackets for trusts and estates.
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