Each year, the IRS makes inflation adjustments. With consistently high inflation in 2022, some experts are predicting larger adjustments that can affect tax brackets in 2023. Optima Tax Relief reviews what exactly these experts are predicting and what it means for taxes in 2023.
Since the 1980s, the IRS’s tax code has required them to make inflation adjustments each year to cover tax brackets, 401(k) contribution limits and other items. This is to prevent “bracket creep” which is when taxpayers are moved into a higher tax bracket because taxable income increases.
Since the COVID-19 pandemic and recession, inflation has accelerated as seen by the rising Consumer Price Index for All Urban Consumers (CPI-U). The IRS is set to release inflation adjustments in the coming months and many experts are predicting a 7% increase for 2023. These provisions would include higher tax brackets and larger standard deductions.
Here are some examples of how this would affect tax brackets in 2023.
Examples:
- The 22% tax bracket could rise to $44,725 of taxable income for single filers in 2023, up from $41,775 for 2022
- The 24% tax bracket could increase to $95,350 of taxable income for those who file Head of Household in 2023, an increase from $89,050 for 2022
- The 22% tax bracket for joint filers in 2023 could be raised from 83,550 to $89,450
Contribution limits for retirement accounts may also increase in 2023. Currently the maximum contribution to an IRA account is $6,000, but experts predict it will rise to $6,500.