The Internal Revenue Service has released dozens of inflation adjustments affecting individual income tax brackets, deductions and credits for 2023 and—no surprise—today’s four decade high inflation has translated into some big hikes.
Consider the standard deduction, now claimed (instead of itemized deductions) by more than 85% of taxpayers. For a married couple filing a joint tax return, that deduction will jump to $27,700 in 2023, from $25,900 in 2022; for singles and couples filing separately it will rise to $13,850, from $12,950; for a head of household it will rise to $20,800 from $19,400. (A head of household is a single adult with dependents, such as children.) The additional standard deduction for someone who is 65 or older will rise to $1,500 per person from $1,400 in 2022; if that senior is unmarried, the additional deduction will be $1,850 in 2023, up from $1,750.
Meanwhile, the individual tax brackets for ordinary income as well as those for capital gains will all be jumping in 2023. So, for example, the lowest 10% ordinary income tax bracket will cover the first $22,000 of taxable income for a married couple filing jointly, up from $20,550 in 2022. The 24% bracket for the couple will kick in at $190,750, up from $178,150, and the highest 37% rate will hit taxable income exceeding $693,750, up from $647,850 in 2022.
You can see all the 2023 income tax brackets on ordinary income (which includes salaries, self-employment income and interest) at the bottom of this post. Remember, the 2022 rates here will apply for the 1040 you file in early 2023.
The individual federal tax brackets have been automatically indexed for inflation since 1985—a provision that was passed in 1981 after a period of inflation even higher than what the country is now experiencing. One key item that isn’t indexed, however, is the income levels at which taxes on Social Security benefits kick in. That means more moderate income retirees will be paying federal taxes on their 2023 benefits, which will be boosted by an 8.7% cost of living adjustment.
As for the tax on long term capital gains (that is gains on stocks and bonds held more than a year), a married couple won’t owe any tax until their income (including those gains) is above $89,250, up from $83,350 in 2022. Above that, the gains rate is 15%. The top gains rate of 20% will kick in above $553,850 for a couple in 2023, up form $517,200 in 2022. For individual filers, the 15% capital gains rate kicks in on income above $44,625 in 2023, up from $41,676 in 2022. But the top 20% rate won’t hit single individuals until their income exceeds $492,300 in 2023, up from $459,760. (Yes, that’s more than half the level for married couples. The top gains rate is one of those areas where the tax codes still has a marriage penalty, and no, you can’t avoid this one by filing separately from your spouse.)
Several key credits are also adjusted for inflation. For example, the maximum earned income tax credit for qualifying taxpayers with three or more children will be $7,430 in 2023, up from $6,935 in 2022. (The credit rises with earned income and then begins to slowly phase out at fairly modest levels of earnings. So, for example, a married couple with three children will begin to see there EITC phase out at $28,120 of income in 2023, but won’t lose the entire credit until their income hits $63,398.)
You can see all the adjustments in IRS Revenue Procedure 22-38 here. (It’s a 28 page document covering everything from the adoption credit to penalties for failing to file certain returns on time.)
Inflation also means that well-off folks will be able to transfer much more to their heirs tax free during life—or at death. One key gifting change: you can give anyone else (and as many people as you want) $17,000 in gifts in 2023, up from $16,000 in 2022, without worrying about using up your lifetime gift and estate tax exemption or paying gift tax. That lifetime exemption will be rising to $12.92 million in 2023, up from $12.06 million. (You can read more about the other estate and gift tax changes here.)
Here are the new tax brackets for ordinary income in 2023: