All About The IRS Tax Inflation Adjustments For The 2023 Tax Year

Key takeaways

• This week, the IRS tax inflation adjustments for the 2023 tax year were released
• The announcement includes changes in 2023 standard deductions and 2023 IRS tax brackets
• The IRS adjusts around 60 tax provisions for inflation annually to prevent “bracket creep”
• While the adjustments won’t apply until the 2023 tax year (filed in 2024), understanding these changes is essential to your investment strategy

2022 has been a financially challenging year for consumers and investors alike. The price of…well, everything, is up. The value of thousands of stocks and cryptocurrencies is down. The real estate market, which buoyed some investors’ portfolios, has begun cooling off as interest rates continue to soar.

But tax filers – including investors – received some good news this week: the IRS tax inflation adjustments for the 2023 tax year.

The announcement itself isn’t exactly a surprise – U.S. tax rates are adjusted for inflation annually. However, thanks to this year’s sky-high inflation, the increase is particularly generous at about 7% across the board.

True, relief is a ways off yet, as the adjustments apply to returns filed in 2024. Still, consumers and investors (particularly those whose wages haven’t kept pace with inflation) may enjoy smaller tax withholding next year.

Among the 60-odd tax provisions altered, the most wide-reaching include 2023 standard deductions and IRS tax brackets. Investors also stand to gain from adjusted long-term capital gains tax brackets.

We’ll highlight some of the most essential tax changes below, and what they could mean for you.

Changes to 2023 standard deductions

The standard deduction is a standard (non-itemized) dollar amount that reduces the amount of income on which you’re taxed. Most tax filers can choose to take the standard deduction unless you itemize deductions or fall into special circumstances.

For the 2023 tax year, the standard deduction increases to:

• $13,850 for single filers (an increase of $900)
• $20,800 for head of household filers (an increase of $1,400)
• $27,700 for married couples filing jointly (an increase of $1,800)

2023 IRS tax brackets: marginal income changes

The seven tax rates remain the same for the 2023 tax year. Instead, the IRS adjusted the income values in each bracket to give filers more breathing room amid high inflation.

For the 2023 tax year, the marginal tax rates for each income bracket are:

Alternative minimum tax rate changes

The alternative minimum tax rate, or AMT, is a secondary tax system that applies to higher-income individuals. The AMT was created in the 1960s to prevent wealthier taxpayers from using legal loopholes to avoid federal income taxes. Functionally, the AMT disallows some otherwise permissible deductions and adds in extra taxable items.

Under the AMT, taxpayers are allowed to exempt a portion of their income from the Alternative Minimum Taxable Income (AMTI) calculation. This prevents low- and middle-income taxpayers from becoming “caught in the net,” so to speak.

But higher-income taxpayers are required to calculate their taxes twice: once under the regular system, and again under the AMTI. Then, the taxpayer is required to pay the higher of the two.

Under the 2023 IRS tax inflation adjustments, the AMT exemption amount begins at $81,300, or $126,500 for joint filers. Married individuals filing separately will see the exemption phase in at $63,250. For estates and trusts, the line is drawn at $28,400.

Earned income tax credit changes

The Earned Income Tax Credit helps certain low- to moderate-income filers reduce their tax bill or even increase their income.

For the 2023 tax year, the EITC tax credit ranges from $600 to $7,430 depending on your income and family size. The complete phaseout income under the tax credit now sits at:

• $17,640 for filers with no children
• $46,560 for filers with one child
• $52,918 for filers with two children
• $56,838 for filers with three or more children

The IRS revenue procedural document contains more information on the EITC changes for specific incomes, categories and phase-outs.

Capital gains tax rates

Long-term capital gains taxes are applied to profits earned on investments or real estate sold at least one year after purchase. For 2023, the IRS tax inflation adjustments on long-term capital gains are:

Specialty allowances

The IRS also increased a number of specialty exclusions and circumstances that may not apply to all situations. However, if you fall into any of these buckets, the tax windfall can be massive.

Among these allowances, for the 2023 tax year:

• The annual exclusion for gifts increases from $16,000 to $17,000
• The foreign earned income exclusion increases from $112,000 to $120,000
• The maximum tax credit for qualified adoption expenses increases from $14,890 to $15,950
• The basic estate tax exclusion for inheritances increases from $12,060,000 to $12,920,000

How these 2023 IRS tax brackets affect you

Annual inflation adjustments were first codified under the Reagan administration; in years prior, tax brackets had to be manually adjusted to account for high inflation – or, more likely, not adjusted at all.

The purpose of adjusting tax rates for inflation is to fend off “bracket creep,” which occurs when inflation-adjusted salaries push you into a higher tax bracket over time.

For Americans whose salaries have kept up with inflation, you may not see an enormous difference. In fact, if you were on the cusp of two brackets, you may still bump into the next bracket, depending on your wage increases.

But for Americans who straddled the middle of their tax bracket, or whose wages haven’t kept up with inflation, the annual tax adjustments present a potential savings opportunity. You might even see your take-home pay increase in the 2023 tax year.

For example, if you earn $175,000 pre-tax in 2022, your top tax rate will be 32%. However, if your wages stay the same in the 2023 tax year, your top tax rate will drop to 24%, representing massive savings.

The same is true of investors who stand to receive a large inheritance or plan to cash in long-term capital gains in the 2023 tax year. Additionally, higher-income taxpayers will want to watch AMT changes to plan their tax year accordingly.

The IRS tax bracket changes are just the latest move the government has taken to help taxpayers cope with rising inflation. Recently, the Social Security Administration announced an 8.7% benefits increase for 2023 to lessen this year’s financial blow.

Don’t rely on IRS tax inflation adjustments alone

The IRS tax inflation adjustments represent big news for consumers and investors alike. However, a 7% rise in the dollar values applied to each tax bracket may not be enough to take the sting out of inflation that, in some areas of the economy, exceeds 15-30%.

To counteract these impacts, we here at Q.ai (naturally) recommend investing for your future. (Perhaps with an AI-backed Inflation Kit designed specifically to overcome higher prices.) While you may not see inflation-beating returns this year, or even next, history has shown time and again that a well-diversified portfolio is key to kicking inflation in the rear long-term.

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