Inflation Will Significantly Alter U.S. Tax Brackets, Deductions

Last week, the Internal Revenue Services (IRS) announced that, due to historic inflation, it has adjusted individual income tax brackets and tax deductions. As a result, businesses that pay federal income taxes through the individual tax system could see large reductions in what they owe for tax year 2023.

Specifically:

• Individual tax brackets will increase by seven percent. The 37 percent top income tax rate will apply to individuals and pass-through companies that earn $578,125 in 2023, up from $539,900 this year. The seven percent increase will apply across all tax brackets.
• The Alternative Minimum Tax exemption amount will $81,300 and begins to phase out at $578,150. The 2022 exemption amount was $75,900 and began to phase out at $539,900.
• The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements will increase to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
• The foreign earned income exclusion will rise to $120,000 from $112,000 for tax year 2022.
• The estate tax for people who die in 2023 will have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of people who died in 2022.
• Joint claims will receive a standard tax deduction of $27,700, up from $25,900. For single filers, the standard deductions will increase to $13,850 from $12,950.

Read the IRS’s full announcement here.