Tax season is stressful for most of us, but this year might be especially concerning given the inflation that’s affected all segments of American society. Recognizing that inflation hurts most taxpayers’ finances, the IRS has issued several changes to minimize the tax burden.
Tax Rates and Deductions
The IRS has raised tax brackets and the standard deduction to avoid “bracket creep.” Bracket creep occurs when inflation pushes taxpayers into a higher tax bracket but without an actual increase in income. For example, for a married couple who files jointly, the maximum income for the 22% bracket is now $190,750, up from $178,150.
Similarly, a married couple who files jointly will see a $1,800 increase in their standard deduction. Their new deduction will be $27,700. This may mean some families fall into a lower tax bracket in 2023.
Retirement Contribution Increases
Depending on your income, the IRS has increased the maximum contribution limits for retirement accounts. For 401(k), 403(b), and most 457 plans, taxpayers can now contribute up to $22,500, or $2,000 more than the previous tax season.
The IRA limit is now $6,500, up from $6,000. The additional $1,000 catch-up for those over the age of 50, however, remains the same.
The IRS has made other adjustments as well. Those claiming mileage may now claim an additional 3 cents per mile driven. Individuals with Flexible Spending Accounts (FSA) can contribute up to $3,050, up $200 from the previous limit.
The Alternative Minimum Tax (AMT) and the Earned Income Tax Credit (EITC) have also increased. The EITC is now $7,430 for taxpayers with three or more qualifying children. The AMT now begins at $81,300 for single filers / $126,500 for married couples filing jointly and begins to phase out at $578,150 / $1,156,300.
The IRS has also adjusted the capital gains tax. A married couple who files jointly can now realize up to $89,250 before paying any tax, an increase of slightly under $6,000.
How Will These Changes Affect Me?
While some changes are automatic, such as the tax brackets, others may shift your tax planning. To find out how the IRS’s recent changes can benefit you and minimize your tax liability, contact Highland Tax Group to see how we can help.