For example, continued high inflation could affect your tax bracket next year


Jamie Grill | Getty Images

As Americans grapple with rising prices, experts say it’s likely we’ll see higher-than-usual inflation adjustments from the IRS in 2023 — in regards to tax brackets, 401(k) plan contribution limits, and more.

These annual IRS changes are built into the tax code and are designed to prevent so-called “bracket creep,” when inflation pushes income up and pushes Americans into higher tax brackets, explains Kyle Pomerleau, senior fellow and federal tax expert at the American Enterprise Institute. .

“That’s not necessarily a good thing,” he said, because Americans may not reflect a better quality of life.

More from Personal Finance:
5 ways the Federal Reserve’s rate hike could affect you
Here’s Why the US $39 Trillion Retirement System Gets a ‘C+’ Rating
The extended tax TBEN is October 17. What do you need to know if you have not yet filed a tax return?

Typically, the IRS releases inflation adjustments for the following year in October or November, and Pomerleau forecasts a 7% increase for many provisions for 2023.

ALSO READ  PGA Tour Sues LIV Golf In Escalating Antitrust Battle

“This year we will see a larger-than-average adjustment because we’ve had higher-than-usual inflation,” he said.

This includes higher tax brackets and a larger standard deduction.

For example, the 24% tax bracket could rise to $190,750 in taxable income for joint filers in 2023, up from $178,150 for 2022, Pomerleau estimates.

This year we will see a larger-than-average adjustment as we have seen higher than normal inflation.

Kyle Pomerleau

Senior Fellow at the American Enterprise Institute

There could also be a higher exemption for the so-called alternative minimum tax, a parallel system for higher earners, and more generous write-offs and phase-outs for the payroll tax credit for low-to-moderate income seekers and more.

And property tax exemptions could rise to $12.92 million and $25.84 million for individual and joint filers, respectively, up from $12.06 million and $24.12 million, Pomerleau predicts.

ALSO READ  Lordstown Motors begins production of its Endurance electric pick-up

However, that is no guarantee for smaller tax bills for 2023.

“It will depend on the taxpayer,” Pomerleau said, pointing to different types of income, how much income has been inflated and what provisions may apply.

Retirement account contribution limits may go up

Higher inflation adjustments may also benefit retirement savers, with larger contribution limits for 401(k) and individual retirement accounts, Pomerleau said.

While it’s too early to predict 401(k) deferral limits, he expects annual IRA limits to rise to $6,500 for savers under 50, up from $6,000 for 2022.

“The jump for the IRA contribution limit is closer to 8% or 9% this year because of the way it interacts with the rounding rule,” he said, explaining that it’s being adjusted in $500 increments.

Some tax provisions still don’t adjust for inflation

Despite above-average inflation adjustments for many provisions, some remain the same every year, experts say.

ALSO READ  These five stocks in the S&P 500 lost nearly half a trillion dollars in value in one day amid widespread wipeout

“It’s a hodgepodge of things that get left out,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.

There is a 3.8% surcharge on investment income, which takes effect when the modified adjusted gross income exceeds $200,000 for single filers and $250,000 for couples, which has not been adjusted.

And the $3,000 cap on capital loss deduction has been set for about 30 years. “Inflation erodes that away,” Pomerleau said.

While the $10,000 limit on the federal deduction for state and local taxes, known as SALT, will disappear after 2025, the established limit “will have a bigger impact in the meantime,” he said.

However, it’s difficult to estimate exactly how much a single determination could affect a person’s tax bill without running a 2023 projection, Harris said.


Please enter your comment!
Please enter your name here