IRS releases new standard deductions and tax brackets as inflation soars

 IRS releases new standard deductions and tax brackets as inflation soars

Tax season is months away, but it’s never too soon to know what to expect when it comes to potential refunds — especially when inflation is gnawing at household budgets.

Hours after data came out showing the rate of inflation hit a 31-year high in October, the Internal Revenue Service announced how much certain inflation-indexed tax provisions would be adjusted for returns filed in 2023.

The IRS already announced the inflation adjustments for provisions, like the standard deduction, that will apply for returns filed in 2022. Those routine adjustments were made last October.

The latest adjustments to more than 60 provisions were determined prior to Wednesday morning’s Consumer Price Index news, IRS spokesman Anthony Burke said.

Put together, the inflation adjustments for tax years 2021 and 2022 sketch out what taxpayers can expect going forward. And if inflation isn’t “transitory,” the adjustment determinations now will be all the more important come tax time in 2023. Here’s a look:

New standard deduction, tax brackets, gift tax and EITC

• The standard deduction rises to $25,100 for married couples filing jointly in their 2022 returns. That’s a $300 increase. It rises to $25,900 for 2023 returns, an $800 rise.

• For single filers and married individuals filing separately, the standard deduction in 2021 returns climbs to $12,550, a $150 increase. The following year, the deduction increases to $12,950, a $400 increase.

• The income levels applying to each tax bracket are increasing up and down the income scale. For example, in 2021 returns, the top 37% rate applies to individuals making $523,600, or $628,300 for married couples filing jointly. In 2022 returns, the richest households face the top rate for incomes above $539,900 or $647,850 for married couples filing jointly.

• The annual exclusion on the gift tax rises for the first time in several years. From 2018 to 2021, $15,000 was the threshold before taxes applied on gifts, according to the IRS. It rises to $16,000 in 2022, with returns filed in 2023.

• The Earned Income Tax Credit, a credit for low- and moderate-income households, also increases. For example, the maximum credit for 2021 returns of qualifying households with three or more eligible children is $6,728. The following year, households with three or more kids will receive $6,935, the IRS said. The American Rescue Plan passed in March expanded the EITC’s rules, qualifications and potential payouts, particularly for workers without children.

Other potential tax changes on the horizon

Of course, other taxes for the super-rich could also be on the horizon if the Biden administration’s social safety net bill passes. The president’s most current tax hike proposal calls for a 5% surtax on households making at least $10 million and an 8% surtax on households making above $25 million.

The 2017 Tax Cuts and Jobs Act lowered the rates on most income tax brackets. But bear in mind that these rates, including the top rate, are due to revert to higher rates at the end of 2025 when certain provisions in the Tax Cuts and Jobs Act expire. One permanent change from the Trump-era law is the method of indexing for inflation on tax provisions, according to the Tax Policy Center.

Without getting too technical, the think tank said the measure now being used “generally increases at a slower rate” than the previous measure, and that may mean “individuals will end up in higher tax brackets.” It also means tax credits indexed for inflation “will increase at slower rates than they would have under the old indexing system.” researchers said. Slower increases in the EITC payouts are one consequence of the changed methods on inflation indexing, the Tax Policy Center said.

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