IRS announces annual inflation adjustments for tax year 2023

By Martha Waggoner

The IRS announced Tuesday annual inflation adjustments for over 60 tax provisions in tax year 2023, including increases in the standard deduction for married couples and single individuals.

These tax year 2023 adjustments generally apply to tax returns that will be filed in 2024. Included are the tax rate schedules and other tax changes. Rev. Proc. 2022-38 provides details about these annual adjustments.

The standard deduction for married couples filing jointly for tax year 2023 increases to $27,700, up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900. For heads of household, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.

The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:

Income rate brackets

For 2023, the top tax rate of 37% applies to individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

The other tax brackets are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly); and
  • 10% for incomes of $11,000 or less ($22,000 for married couples filing jointly).

Other adjustments

The alternative minimum tax exemption amount will be $81,300, which begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300). The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly; their exemption began to phase out at $1,079,800).

The maximum earned income tax credit amount will be $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022. The revenue procedure contains a table providing the maximum EITC amount for other categories, income thresholds, and phaseouts.

The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the 2022 limit.

For tax years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from tax years beginning in 2022.

For participants who have self-only coverage in a medical savings account, the plan must have an annual deductible that is not less than $2,650 — up $200 from tax year 2022 — but not more than $3,950, an increase of $250 from tax year 2022. For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350 from 2022. For family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022. However, the deductible cannot be over $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit will be $9,650, an increase of $600 from tax year 2022.

The foreign earned income exclusion will be $120,000, up from $112,000 for tax year 2022.

Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from $12,060,000 for estates of decedents who died in 2022.

The annual exclusion for gifts will increase to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.

The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.

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