The Internal Revenue Service (IRS) recently announced updates to the federal tax code for the 2023 tax year, bringing in new changes that may affect your overall tax strategy and financial decisions. Here are the highlights of the changes to keep in mind.
Higher Federal Income Tax Brackets: The IRS has announced an increase in the federal income tax brackets, meaning taxpayers can now shield more of their income from taxation. The increase is around 7%, making it a welcome relief amid continuing inflation. For example, single taxpayers earning between $44,726 to $95,375 will now pay $5,147 plus 22% of the amount over $44,725. Married taxpayers filing jointly making between $89,451 to $190,750 will now pay $10,294 plus 22% of the amount over $89,450. To find your 2023 tax bracket information, check out the IRS website.
Standard Deduction Increase: The standard deduction is increasing from $25,900 in 2022 to $27,700 for married couples filing jointly, and from $12,950 to $13,850 for single taxpayers.
Earned Income Tax Credit Boost: The earned income tax credit amount is going up to $7,430 for qualifying taxpayers with three or more children, an increase from the tax year 2022’s $6,935.
Flexible Spending Account Contributions Limit: The IRS limit for FSA contributions for 2023 is $3,050, a 7% increase from 2022’s threshold of $2,850.
Gift Tax Exemptions: Taxpayers will now be able to give up to $17,000 in gifts in 2023 without paying taxes, an increase from the previous year’s $16,000.
Estate Tax Exemptions: The IRS will exempt up to $12.92 million from the estate tax, an increase from the $12.06 million for people who died in 2022, which is another 7% increase.
In addition to the tax changes, it’s worth noting that millions of Social Security recipients will receive an 8.7% increase in their benefits, which is an average of $140 per month, in 2023.
It’s important to keep in mind that these changes only impact the 2023 tax year and will have no effect on the taxes you file this April. However, doing 2023 Tax Planning based on this information will impact your financial decisions and overall tax liability, so it’s important to be aware of the updates.