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by Steve Dinnen
It’s hard to say anything kind about inflation. Everything from soup to nuts costs more, and sometimes our incomes don’t rise fast enough to keep up.
But there’s some relief — just a little — from an unexpected quarter: the IRS. The Internal Revenue Service annually adjusts more than 60 tax provisions for inflation to prevent what’s called “bracket creep.” The Tax Foundation tells us that bracket creep occurs when people are pushed into higher income tax brackets or when their assets have reduced value from credits and deductions due to inflation instead of any increase in real income.
Until 2018, the IRS used the Consumer Price Index (CPI) as a measure of inflation. However, with the Tax Cuts and Jobs Act of 2017, the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts and credit values.
Here are some key changes to anticipate as you prepare your 2023 taxes. (Unless noted, all of the following numbers apply to married taxpayers who file jointly.)
- The lowest tax bracket (10%) applies to taxable income up to $22,000 instead of $20,550. The highest bracket (37%) kicks in at $693,750 instead of $647,850.
- The standard deduction is now $27,700 instead of $25,900.
- The alternative minimum tax exemption is now $126,500 instead of $118,100.
- You’ll pay zero taxes on capital gains if your taxable income is below $89,250 instead of $83,350. You’ll pay 15% if it’s between $89,250 and $553,850, instead of $517,200, and 20% if it’s higher.
- The gift tax exclusion is $17,000 instead of $16,000.
Fair warning: This benevolence has limits. There is no inflation adjustment on the 3.8% net investment surtax threshold, nor is there a change to the income tax threshold on Social Security benefits. Coming on the heels of one of the largest ever hikes in Social Security payments, this could actually kick you into a higher tax bracket.
Keep in mind, too, that there is no inflation adjustment for the exclusion of net proceeds from the sale of a primary residence, which is $500,000. But hasn’t inflation played at least some role in the rise of home prices?
The fight against inflation has led the Federal Reserve to raise interest rates 10 times since the start of 2022. This has pushed up bank CD and money market rates, and returns of 4.5% are now common. All those plumped-up interest payments are taxed, too.
