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What Are The New Tax Brackets For 2023

What Are The New Tax Brackets For 2023

Americans are feeling the pain from rising prices in all sectors, but they could make filing taxes a little less complicated in the future.

This is because inflation has caused the IRS to raise the income tax thresholds for the 2023 tax year.

While these adjustments are made annually based on a formula established by Congress, this year's extraordinarily large increases will be good news for anyone whose paychecks have not kept up with the significant price hike over the last year.

Standard deductions for all filing status are also increasing. This allows workers to reduce their annual earnings by an amount determined before income tax is calculated.

The result? Many households will benefit from a reduced tax burden in the tax season of 2024.

Taxpayers do not have to take any particular steps to take proper advantage of the new tax brackets that will automatically apply when filing their income tax returns.

However, increasing the standard deduction could mean you no longer have to itemize deductions when you file your taxes, which can save you hours of paperwork.

And there are recent inflation-related moves you can take advantage of as well, such as the recent increase in 401(k) and IRA contribution limits that allow savers to save more pre-tax dollars for retirement.


What are the tax brackets?

The United States taxes income at progressively higher rates as you earn more. These rates, ranging from 10% to 37%, will remain unchanged in 2023. What changes is the amount of income taxed at each rate?

For example, in 2023, a single taxpayer with a taxable income of $95,000 will have a top tax rate of 22%, up from 24% in 2022. This translates to a tax savings of $429, assuming that income does not change between the two years.

Here's how the calculation works: the first $11,000 of your income will be taxed at 10%; the next $33,725 of that income will be taxed at 12%; the last $50,275 from your income will be taxed at 22%. This equates to a tax of $16,207 in 2023, compared to $16,636 in 2022.

This is where the income thresholds for next year fall. If you are single:

This is where the income thresholds for next year fall. If you are single:

2023 Income Tax Brackets for Single Filers

TAX RATE

FOR INCOMES ABOVE

37%

$578,125

35%

$231,250

32%

$182,100

24%

$95,375

22%

$44,725

12%

$11,000

10%

$11,000 or less

Source: IRS

And if you're married and filing a joint return:

2023 tax brackets for married filers

TAX RATE

FOR INCOMES ABOVE

37%

$693,750

35%

$462,500

32%

$364,200

24%

$190,750

22%

$89,450

12%

$22,000

10%

$22,000 or less

Source: IRS


What is the Standard Deduction?

All taxpayers can choose to take the standard deduction or itemized deductions. This reduces the amount of taxable income for the year. Most taxpayers accept the standard deduction because it's simpler: you don't have to account for certain expenses, such as charitable donations, large medical bills, and local and state taxes.

Like income tax brackets, the standard deduction is adjusted annually for inflation. But next year's deduction is one of the biggest yet.

The standard deduction for single filers will increase from $900 to $13,850 in 2023. The standard deduction for married couples filing jointly is double that for single filers. In 2023, this will increase to $27,700.


AMT tax limits

You may have to pay taxes regardless of the deductions and other benefits you claim if you have a large income. This is due to the Alternative Minimum Tax, designed to create a base tax rate for all income earners. The AMT exemption and the level of income at which this exemption begins to disappear will change until 2023.

This is where the AMT limits for next year's threshold fall. If you are single:

2023 Alternative Minimum Tax Exemption for Individual Taxpayers

  • Exemption Amount: $81,300

  • Phase Out starts: $578,150

Source: IRS

And if you're married and filing a joint return:

2023 AMT Exemption for Married Joint Filers

  • Exemption Amount: $126,500

  • Phase Out starts: $1,156,300


Source: IRS

How to know your tax bracket

You can get an estimate of your taxes by dividing your income into portions that will be taxed in each applicable bracket. Each bracket has its tax rate. Which group you belong to depends on your filing status: whether you are a single filer, married filing separately, head of household or married filing jointly.

The tax bracket where the highest dollar falls is the marginal tax bracket. This bracket corresponds to your highest tax rate, which applies above your income.

For instance, if you are single and your taxable income in 2022 is $75,000, your marginal tax bracket is 22%. But, some of your income will be taxed at lower rates of 10% and 12%. As your income increases, your taxes increase:

  • The first $10,275 is taxed at 10%: $1,027.50.

  • The following $31,500 (41,775-10,275) is taxed at 12%: $3,780.

  • The last $33,225 (75,000-41,775) is taxed at 22%: $7,309.50

  • The total tax on your income of $75,000 is $1,027.50 + $3,780 + $7,309.50 = $12,117 (ignore any itemized or standard deductions that apply to your taxes).


How to get into a lower tax bracket

You can reduce your income to another tax bracket by using tax deductions, such as charitable write-offs, property taxes, and mortgage interest. Deductions help reduce taxes by lowering taxable income.

Tax credits, such as income or child tax credits, can also put you in a lower tax bracket. The credits provide a dollar-for-dollar reduction in the amount of tax you owe.

Depending on your financial situation, you can use tax deductions and credits to reduce the amount you pay the IRS each year.


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Tiffany Gaskin
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