IRS Announces Inflation-Adjusted Individual Tax Rates for 2023 by Jeffrey M. Mutnik, CPA/PFS
Posted on December 12, 2022
The IRS has released the annual cost-of-living adjustments to various provisions of the tax code for 2023, noting that some of the changes are significant due to persistently high inflation. For some taxpayers, these adjustments will result in higher take-home pay, larger credits and deductions, and the ability to protect more assets from the federal estate tax.
Marginal Income Tax Rates
The following seven tax rates apply to income taxpayers earn beginning on Jan. 1, 2023:
- 37 percent for individual single taxpayers with income greater than $578,125, up from $539,900 in 2022 (or $693,750 for married couples filing jointly);
- 35 percent for individual income above $231,250 ($462,500 for married couples filing jointly);
- 32 percent for individual income exceeding $182,100 ($364,200 for married couples filing jointly);
- 24 percent for individual income greater than $95,375 ($190,750 for married couples filing jointly);
- 22 percent for individual income exceeding $44,725 ($89,450 for married couples filing jointly);
- 12 percent for individual income above $11,000 ($22,000 for married couples filing jointly); and
- 10 percent for individual income of $11,000 or less ($22,000 for married couples filing jointly).
The income-tax brackets for trusts and estates also increase in 2023 to the following:
- 37 percent for income greater than $14,450;
- 35 percent for income between $10,550 and $14,450;
- 24 percent for income between $2,900 and $10,550; and
- 10 percent for income of $2,900 or less.
Standard Deduction vs. Itemized Deductions
The standard deduction for individual taxpayers rises from $12,950 in 2022 to $13,850 in 2023. For married couples filing joint tax returns, the standard deduction increases to $27,700, up from $25,900 in the prior year. This is the amount all taxpayers may use to automatically reduce their adjusted gross income (AGI) for purposes of determining their federal income tax brackets.
When taxpayers’ allowable expenses exceed the standard deduction in any given year, they may instead itemize their deductions and further reduce their taxable income and related tax liabilities. These deductible expenses include student loan interest, mortgage interest, charitable donations, qualifying medical and dental expenses as well as up to $10,000 paid toward state and local taxes.
Federal Gift and Estate Taxes
An individual who dies in 2023 can exclude $12,920,000 from federal estate tax, up from $12,060,000 for estates of decedents who died in 2022. Married couples filing joint tax returns may shield as much as $25,840,000 from federal estate tax in 2023. Taxpayers should note, however, that these generous estate tax exemptions are scheduled to be cut in half in 2026 and may be reduced sooner depending on Congressional action. In addition, these exemptions apply only at the federal level; depending on where they live, taxpayers also may be subject to estate and inheritance taxes at the state level. Moreover, taxpayers should consider this increased exemption that goes into effect on Jan. 1, 2023, when planning year-end gifts in 2022.
Taxpayers also have an opportunity in 2023 to gift up to $17,000 to as many people as they wish without incurring federal gift tax, up from $16,000 in 2022. While married spouses who are both U.S. citizens can continue to make an unlimited number of tax-free gifts to each other, only the first $175,000 of a spousal gift to a non-U.S. citizen spouse may be excluded from the total amount of taxable gifts for 2023.
Alternative Minimum Tax (AMT)
For individual taxpayers, the AMT exemption in 2023 is $81,300 and 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).
Minor children younger than 19 years of age and college students younger than 24 with unearned income (i.e. investment income) of $1,250 or more in 2023 from sources other than salary and wages will be subject to tax at the same rate as trusts and estates. Parents may elect to include on their tax returns an eligible child’s unearned income that is between $1,250 and $12,500.
Adoption Tax Credit
The maximum credit taxpayers may receive for qualified adoption expenses incurred in 2023 increases to $15,950. The availability of the full adoption credit begins to phase out when taxpayers’ modified adjusted gross incomes (MAGI) exceed $239,230, and it is completely phased out for taxpayers with MAGI of $279,230.
Foreign Earned Income Exclusion
The foreign earned income exclusion in 2023 increases to $120,000, up from $112,000 for tax year 2022.
The dollar amount that employees may contribute in 2023 to a health flexible spending account via salary deferral increases to $3,050, up from $2,850 in the prior year. The maximum amount of unused funds account owners may carry over, if their plans allow, is $610.
For taxpayers with self-only coverage in a Medical Savings Account, plans must have an annual deductible that is not less than $2,650 but not more than $3,950, and the maximum out-of-pocket expense limit is $5,300. For family coverage, the annual deductible may not be less than $5,300 or more than $7,900, with an out-of-pocket expense limit of $9,650.
Deduction for Pass-Through Business Owners
The Section 199A deduction of up to 20 percent of qualified business income (QBI) that is available to eligible sole proprietors and owners of pass-through businesses (i.e. S Corporations), is subject to income limitations. For 2023, the deduction is reduced when taxable income exceeds $182,100 for individuals, or $364,200 for married couples filing jointly and is phased out completely when individual income reaches $232,100, or $464,200 for married couples filing jointly.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or email@example.com.