New tax brackets and standard deductions have been put into effect recently, potentially boosting paychecks and lowering income taxes for many investors in America, who are entering the new year battling high inflation. As the IRS keeps taxpayers compliant with their tax obligations, these new tax brackets as well as other adjustments are important for investors to stay current with their earnings at maximum potential. For the 2023 tax year, the seven federal tax brackets are shown below.
The income thresholds for the seven federal tax brackets increased by a bigger-than-normal amount for the 2023 tax year to reflect the increasing inflation seen since last year. Jon Whiten from the Institute on Taxation and Economic Policy told Yahoo Finance, “They are just the usual changes due to inflation… more dramatic this year since inflation was also dramatic." The inflation-adjusted amounts jumped by more than 7% from 2022, according to the Tax Policy Center, which is significantly more than last year's 3% uptick. The changes themselves are not new since the Internal Revenue Service adjusts its tax brackets annually for inflation. Even though the change is drastic compared to last year, the positive outcome is taxpayers will likely avoid being pushed into a higher income tax bracket. This allows taxpayers to combat inflation without increasing real income, ultimately paying lower taxes. The new tax adjustments apply to tax returns filed in 2024, but the IRS also changed the 2023 tax withholding tables, which determine how much money employers should withhold from employee wages in paychecks for federal taxes.
The 2023 tax year standard deduction for married couples filing jointly will be $27,700, up $1,800 from the deduction for the 2022 tax year. For single taxpayers, the standard deduction is $13,850, which is an increase of $900. Furthermore, while tax rates remain the same, the income limits for each tax rate are different, meaning that for some, tax rates could possibly decrease. For example, an American earning $90,000 in 2022 would have a tax rate of 24%. In 2023, it's 22%. In October, the IRS also announced that it was raising the limit for 2023 contributions to health flexible spending arrangements to $3,050, up from $2,850 for 2022.
Retirement Limit Increases
In regards to changes to the retirement limit, Americans can contribute up to $22,500 into 401(k), 403(b), and most 457 plans. This is $2,000 more than the $20,500 contribution limit for 2022. In addition, the limit on annual contributions to an IRA increased to $6,500, up from $6,000. The income ranges for determining eligibility to make deductible contributions to traditional & Roth IRAs and to claim the Saver’s Credit, all increased for 2023. Are these new limits and adjustments considered beneficial for investors?