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Overview: 2023 is just around the corner, so this is the perfect time to discuss up-to-date tax brackets info. Let’s dive in!

The year 2022 will soon be behind us, and 2023 is upon us, which means a new tax year is about to begin. Even as you anticipate filing your 2022 tax returns by next April, you should also stay conscious of the new tax year. There’s no time like the present to ask the question “What do I need to know about tax brackets for 2023?”

Amid soaring inflation, the Internal Revenue Service (IRS) announced updates to tax brackets and the standard deduction for 2022, and they’re making adjustments again for 2023. Does that mean that you could fall into a lower bracket for your income earned in 2023? It just might!

The good news is that if you start planning to reduce your 2023 tax bill now, you’ll be on the right track. Knowing the tax brackets for 2023 will help you implement smart tax strategies by adjusting your income tax withholding. This way, you will avoid getting caught with a big tax bill next year.

Tax Bracket for Income Earned in 2023:

For 2023, your tax bracket for income earned will follow this:

  • 37% for incomes over $578,125 ($693,750 for a married couple filing jointly)

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly)

  • 32% for incomes over $182,100 ($364,200 for a married couple filing jointly)

  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly)

  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly)

  • 12% for incomes over $11,000 ($22,000 for a married couple filing jointly

  • 10% for incomes of $11,000 or less ($22,000 or less for a married couple filing jointly)

Source: Internal Revenue Service

Income Tax Brackets for Single Filers:

  • 37% for incomes over $578,125

  • 35% for incomes over $231,250

  • 32% for incomes over $132,100

  • 24% for incomes over $95,375

  • 22% for incomes over $44,725

  • 12% for incomes over $11,000

  • 10% for incomes of $11,000 or less

In addition, the standard tax deduction will rise to $13,850 for single filers for the 2023 tax year — up from $12,950 the previous year. Meanwhile, the standard deduction for couples filing jointly will rise to $27,700 in 2023.

Single filers age 65 and older who aren’t a surviving spouse may increase the standard deduction by $1,850 — while the joint filer 65 and over can improve the standard deduction by $1,500 apiece, for a total of $3,000 if both joint filers are 65-plus.

You can also itemize individual tax deductions for things like charity and donations, but you’ll want to be sure they add more than the standard deductions to make itemizing worthwhile.

Learn more about federal income tax brackets here.

Heads of Household Tax Brackets:

  • 12% for incomes over $15,700

  • 22% for incomes over $59,850

  • 24% for incomes over $95,350

  • 32% for incomes over $182,100

  • 35% for incomes over $231,250

  • 37% for incomes over $578,100

 What is the Standard Deduction?

Tax filers may choose to take the standard deduction or itemized deductions, which may reduce the amount of their income taxable for the year. The standard deduction is used by people who don’t itemize their taxes and reduces the amount of income you must pay taxes on.

The bulk of filers claim the standard deduction as it’s more straightforward to do so, and  it doesn’t require tallying up select expenses like charitable donations, medical bills, and federal, state, and other local taxes.

Similar to the income tax brackets, the standard deduction gets an annual adjustment for inflation. And here’s what’s happening in 2023: The standard deduction for single filers is increasing by $900 to $13,850 in 2023. As for married couples filing taxes jointly, the standard deduction for 2023 is increasing to $27,700.

Tim Steffen of Baird Private Wealth Management commented on these changes to CBS News. “The flip side of this, though,” said Steffen, “is that it’s going to be harder to itemize your deductions in 2023.” Steffen continued: “That means your tax payments, mortgage interest, and charitable contributions are less likely to provide you with a tax benefit next year.”

Most taxpayers opt for the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction. However, only about 14% of taxpayers itemized their taxes after the passage of the tax overhaul – put another way, that’s a 17 percentage point drop compared with those who itemized prior to the law.

Source: Tax Foundation.

How the Tax Brackets Work:

Since the U.S. tax system is graduated, you’ll be paying different rates on different amounts of taxable income. There are seven tax brackets in all – from your total income to your adjusted income, filing jointly or as an individual taxpayer, and dependents to credits; the bracket you land in depends on various factors.

You may try to squeeze into a lower tax bracket by reducing your taxable income; however, this is a difficult trick and requires a fair amount and time of planning – one of the reasons why we recommend you start thinking about calculating your taxes early.

It’s important to note that your highest tax bracket doesn’t reflect how much you’re paying in federal income taxes. Let’s assume that you’re a single filer in the 22 percent tax bracket for 2023; you won’t pay 22 percent on your entire taxable income. But you’ll pay 10 percent on taxable income up to $11,000, 12 percent on the amount from $11,000 to $44,725, and 22 percent above that – up to $95,375.

So when someone talks about being in the 24% bracket, that doesn’t mean all of their taxable income endures the same 24% bite; rather, only their taxable income – depending on filing status.

Flexible Spending Accounts:

Here’s another wrinkle: Flexible spending accounts allow payers to put money up to the limit allowed by the IRS in an account that can be used to cover medical expenses. Since the funds are taken from their account on a pre-tax basis, it offers tax savings for many workers.

The new IRS limit for FSA contributions for 2023 is $3,050, with an increase of about 7% from the current tax year’s threshold of $2,850.

Earned Income Tax Credits:

According to IRS, the maximum amount for households who claim the Earned Income Tax will be $7,430 for people with at least 3 children.

Capital Gains Tax Bracket:

Capital gains are the profit you make from investments and other assets. These assets are taxed using different brackets and rates than earned income. The income threshold for capital gain taxes is also being adjusted due to inflation.

Bigger Gift Tax Exclusion in 2023:

How about some more good news amidst all this seeming chaos? The gift tax exclusion amount is increasing. Now you can give $17,000 in gifts in 2023 without paying taxes on the money. That’s a $1,000 increase over last year.

 How to Calculate Taxable Income:

Calculating your taxable income requires a bit of arithmetic. Beginning with your gross income, it’s all the money that you earn during the year – income from your job (be it a business or a job), retirement withdrawals, social security, rent, and/or investment earnings.

For the next step, determine your Adjusted Gross Income, aka AGI. Since there are adjustments taken before any adjustment is applied, consider subtracting moving expenses, students loan, tuition, fee, and other alimony you paid to arrive at your AGI.

Now it’s time to apply deductions!

See above for the standard deduction rates for 2023. Once you calculate and subtract all that from your AGI, you’ll arrive at your taxable amount. However, calculating how much you owe in taxes isn’t as simple as multiplying that number by the tax rate. In such a scenario, it’s best to reach out for professional help to get on the right track.

How to Determine Your Tax Bracket:

As discussed above, determining your tax bracket hinges upon filing status and taxable income. The IRS regards five filing statuses we’re mentioning here:

Single filing: Bachelors, legally separated and divorced all qualify for this status.

Married filing jointly: Married couples agree to combine incomes and deduct the allowable expenses.

Married filing separately: As the name suggests, a married couple files separate tax returns to lower an individual’s income. This option is beneficial in certain situations, including repaying student loans under an income-driven repayment plan.

Head of households: These are the unmarried individuals who pay more than half the cost of keeping up the home for a year, with a qualifying person living in their home for more than half the year.

Qualifying widow(er): A widow(er) can file jointly in the year of their spouse’s death, while a qualifying widow(er) has a dependent child and has the liability to use the joint tax rates and highest deduction amount for the next two years after their spouses’ death.

The IRS has stated that it will be adjusting many of its rules to account for the impact of inflation, ranging from adjustments to individual tax brackets to standard tax brackets. Although the IRS makes adjustments annually, this year’s rising inflation has led to more significant changes than in other years. This helps Americans who are struggling with the stubbornly high inflation that is eating into their purchasing power as the average wage gains a sharp rise in prices.

In Summary:

With all that said, we hope you now have enough information to understand your place in the 2023 tax brackets. With the inflation rate rising, we all need to brace ourselves and prepare for a visit from the taxman.

If you’re still unsure what tax bracket you’re in, or what kind of deductions you should take, or if you have any other concerns about your 2023 taxes, please contact us at Prospect Financial Services. We’re located in Redlands, California, and we’re the premier firm for tax services in the Inland Empire and throughout Southern California. Our knowledgeable team will be happy to help you make sense of your taxes for 2023 and beyond!