Tax Inflation Adjustments by IRS For 2023

It’s tax time again, and the IRS is getting ready to make some changes that could affect your bottom line. Starting in 2023, the Internal Revenue Service will be adjusting various tax provisions due to inflation, such as the tax rate schedules, personal exemption amounts, and standard deductions.

Here’s a quick look at the changes you can expect this tax season, so you can stay ahead of the game.

What’s New for 2023?

With the Inflation Reduction Act of 2012, certain energy-related tax breaks are being extended, and the deduction for energy-efficient commercial buildings is being indexed for inflation. Under this new law, businesses that invest in energy-efficient measures and meet specific criteria will be able to receive deductions on their taxes.

To calculate the maximum deduction, the dollar value of $0.54 must be increased (but not above $1.07) by $0.02 for every percentage point by which the total amount of energy and power used by the building is reduced by more than 25%.

In addition, the applicable dollar value used to determine the increased deduction amount for certain properties is $2.68, which is increased by $0.11 for every percentage point that a building’s annual energy and power costs are certified to be reduced by 25 percent or more (but not above $5.36).

This new law will benefit businesses that are looking for ways to reduce their energy costs and invest in more efficient measures. Businesses that meet the criteria outlined by the Inflation Reduction Act will be able to save money on their taxes while contributing to a more sustainable planet.

It is an important step forward in reducing energy usage and promoting cleaner, renewable sources of energy. This new law is a positive step towards creating an equitable and sustainable future for us all.

The Inflation Reduction Act is part of the larger effort to combat climate change and reduce emissions. By providing incentives for businesses to invest in energy-efficient measures, we can take an active role in reducing emissions and protecting the environment. This new law is important to creating a better, more sustainable future.

A summary of the changes made in Revenue Procedure 2022-38:

The IRS has made several adjustments to tax items for the tax year 2023, including the following dollar amounts:

  • For married couples filing jointly in 2023, the standard deduction will be $27,700, an increase of $1,800 from the prior year, and singles and married couples filing separately will be $13,850. That’s an increase of $900 from the prior year. Heads of households will see a $1,400 increase in their standard deduction to $20,800 for 2023.

Marginal Rates: For the tax year of 2023, individuals who are single taxpayers with an annual income exceeding $578,125 (or $693,750 for married couples filing jointly) will still be subject to a top tax rate of 37%.

While the other rates are as follows:

  1. The tax rate will be 35% for incomes over $231,250 ( If married couples file jointly, it’ll be $462,500).
  2. The tax rate will be 32% for income over $182,100 ( If married couples file jointly, it’ll be $364,200).
  3. The tax rate will be 24% for income over $95,375 ( If married couples file jointly, it’ll be $190,750).
  4. The tax rate will be 22% for income over $44,725 ( If married couples file jointly, it’ll be $89,450).
  5. The tax rate will be 12% for income over $11,000 ( If married couples file jointly, it’ll be $22,000).
  6. The tax rate will be 10% for income over $11,000 or less (If married couples filing jointly, it’ll be $22,000)
  • For taxpayers in 2023, the Alternative Minimum Tax (AMT) exemption amount is $81,300. This significant sum can be used to offset income subject to the AMT. This amount is phased out as taxable income increases, starting at $578,150 ($126,500 for married couples filing jointly, with the exemption beginning to phase out at $1,156,300). The AMT exemption for 2023 is higher than the 2022 exemption amount of $75,900, which phased away at $539,900 ($118,100 for married couples filing jointly, with the exemption beginning to phase out at $1,079,800).
  • For taxpayers with three or more qualifying children, the 2023 Earned Income Tax Credit, or EITC, is a generous $7,430. This is up from the tax year 2022 maximum credit of $6,935 and an increase of $495 from last year. The IRS offers a revenue procedure containing a table of maximum EITC amounts for other categories, income thresholds, and phase-outs.
  • For 2023, the IRS has increased the maximum allowance for certain workplace benefits related to transport and parking. The new ceiling is set at $300 per month for transportation fringe benefits and $300 for qualified parking. This is a $20 increase from the limit in 2022.
  • For the taxable years starting in 2023, employees can set aside pre-tax income for contributions to health flexible spending arrangements. These arrangements allow employees to pay for qualified medical expenses with pre-tax dollars, resulting in lower taxes and potential savings. Employees can contribute up to $3,050 for the 2023 taxable year. Additionally, employees can carry over unused amounts up to $610 for the upcoming 2023 taxable year. This is an increase of $40 from the 2022 taxable year.
  • For the tax year 2023, participants with self-only coverage who have a Medical Savings Account will have an annual deductible that must not be less than $2,650 but not more than $3,950. The maximum out-of-pocket expense for self-only coverage is $5,300. The annual deductible for participants with family coverage must be less than $5,300 but not more than $7,900. The out-of-pocket expense limit for family coverage is $9,650. These amounts have all been increased from the limits in the tax year 2022, providing greater financial protection to Medical Savings Account participants.
  • For the tax year 2023, individuals may be able to exclude a maximum of $120,000 of their foreign-earned income from taxation.
  • The estates of individuals who passed away during the year 2023 are eligible to receive a significantly increased basic exclusion amount compared to the estates of decedents who died in the prior year. The basic exclusion amount for estates of decedents who died during 2023 is $12,920,000, a substantial increase over the $12,060,000 basic exclusion amount for estates of decedents who died in 2022.
  • For the 2023 calendar year, individuals can take advantage of a generous gift-giving allowance. This amount has increased from $16,000 in 2022 to $17,000 in 2023.
  • Adopting a child can be one of the most rewarding experiences for any family, and in 2023, the United States government increased the amount of credit allowed for adoption expenses. The new maximum allowable credit is up to $15,950 from the previous year’s $14,890.

Note: The tax year 2023 adjustments described above generally apply to tax returns filed in 2024.