You may have heard that the IRS is changing its tax brackets for the coming year. The reason for these changes is tax consolidation. The IRS is attempting to streamline the tax code.
What does this have to do with you? The new tax brackets should make it easier for you to calculate how much you owe. It should also make the IRS’s processing of tax returns easier and faster, allowing you to pay less in taxes.
Let’s go over these tax bracket changes in greater detail so you know what to expect next year.
How Do Tax Brackets Work in the United States?
The United States has a graduated or progressive tax system in place. This is the inverse of a flat tax rate or system.
You are taxed at different rates depending on your annual income. The rates are currently 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These are known as brackets or thresholds.
Here’s where the income thresholds fall for the upcoming year. If you are single:
|TAX RATE||FOR INCOMES ABOVE|
|10%||$11,000 or less|
And if you are married and file a joint return:
|TAX RATE||FOR INCOMES ABOVE|
|10%||$22,000 or less|
How Will Tax Rates in 2023 Differ From Those in 2022?
The amount of money you can earn before entering a higher tax bracket will increase in 2023. That’s good news for you because you’ll probably have to pay less in taxes next year, even if you make more money.
Again, the federal government wants to make this change to simplify the tax code, but it also wants to provide relief to families and individuals who are feeling the pinch as a result of inflation. Many goods and services are becoming more expensive, and this action should help to mitigate that.
An Example of This Change
Let’s look at how your 2022 tax rate might differ from this year’s. In 2022, we’ll assume you’re a single filer earning $41,776. That is the maximum amount you can earn to qualify for the bracket, which requires you to pay 22% in taxes.
You can earn up to $44,726 in 2023 and still qualify for the 22% tax bracket. That means you can earn an extra $2,950 without paying more tax in 2023 than you did in 2022.
You can keep your tax savings in any of the tax brackets. The more money you earn, the more money you could save under the new tax code.
What If You File Together (Spouse)?
If you file jointly, you can still benefit from tax bracket changes next year. Using the 22% tax bracket as an example, if you file jointly in 2022, you can stay in that bracket up to $83,551. You can earn up to $89,451 as a couple next year and still be in the 22% tax bracket. That’s a $5,900 difference.
These Changes Mean You’ll Save More of Your Money
All of this may sound a little complicated, but the main takeaway is that when the IRS changes the tax code next year and adjusts each bracket, you will be able to keep more of your money. You will have to pay less to the IRS regardless of your adjusted tax bracket.
If you go to the IRS website, you’ll find detailed tables that show the current tax brackets and how they will change in 2023. You can probably guess how much money you’ll make next year. When you have that number, you can apply it to the table and estimate how much more of your money you will be able to keep.
What is the standard deduction?
All taxpayers have the option of taking the standard deduction or itemizing their deductions. This reduces their taxable income for the year. The standard deduction is claimed by the vast majority of taxpayers, in part because it is simpler—it does not require totaling specific expenses such as charitable contributions, major medical bills, and state and local taxes.
The standard deduction, like the income tax brackets, is adjusted for inflation annually. However, next year’s increase will be one of the largest yet.
In 2023, the standard deduction for single filers will increase by $900, to $13,850. The standard deduction for married couples filing jointly is twice that of single filers. It will increase to $27,700 in 2023.