What the IRS’ inflation adjustments mean for your paycheck
“This might be the only good news to come out of our inflationary times.”
Uncle Sam might be giving us a little break when it comes time to file taxes in 2024.
On Tuesday, the Internal Revenue Service announced new, inflation-adjusted tax brackets that will take effect for the 2023 tax year. Experts say the adjustments could mean more savings for people across all income brackets.
“The point here is that inflation is being taken into account and people will save money,” said David Caplan, a CPA out of Lafayette Hill. “But it affects people in many different ways.”
Adjustments from the IRS happen every year. What’s different this year is just how much the IRS has to compensate for. Data from the Bureau of Labor Statistics showed that inflation is hitting us hard — with rent, electricity, and grocery prices at a 40-year high.
What’s happening with the standard deduction?
The IRS’ updated tax rates and standard deductions — the baseline amount of income that can be collected tax-free — will rise.
“The IRS lowers your taxes by raising the standard deduction,” said Howard Dvorkin, CPA and chairman of Debt.com. “Think of it as a chunk of your money the IRS ignores. This year, the IRS will hike the standard deduction by around 7%, depending on your circumstances.”
The increased standard deduction marks the largest adjustment since 1985, the year the agency implemented annual automatic adjustments for inflation.
For a married couple filing jointly, if their standard deduction last year was $25,100 — meaning the IRS only taxed the spouses for what they earned over that amount — this year, the standard deduction would jump by $800 to $25,900.
What are the standard deduction increases?
Separate filers: from $12,950 in 2022 to $13,850 in 2023
Joint filers: from $25,900 to $27,700
Heads of households: from $19,400 to $20,800
How are tax brackets changing?
Income thresholds for tax brackets will increase by 7% to keep up with the rate of inflation. That means your top tax rate may decrease. For example, if you were earning $43,000 in 2022, your top tax rate was 22%. But next year, it will be 12%. However, Caplan cautions, just because you drop to a lower bracket, it doesn’t necessarily mean that you’re going to save a lot.
“Even if you’re in a different tax bracket, it doesn’t mean you’re paying that amount on all of your income,” he said. “You will pay the average of all of the brackets that you’re in.”
Marginal rates in 2022 vs 2023 for single filers
How will my paycheck be affected?
Taxpayers can expect to see the new withholding statements reflected in their paychecks starting in January.
Still, Caplan said, you should take those paycheck stubs with a grain of salt.
“The IRS will adjust the withholding based on what they think you’ll pay eventually, but it’s based on what you put down on your W4 forms,” he said. “Those forms change and people may put down the wrong deduction. They are inferring that they’re going to get this right, but it’s never perfect.”
Still, both CPAs The Inquirer spoke with agreed, the IRS’ changes should mean more money for most.
“This might be the only good news to come out of our inflationary times,” Dvorkin said.