Many of the 145 million Americans who
Substantial
"In general, it means people will see savings," said Tim Steffen, the director of tax planning at Baird's private wealth management group in Milwaukee. The extra money could go toward retirement nest eggs — if, financial advisors say, higher consumer prices don't stick around and siphon it away.
With its adjustments for next year, the IRS didn't change tax rates; instead, it pushed up by roughly 7% the income levels at which established rates kick in. That means "you'll have more income taxed at a lower rate than what you had before," Steffen said.
It's all due to the way in which wages, bonuses, commissions, capital gains, interest, dividends and other income are taxed in the U.S.
The IRS taxes Americans along a progressive system with seven brackets, each with its own rate. Chunks of income are taxed at progressively larger rates that range from 10% to a top 37%. The first income tranche that falls into the threshold for the lowest rate is taxed at that rate, the next, larger slice is taxed at the following higher rate and so on. When someone says they're in the 37% bracket, it doesn't mean that all of their income is taxed at that top "marginal" rate — it means that the top tier of their income is taxed at that rate. A taxpayer's "effective" rate, a measure of how much money he sends to the IRS each year, reflects an average of all the rates that apply to their total taxable income.
A Baird calculation using a simplified example shows that a married couple with taxable income of $200,000 in both 2022 and 2023 will see a reduction in their federal tax bill of nearly $900 based on the recent adjustments. A couple with $500,000 of income both this year and next would see their tax bill fall by over $3,700. For single taxpayers at those same income levels, tax bills would fall by roughly $1,400 and $1,900, respectively.
In another example, Elliott Brack, the managing director of tax services at Manhattan West, an independent wealth advisory firm in Los Angeles, calculates that a married couple with a combined income of $675,000 this year would see $27,150 of the total subject to the top 37% rate. That rate kicks in this year once income hits $647,850.
More than 60 tax provisions are going up, according to Rev. Proc. 2022-38.
But with the adjustments, Brack said none of the couple's combined income next year, assuming it stays the same, will be taxed at that top rate, which will kick in once income hits a higher $693,750. As a result, the pair will save around $4,200 in federal taxes next year, he said.
Neither set of calculations takes into account deductions and exemptions. The standard deduction, which allows taxpayers to protect a chunk of their income from federal taxes, will rise next year to $13,850 for individuals and $27,700 for married couples, also a roughly 7% increase. The IRS also boosted the amount of money that investors can exclude from their taxable estates in 2023, to $12.92 million from $12.06 million per individual. The amount that a person can gift to another each year will rise to $17,000 from $16,000.
Each year, the IRS adjusts a host of tax-related provisions, including brackets, the standard deduction, Social Security and contribution levels for retirement accounts, to reflect the impact of rising consumer prices. Inflation is running
Advisors are telling recipients not to get used to such large adjustments.
The IRS adjusts brackets annually so that taxpayers are less hurt by the "hidden" tax of inflation. That's so workers who get a raise to offset higher consumer costs don't find themselves pushed into a higher bracket. When increased earnings are taxed at a higher rate but still buy the same amount of goods and services as before, the phenomenon is known as "
The value of the IRS's adjustments comes down to how long consumer prices continue to rise.
"In nominal terms, this is a tax cut, but in real terms it's not, due to inflation," said Alex Muresianu, a policy analyst at the right-leaning Tax Foundation. The think tank has the 2023 brackets
