2023 Tax Brackets Changed: What Every Taxpayer Should Know

The other day, my wife Denise sent me an Instagram Message discussing the changes in the 2023 tax brackets.

The headline read, "Due to inflation, Americans can keep more money from taxes next year."

This caught my interest, but I wondered how much money we're actually talking about.

It dawned on me that I didn't fully understand how tax brackets worked or how taxes were calculated.

As someone working in finance, this seemed off, so I decided to educate myself and share what I learned.

Let's dive into the topic: Inflation has had a significant impact on this year's tax brackets.

What does this mean for you? It means bigger changes than we've seen in a while.

I'll guide you through the new tax game without using complicated jargon, providing you with the facts and explaining how it will affect your cash flow.

Let's ensure your finances remain on track despite these changes.

Did You Know that Tax Brackets Get Adjusted Annually? 

On a yearly basis the Internal Revenue Service (IRS) adjusts more than 60 tax provisions for inflation to prevent what is called “bracket creep.”

Bracket creep occurs when people are pushed into higher income tax brackets or have reduced value from credits and deductions due to inflation, instead of any increase in real income.

The IRS used to use the Consumer Price Index (CPI) as a measure of inflation prior to 2018.

However, with the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to adjust income thresholds, deduction amounts, and credit values accordingly.

The new inflation adjustments are for tax year 2023, for which taxpayers will file tax returns in early 2024.

So Uncle Sam is looking out for us now? Well, in this case, yes. 

Overview of the New Tax Brackets

The updated tax brackets for 2023 determine the income ranges at which different tax rates apply.

These brackets outline the percentage of income that individuals and families will owe in federal income taxes.

It is essential to be aware of these changes to better understand how they may impact your tax liability and financial planning.

The income limits for all 2023 tax brackets and all filers will be adjusted for inflation and will be as follows in the table below.

There are seven federal income tax rates in 2023: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.

The top marginal income tax rate of 37 percent will hit taxpayers with taxable income above $539,900 for single filers and above $693,750 for married couples filing jointly.

2023 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households

2022 Federal Income Tax Brackets and Rates for Comparison 

22-23 Comparision Breakdown Chart 

2023 Standard Deduction and Personal Exemption:

The standard deduction will increase by $900 for single filers and by $1,800 for joint filers

The personal exemption for 2023 remains at $0 (eliminating the personal exemption was part of the Tax Cuts and Jobs Act of 2017 (TCJA).

Impacts on Your Finances

The new tax brackets for 2023 can have significant implications for individuals and families financially, especially if you are on the fringe of a lower tax bracket. Understanding these changes is crucial for effective financial planning. Here are some key points to consider:

1. Tax Liability: With the updated tax brackets, your tax liability may change based on your income level. It's important to review the new brackets to determine how they may impact the amount of taxes you owe.
2. Marginal Tax Rates: The new brackets determine the percentage of income that will be taxed at each rate. Be aware of the marginal tax rates applicable to your income range to better estimate your tax obligations.
3. Deductions and Credits: Changes in tax brackets can also affect the availability and value of deductions and credits. Some deductions may phase out or become less beneficial, while others may remain unchanged. Reviewing these changes can help you optimize your tax savings.
4. Financial Planning: The new tax brackets can impact your overall financial planning. Consider how changes in your tax liability may affect your budget, savings, and investment strategies. It may be necessary to adjust your financial plans to accommodate these changes.

How This Could Impact You Examples 

Here are a few examples to help you understand the potential impact of the new tax brackets on your tax liabilities or refunds:

1. Example 1: Single Filers
   • John, a single filer, had a taxable income of $50,000 in 2022. Under the previous tax brackets, he fell into the 22% tax bracket and owed $9,240 in federal income taxes. However, with the updated tax brackets for 2023, John's taxable income would still fall into the 22% bracket, but the tax owed would be $8,850, resulting in a savings of $390.
2. Example 2: Married Filing Jointly
   • Sarah and Mike, a married couple filing jointly, had a combined taxable income of $150,000 in 2022. Under the previous tax brackets, they fell into the 24% tax bracket and owed $31,200 in federal income taxes. With the updated tax brackets for 2023, their taxable income would still fall into the 24% bracket, but the tax owed would be $30,300, resulting in a savings of $900.
3. Example 3: Heads of Households
   • Lisa, a head of household, had a taxable income of $80,000 in 2022. Under the previous tax brackets, she fell into the 22% tax bracket and owed $16,720 in federal income taxes. With the updated tax brackets for 2023, her taxable income would still fall into the 22% bracket, but the tax owed would be $16,500, resulting in a savings of $220.

If you are having trouble understanding how the taxes are calculated here is an example.

How Taxes Are Calculated Example: Tax Liability for Single Filer with $90,000 Income

Let's consider an example of a single filer with a taxable income of $90,000. We'll calculate their tax liability using the 2023 tax brackets.

According to the 2023 tax brackets, the income range for the 22% tax bracket for single filers is $44,725 to $95,375. Since the income falls within this range, the tax calculation would be as follows:

• The income up to $44,725 is taxed at 10%: $44,725 * 0.10 = $4,472.50.
• The remaining income from $44,725 to $90,000 is taxed at 22%: ($90,000 - $44,725) * 0.22 = $9,954.50.

Adding these two amounts together, the total tax liability for a single filer with a $90,000 income would be $4,472.50 + $9,954.50 = $14,427.

Please note that these calculations are for illustrative purposes only and assumes no deductions, credits, or other factors that may affect the final tax liability. It's always recommended to consult with a tax professional for accurate calculations based on individual circumstances.

Remember to stay updated on any additional developments or clarifications from the relevant authorities regarding the new tax brackets.

Strategies for Optimizing Tax Savings within New Tax Brackets

• Take advantage of tax deductions and credits: Explore available deductions and credits that can help reduce your taxable income or provide tax relief. Examples include the Earned Income Tax Credit, Child Tax Credit, and education-related deductions.
• Maximize contributions to retirement accounts: Consider contributing the maximum allowable amount to your retirement accounts, such as a 401(k) or IRA. These contributions can lower your taxable income and potentially qualify you for additional tax benefits.
• Utilize tax-efficient investment strategies: Explore investment options that offer tax advantages, such as tax-efficient mutual funds or tax-exempt bonds. These investments can help minimize your tax liability on investment gains.
• Plan charitable contributions strategically: Make charitable donations to eligible organizations and take advantage of the tax deductions associated with them. Keep track of your donations and ensure compliance with IRS guidelines.
• Consider tax-efficient withdrawal strategies: If you're retired or nearing retirement, plan your withdrawals from retirement accounts strategically to minimize the impact on your tax liability. Consult a financial advisor for guidance on tax-efficient withdrawal strategies.
• Review your business structure: If you're a business owner, assess whether your current business structure is optimal for your tax situation. Consult with a tax professional to determine if there are more tax-efficient options available.
• Stay informed about tax law changes: Keep yourself updated on any changes to tax laws and regulations that may impact your tax situation. This will help you proactively adapt your tax planning strategies to maximize savings within the new tax brackets.

TLDR Conclusion:

The new tax brackets for 2023 have been updated, and it is important to understand how they may impact your tax liability and financial planning.

While a 7% change in the bracket may seem significant, the actual dollar impact on your taxes has not changed much.

The implication here is that the IRA takes inflation into consideration, preventing you from moving into higher tax brackets over time.

While this is beneficial in the long term, it is unlikely to significantly affect your tax outcome. To optimize your tax situation, it is best to utilize various strategies and plan ahead.

Consider seeking personalized advice from a tax professional or financial advisor based on your specific circumstances. Stay informed about any additional developments or clarifications from the relevant authorities regarding the new tax brackets.