How high inflation could affect your tax bracket next year

Jimmy Grill | Getty Images

As Americans grapple with higher prices, experts say we’ll likely see higher-than-normal inflation adjustments from the IRS for 2023 — covering tax brackets, 401(k) plan contribution limits and more.

These annual changes, built into the tax code, are intended to prevent so-called “bracket creep,” when inflation increases incomes and pushes Americans into higher tax brackets, explained Kyle Pomerleau, senior fellow and federal tax expert at the American Enterprise Institute.

“It’s not necessarily a good thing,” he said, because Americans may not reflect a better quality of life.

More personal finance:
5 ways a Fed rate hike could affect you
Here’s Why America’s $39 Trillion Retirement System Has a ‘C+’ Score
The extended tax deadline is October 17th. What do you know if you haven’t submitted yet

Typically, the IRS releases inflation adjustments for the following year in October or November, and Pomerlo Expect 7% increase in many provisions for 2023.

“This year, we will see a larger-than-average adjustment because we have seen higher-than-normal inflation,” he said.

This includes higher tax brackets and a larger standard deduction.

For example, the 24% tax bracket could rise to $190,750 of taxable income for subscribers in 2023, up from $178,150 in 2022, Pomerleau estimates.

This year, we’ll see a larger than average adjustment because we’ve seen higher-than-normal inflation.

Kyle Pomerloh

Senior Fellow at the American Enterprise Institute

There may also be a higher exemption for the so-called Alternative minimum taxa parallel system for higher-income earners, and more generous write-offs and phaseouts for higher-income earners Received tax revenue Low to middle income earners and more.

See also  Surprise 'terrible' sales wipe out $47 billion of social media stock

and the Real estate tax credits It could rise to $12.92 million and $25.84 million for single and joint files, respectively, up from $12.06 million and $24.12 million, Pomerleau predicts.

However, this is not a guarantee of smaller tax bills for 2023.

β€œIt will depend on the taxpayer,” Pomerleau said, pointing to different types of income, the amount of inflated earnings and provisions that might apply.

Retirement account contribution limits may increase

Higher inflation adjustments may benefit retirement savings, Pomerleau said, with larger contribution limits for 401(k) and individual retirement accounts.

While it’s too early to predict the 401(k) limit for deferment, he expects the annual IRA limits to jump to $6,500 for savers under 50, up from $6,000 for 2022.

“The jump for the IRA contribution limit is getting closer to 8% or 9% this year because of the way it interacts with the rounding rule,” he said, adjusting for increments of $500.

Some tax provisions are still not adjustable for inflation

Despite above-average inflation adjustments for many provisions, Many of them remain the same every yearexperts say.

“It’s a patchwork of things that get neglected,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.

there 3.8% surcharge on investment incomebegins when your adjusted adjusted gross income exceeds $200,000 for single subscribers and $250,000 for couples, which is not adjusted.

And a maximum of 3000 dollars Capital Loss Discounts It was fixed about 30 years ago. “Inflation is eroding that away,” Pomerleau said.

While the $10,000 cap on the federal deduction for state and local taxes, known as SALT, will expire after 2025, the cap “will have a greater impact in the meantime,” he said.

However, it’s hard to gauge how much any one line item will affect someone’s tax bill without running a 2023 forecast, Harris said.

Leave a Reply

Your email address will not be published.