Inflation Tax Adjustments for 2023

Inflation has been an issue for almost all American families in the past couple of years, driving up the cost of everything from food and clothing to energy and automobiles. The country has seen prices rise at the fastest level of growth in forty years, and just about everyone is feeling the pinch.

There have always been inflation tax adjustments, but given the rapid pace of inflation, the shift in rates for 2023 has been much greater than typical, at about seven percent. What do the tax adjustments for inflation mean for taxpayers?

IRS 2023 Tax Brackets

The top marginal tax rate for tax year 2023 will remain 37% for individual taxpayers with incomes of more than $578,125, and married couples filing jointly with incomes above $693,750. The other marginal tax rates are:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly)
  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly)
  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly)
  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly)
  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly)
  • 10% for incomes of $11,000 or less ($22,000 for married couples filing jointly)

2023 Standard Deduction Increase

Fewer people have had the incentive to itemize their tax deductions since the enactment of the 2017 Tax Cuts and Jobs Act (TCJA), so the amount of the standard deduction is relevant to more people than in the past. For tax year 2023, the standard deduction taxpayers can claim on their income tax return is:

  • $27,700 for married couples filing jointly (increased by $1,800 from 2022)
  • $13,850 (increased by $900) for single taxpayers and married individuals filing separately
  • $20,800 (increased by $1,400) for heads of households

Alternative Minimum Tax in 2023

The Alternative Minimum Tax (AMT), as the name suggests, is a “floor” on the percentage of taxes a taxpayer must pay, regardless of the number of tax credits or deductions they have available to them. The AMT was created to ensure that high-income earners pay at least a minimum amount of income tax.

If your taxable income falls below the exemption amount, you are not subject to the AMT, and the exemption begins to phase out at higher income levels. For 2023, the AMT exemption amount for an individual taxpayer is $81,300 (up from $75,900 in tax year 2022) and begins to phase out at $578,150 (up from $539,900). For married taxpayers filing jointly, the AMT exemption is $126,500 (up from $118,100 in 2022) and begins to phase out at $1,156,300 (up from $1,079,800).

Earned Income Tax Credit in 2023

The Earned Income Tax Credit (EITC) primarily benefits lower income earners by giving them a dollar-for-dollar refundable tax credit which increases with the number of qualifying children they are supporting. For inflation tax year 2023, the maximum EITC amount is $7,430 for eligible taxpayers with three or more qualifying children; that is an increase of the 2022 maximum of $6,935.

2023 Lifetime Exclusion and Annual Gift Tax Exclusions

Individuals who die in 2023 will have $12,920,000 of their estate excluded from estate tax. This is a significant adjustment from the 2022 exclusion amount of $12,060,000. While the estate tax exclusion amount is adjusted annually for inflation, you may remember that the base amount of the exclusion was nearly doubled in 2018 by the 2017 Tax Cuts and Jobs Act (TCJA). That law also provided that the amount of the exclusion would “sunset” back to pre-TCJA levels after December 31, 2025.

Accordingly, even with annual adjustments for inflation tax, the unified credit against estate tax will be much lower for tax year 2026 than for tax year 2025. That said, most people will still have estates small enough to avoid paying estate tax, especially with proper estate planning.

The annual gift tax exclusion has also been adjusted for inflation for tax year 2023. The amount is now $17,000, up from $16,000 in 2022. An individual can make gifts of up to the exclusion amount each year to as many other individuals as they choose without having to file a gift tax return. If a married couple wants to make a gift to an individual, they can each give $17,000, for a total of $34,000.

Other Tax Inflation Adjustments

Numerous other aspects of taxes will be affected by inflation adjustments, including:

  • Transportation and parking: the monthly limits for the qualified transportation fringe benefit and qualified parking exclusion increase to $300 each, a $20 bump from 2022.
  • Health flexible savings accounts: the dollar limitation for employee salary reductions for contributions to health FSAs jumps to $3,050.
  • Medical savings accounts: Health Savings Account (HSA) participants with self-only coverage must have a high-deductible health plan with an annual deductible between $2,650 and $3,950.
  • Adoption credit and adoption assistance exclusion: In 2023, parents who adopt a child can take a maximum adoption credit of $15,950. Employees who receive assistance to adopt a child can exclude up to $15,950 of that assistance from income for tax purposes.

The Bottom Line

To learn more about inflation tax, including the new IRS tax brackets and increased deduction amounts, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.