IRS issues inflation adjustments to tax rates and limitations for 2023

The Internal Revenue Service announced that it will be making adjustments for inflation to several key tax provisions for 2023. As a result of these adjustments, taxpayers will benefit from higher tax rate thresholds and adjusted limitations on deductions. While the adjustments apply to more than 60 tax provisions, we will cover those that more widely impact taxpayers.  

Individual tax brackets

The income thresholds for marginal tax rates have been increased for the tax year 2023 as follows:

Tax Rate

Single Filers Income

Married Filing Jointly Income

10%

$0 to $11,000

$0 to $22,000

12%

$11,001 to $44,725

$22,001 to $89,450

22%

$44,726 to $95,375

$89,451 to $190,750

24%

$95,376 to $182,100

$190,751 to $364,200

32%

$182,101 to $578,125

$364,201 to $693,750

37%

$578,126 or more

$693,751 or more

The Standard Deduction

The standard deduction is a set amount that reduces the taxable income for those who don’t itemize. The standard deduction amounts for 2023 are below.

Filing Status

2023 Standard Deduction

Change

Married filing jointly

$27,700

+$1,800

Single taxpayers and married individuals filing separately

$13,850

+900

Head of household

$20,800

+$1,400

Long-term capital gains tax rates

Long-term capital gains taxes are levied on the profit from the sale of assets held for more than a year. The following are the 2023 tax rate thresholds based on filing status.

Filing Status

0% Tax Rate

15% Tax Rate

20% Tax Rate

Single

$0 to $44,625

$44,626 to $492,300

$492,301 or more

Married filing jointly

$0 to $89,250

$89,251 to $553,850

$553,851 or more

Married filing separately

$0 to $44,625

$44,626 to $276,900

$276,901 or more

Head of household

$0 to $59,750

$59,751 to $523,050

$523,051 or more

Estate and gift tax exemption

The lifetime estate and gift tax exemption is a federal tax exclusion that allows taxpayers to transfer a certain amount of assets during their lifetime or upon death without incurring any federal estate or gift taxes. The exemption amount for individuals was increased from $12.06 million to $12.92 million for 2023. 

The annual gift exclusion is a provision under the federal gift tax rules that allows an individual to make gifts up to a certain amount each year without incurring any gift tax liability. The annual gift exclusion was increased from $16,000 to $17,000 per donee for 2023. Gifts over $17,000 will reduce your lifetime estate and gift tax exemption. 

Estate and trust tax rates

Estates and trusts are taxed on their income, just like individual taxpayers. Below are the tax rates based on income:

Taxable Income

Tax Rate

$0 to $2,900

10% of taxable income

$2,901 to $10,550

$290 + 24% of the amount exceeding $2,900

$10,551 to $14,450

$2,126 + 35% of the amount exceeding $10,550

Over $14,450

$3,491 + 37% of the amount exceeding $14,450

Cafeteria plans

A flexible spending arrangement is a cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified benefits. The limitation on how much an employee may contribute to health flexible spending arrangement was increased to $3,050 for 2023. The maximum carryover amount for cafeteria plans that permit the carryover of unused amounts will be $610 for 2023, up from $570 in 2022. 

Qualified transportation fringe benefit

Qualified transportation fringe benefits, such as employer-paid parking, are exempt from federal income and payroll taxes up to a certain amount. The monthly limitation for qualified transportation and parking was increased to $300 per month in 2023, up from $280 per month in 2022. 

Qualified business income

The qualified business income (QBI) deduction allows owners of pass-through entities to deduct up to 20% of their QBI from their taxable income. To be eligible for the full deduction, owners must have a taxable income below certain thresholds. Limitations are phased in for incomes above the threshold.

The qualified business income (QBI) deduction allows owners of pass-through entities to deduct up to 20% of their QBI from their taxable income. To be eligible for the full deduction, owners must have a taxable income below certain thresholds. Limitations are phased in for incomes above the threshold.

Filing Status

Threshold

Phase-in Range

Married filing jointly

$364,200 

$464,200 

Married filing separately

$182,100 

$232,100 

All other filing statuses

$182,100 

$232,200 

Limitations for section 179 expensing

Section 179 allows a business to deduct the full cost of purchasing or leasing eligible new or used assets up to certain limits. The business can deduct up to $1.16 million of expenses (up from $1.08 mil.) for assets placed into service in 2023. If the business purchases more than $2.89 million of eligible assets in 2023 (up from $2.62 mil.), then the amount it’s able to deduct is reduced dollar for dollar for any expenditures in excess of $2.89 million.   

Energy-Efficient Commercial Building Deduction

The dollar value used to compute the section 179D deduction for energy-efficient commercial buildings was increased to $.54 for 2023, an amount that may be increased up to a maximum of $1.07 based on certain reductions of certified energy and power. The dollar value used for the section 179D deduction for projects meeting certain prevailing wage and apprenticeship requirements was increased to $2.68 in 2023, an amount that may be increased up to a maximum of $5.36 based on certain reductions of certified energy and power.

Excess Business Loss Limitation

Noncorporate taxpayers may not deduct business losses in excess of certain limitations. For 2023, the limit under Section 461(I) was increased to $289,000 for single filers and $578,000 for married filing jointly.  

 

This article is intended to provide a brief overview of the IRS’s recent inflation adjustments for the 2023 tax year. It is not a substitute for speaking with one of our expert advisors. Please contact our office if you’d like to learn more about these tax changes and how they might affect your unique situation.

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