How will inflation help lower federal taxes in 2023 tax year for many Americans?

The Internal Revenue Service today announced the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. 

For details about these annual adjustments, click here.

New in 2023, the Inflation Reduction Act extended certain energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction.

The tax year 2023 adjustments generally apply to tax returns filed in 2024. Here are some of them:

• The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700, up $1,800 from the prior year.
• For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
• Marginal Rates: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).

The other 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).
• The lowest rate is 10% for incomes of single individuals with incomes of $11,000 or less ($22,000 for married couples filing jointly).

The Alternative Minimum Tax exemption amount for tax year 2023 is $81,300 and begins to phase out at $578,150 ($126,500 for married couples filing jointly for whom the exemption begins to phase out at $1,156,300).

The 2022 exemption amount was $75,900 and began to phase out at $539,900 ($118,100 for married couples filing jointly for whom the exemption began to phase out at $1,079,800).

The tax year 2023 maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935 for tax year 2022.

For the taxable years beginning in 2023, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050. 

For tax year 2023, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650, up $200  from tax year 2022; but not more than $3,950, an increase of $250 from tax year 2022.

For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350  from 2022.

For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950 for 2022; however, the deductible cannot be more than $7,900, up $500 from the limit for tax year 2022. For family coverage, the out-of-pocket expense limit is $9,650 for tax year 2023, an increase of $600 from tax year 2022.

For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.

Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2021.

The maximum credit allowed for adoptions for tax year 2023 is the amount of qualified adoption expenses up to $15,950, up from $14,890 for 2022.