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Your First Look at 2023 Tax Brackets, Deductions, and Credits (1) & More News

 

The US Bureau of Labor Statistics reported that the consumer price index increased just 0.1% for August after no change in July. However, inflation remains a concern because over the last 12 months, the index rose 8.3% before seasonal adjustment. And those rates could impact your 2023 tax picture.

The CPI measures the cost of goods and services in urban areas—in other words, your cost of living. It’s the most widely used measure of inflation since, as prices go up, the purchasing power of your dollar goes down. This is important information for taxpayers because the Tax Code provides for mandatory annual adjustments to certain tax items based on inflation.

(For more on inflation and the CPI, including a look at how the chained CPI works, check out this previous article.)

Bloomberg Tax’s projected US tax rates forecast that inflation-adjusted amounts in the tax code will increase by roughly 7.1% from 2022, more than double last year’s increase of 3%. What will inflation mean for your 2023 tax picture? “We predict that inflation-adjusted amounts in the tax code will increase significantly in 2023 compared to prior years due to the economic environment,” said Heather Rothman, vice president for Analysis & Content at Bloomberg Tax.

Here’s how that translates into dollars.

2023 Standard Deduction

For one, taxpayers will see a bump in the standard deductions. Since the doubling of the deduction due to tax reform, today, nearly 90% of taxpayers file using the standard deduction.

Married taxpayers were entitled to a standard deduction of $25,900 in 2022—that number is expected to jump to $27,700 in 2023. Single and married individuals filing separately will see the standard deduction rise to $13,850, up from $12,950 in 2022. Heads of households will also see a boost to $20,800, up from $19,400 in 2022.

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The additional standard deduction for blind people and senior citizens will be $1,500 for married individuals and $1,850 for singles and heads of household in 2023.

Bloomberg also predicts that the standard deduction for taxpayers who may be claimed as a dependent by another taxpayer will be the greater of $1,250 or the sum of $400 plus the individual’s earned income.

2023 Tax Brackets

Tax brackets are also expanding. You can take advantage of these early numbers now. As Rothman noted, “Taxpayers and advisers can use our projections to begin their 2023 tax planning before the IRS publishes the official 2023 inflation-adjusted amounts later this year.”

Here’s how those are expected to look.

Individual Taxpayers

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Married Taxpayers Filing Jointly

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Married Taxpayers Filing Separately

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Heads of Household

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Capital Gains

As with income tax rates, the actual capital gains rates don’t change from year to year, but the brackets will widen in 2023. Short-term capital gains rates—for assets held less than a year—are the same as your income tax rates. But favorable long-term capital gain rates are dependent on your taxable income. Generally, the higher your income, the higher the rate.

The projected maximum zero rate amount for single and married taxpayers filing separately in 2023 is $44,625. The number bumps to $59,750 for heads of household and $89,250 for married taxpayers filing jointly.

The projected maximum 15% rate amount is $492,300 for single taxpayers and $276,900 for married taxpayers filing separately. Heads of household see an increase to $523,050 and for married taxpayers filing jointly, it’s $553,850.

Child Tax Credit

For the tax year 2021, the child tax credit amount increased from $2,000 to $3,600 for qualifying children under age 6, and $3,000 for other qualifying children under age 18. The entire amount was also refundable. However, the enhanced version of the credit disappeared in 2022—a version of the child tax credit remains in place for 2022 and 2023.

The 2023 credit amount will remain at the original $2,000 per qualifying child since it is not adjusted for inflation. However, the maximum refundable portion of the credit for a qualifying child is adjusted for inflation and is expected to be $1,600 in 2023.

Federal Estate & Gift Tax

Federal estate and gift tax numbers are moving, too. For 2023, the unified credit amount used to calculate the personal exemption will bump to $12,920,000 (or $25,840,000 for married couples). The annual exclusion for gifts is also expected to move up $1,000 to $17,000 in 2023.

(For more on how the federal estate and gift tax system works, check out this previous article.)

What It Means for 2023

Wider tax brackets and increased exemptions and credits typically mean lower tax bills for most taxpayers, which is a good thing. But remember that this isn’t a bone being tossed to voters; it’s a statutory increase due to inflation.

And keep in mind that these are projections for the tax year 2023, beginning Jan. 1, 2023—the numbers you’ll use to prepare your tax return in 2024. These are not the tax rates and other numbers for 2022 that you’ll use to prepare your tax return in 2023.

Finally, remember that these are just projections. The IRS will publish the official tax brackets and other tax numbers for 2023 later this year—typically in October—and we’ll share those when available.

The 2023 tax projections are just one of the features available from Bloomberg Tax. The full report with additional projections is available for free here.

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This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.

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