Each year, the IRS calculates inflation adjustments for various tax provisions for the following tax year. Typically, the inflation adjustments for the upcoming tax year are announced in early November; therefore, official inflation adjustments for the 2023 tax year should be released at that time. Wolters Kluwer, a global provider of professional information, services, and software for the accounting and tax industry, has released its projected inflation adjustments for the 2023 tax year. With much higher inflation over the last year, experts are predicting higher-than-usual inflation adjustments for 2023. Projected adjustments for some of the more common tax provisions are listed below:
Federal Income Tax Provisions
- The top marginal income tax bracket of 37% will now apply to married filing joint couples if their taxable income exceeds $693,750 (up from $647,850 in 2022). For single individuals, the top rate will apply at $578,125 of taxable income (up from $539,900 in 2022). (Taxable income is your adjusted gross income minus your allowable itemized or standard deductions).
- The maximum capital gains tax rate of 20% will apply to married filing joint couples with taxable income over $553,850 and to single filers with taxable income over $492,300. Taxpayers pay either a 0% or 15% capital gains tax rate if taxable income is below these amounts, depending on their income level and filing status.
- For estates and trusts, the top bracket of 37% will apply at taxable income levels of $14,450 for 2023. The maximum 20% capital gains tax rate applies to estates and trusts with taxable income at or above $14,650.
- The Social Security wage base (the amount of earnings which are subject to social security (FICA) tax will be $155,100 for 2023, up from $147,000 in 2022. There is no earnings cap for Medicare tax – it applies to all earnings.
- The standard deduction for 2023 will be $27,700 for married filing joint couples (up from $25,900) and $13,850 for single individuals (up from $12,950). The standard deduction was nearly doubled after the passage of the Tax Cuts & Jobs Act of 2017, and many itemized deductions were either limited or repealed with that law. The ever-increasing standard deduction amount, along with other limits on itemized deductions, is making it increasingly difficult for some taxpayers to itemize deductions.
- The additional standard deduction for taxpayers who are over 65 or who are blind will be $1,500 per person for married filing joint taxpayers and $1,850 for single taxpayers.
Estate and Gift Tax Provisions
- The estate tax exemption (unified credit against estate and gift tax) will increase by $860,000 per taxpayer in 2023 to a total exemption of $12,920,000 per person. This is the largest increase on record for the estate tax exemption and means that a taxpayer dying in 2023 can pass nearly $13 million of assets on to his or her heirs tax-free. The amount is doubled for married couples ($25,840,000) if portability is properly elected on the predeceased spouse’s estate tax return.
- Planning tip: When this additional estate tax exemption increase is officially implemented in 2023, high-net-worth individuals who have utilized most or all of their combined estate and gift tax exemption should consider making additional gifts of up to $860,000. This will lock in the benefit of the large 2023 inflation adjustment in the event that Congress passes legislation that reduces the available exemption amount for a future tax year. In addition, the current expanded exclusion amount is set to expire at the end of 2025, causing the exclusion amount to be decreased to approximately $6.4 million per person. Consult your tax advisor for more information.
- The annual exclusion for gifts to any one recipient will be $17,000 for 2023 (up from $16,000 in 2022). Gift-splitting will allow married couples to gift up to $34,000 during 2023 to a recipient without using any of their estate and gift tax exemption.