Let’s Get to the Bottom of Inflation and Taxes
With the IRS adjusting tax rates across different income brackets for inflation, the implications of these changes can be far-reaching. In this blog post, we’ll explore how this affects individuals filing taxes in 2023. With a better understanding of inflation and taxes, you’ll have an easier time navigating this year’s tax season.
Understanding Inflation Before the 2023 Tax Season
Much to the chagrin of many Americans, inflation rose 9.1% in 2022. As prices rose, it became more difficult to purchase everyday goods like groceries and gas. It also caused housing prices to escalate. The median monthly rent for an apartment rose from $1,889 in December 2021 to $1,979 in December 2022, according to Rent.com’s annual rent report. Across the board, this spike in inflation made it more difficult for many Americans to go about their daily lives. The effects of inflation don’t stop there—they also impact your 2023 taxes.
Why Inflation Rose So Sharply
While there are many factors at play, it’s clear that the COVID-19 pandemic was one of the driving forces. The global health crisis created massive supply chain issues, such as weeks-long port backlogs and shortages of essential goods. These drastically affected both supply and consumer demand, causing prices throughout the country to skyrocket.
The Inflation Tax Adjustment: How Your Tax Rates Change
For Individual Single Taxpayers
|Tax Rate||For Tax Year 2023||For Tax Year 2022|
|10%||$0 to $10,275||$0 to $9,950|
|12%||$10,275 to $41,775||$9,950 to $40,525|
|22%||$41,775 to $89,075||$40,525 to $86,375|
|24%||$89,075 to $170,050||$86,375 to $164, 925|
|32%||$170,050 to $215,950||$164,925 to $209,425|
|35%||$215,950 to $539,900||$209,425 to $523,600|
|37%||$539,900 or more||$523,600 or more|
For Married Couples Filing Jointly
|Tax Rate||For Tax Year 2023||For Tax Year 2022|
|10%||$0 to $20,550||$0 to $19,900|
|12%||$20,550 to $83,550||$19,900 to $81,050|
|22%||$83,550 to $178,150||$81,050 to $172,750|
|24%||$178,150 to $340,100||$172,750 to $329,850|
|32%||$340,100 to $431,900||$329,850 to $418,850|
|35%||$431,900 to $647,850||$418,850 to $628,300|
|37%||$647,850 or more||$628,300 or more|
Want to learn how to protect your income from inflation and achieve your financial goals? Explore our blog to find out.
How Inflation Affects Your Tax Returns
Although inflation makes it more difficult to put money away and maintain financial stability, you can still navigate the 2023 tax season with poise and confidence. Here are a few key tax areas that have changed with inflation.
The Standard Deduction
Taxpayers can choose between itemized deductions or the standard deduction when filing their taxes. Typically, people file for a deduction that requires them to pay the least. This tax season, the standard deduction is rising by more than 3% in response to inflation. Here’s how that plays out for single taxpayers and married individuals filing jointly:
- For single taxpayers: $12,500 to $12,950
- For married couples filing jointly: $25,100 to $25,900
401(k) and IRA Contribution Limits
Inflation also affects how much money you can put into your 401(k) and IRA accounts. For the most part, inflation tax adjustments allow you to add more money to these accounts each year. This is especially advantageous because these reduce your taxable income.
Health Savings Accounts
Health savings accounts (HSAs) allow individuals to set aside money to pay for qualified health expenses. The funds contributed to your HSA are not subject to federal taxes. In addition, the tax-deductible amount is adjusted for inflation—contribution limits will rise as inflation increases.
Child, Adoption, and Earned Income Tax Credits
Here are a few more points of intersection between inflation and taxes:
- Child Tax Credit: The child tax credit helps families with qualifying children secure a tax break. This tax credit is not adjusted for inflation, but the refundable portion of it is. This year it’s increasing from $100 to $1,500.
- Adoption Credit: The adoption credit eases the tax burden on parents that have adopted children or are in the process of adopting children. This year, the maximum credit has increased from $14,440 to $14,890 due to inflation.
- Earned Income Tax Credit (EITC): The EITC helps lower-income families ease their financial burden. Factors such as maximum credit amounts and investment income limits adjust for inflation, making it easier for these families to remain financially stable as the cost of living increases.
Learn How to Navigate the 2023 Tax Season With Physician’s Resource Services
If you’re a physician or healthcare professional, navigating tax season can be a challenge. Fortunately, Physician’s Resource Services is here to help. We work with physicians and help them develop a comprehensive tax planning strategy that reduces tax liability.
If you need assistance this tax season, give us a call.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
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