IRS Announces Inflation Adjustments for Tax Year 2023
The IRS recently released Revenue Procedure 2022-38, announcing the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes.
New for 2023
The Inflation Reduction Act (IRA) extended certain energy-related tax breaks and indexed for inflation the energy-efficient commercial buildings deduction beginning with tax year 2023. The applicable dollar value used to determine the maximum allowance of the deduction is 54 cents, increased (but not above $1.07) by 2 cents for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%. The applicable dollar value used to determine the increased deduction amount for certain property is $2.68, increased (but not above $5.36) by 11 cents for each percentage point by which the total annual energy and power costs for the building are certified to be reduced by a percentage greater than 25%.
Highlights of Changes in Revenue Procedure 2022-38
The tax year 2023 adjustments described below generally apply to tax returns filed in 2024.
The tax items for tax year 2023 of greatest interest to most taxpayers include the following dollar amounts:
- 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, up $1,400.
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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 (EITC) amount is $7,430 for qualifying taxpayers who have three or more qualifying children, up from $6,935. The revenue procedure contains a table providing maximum EITC amounts for other categories, income thresholds and phase-outs.
- For tax year 2023, the monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking increases to $300, up $20 from the limit for 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 cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount is $610, an increase of $40 from taxable years beginning in 2022.
- For tax year 2023, for participants who have self-only coverage in a Medical Savings Account, their plan must have an annual deductible not less than $2,650 (up $200); but not more than $3,950 (up $250). For self-only coverage, the maximum out-of-pocket expense amount is $5,300, up $350. For tax year 2023, for family coverage, the annual deductible is not less than $5,300, up from $4,950; 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.
- 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 $12.92 million, up from a total of $12.06 million 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 2022.
- 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.
Items Unaffected by Indexing
By statute, certain items that were indexed for inflation in the past are currently not adjusted.
- The personal exemption for tax year 2023 remains at 0, as it was for 2022. This elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
- For 2023, as in 2022, 2021, 2020, 2019 and 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
- The modified adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit provided in ยง 25A(d)(2) is not adjusted for inflation for taxable years beginning after Dec. 31, 2020. The Lifetime Learning Credit is phased out for taxpayers with modified adjusted gross income in excess of $80,000 ($160,000 for joint returns).