Each year the IRS makes adjustments to tax brackets to account for increases in the cost of living in the U.S. Given the high rates of inflation we are seeing, this year you’ll be seeing larger adjustments than usual.
Here’s the quick summary for 2023:
There are new income brackets for 2023
The standard deduction has been raised
You will have higher contribution limits for 401(k)s, IRAs, and HSAs
Most people will likely see net tax cuts (aka you’ll owe less in taxes overall). However, due to high inflation, this doesn’t necessarily mean you’ll have the same purchasing power as you did in 2022.
The standard deduction has been raised
This one is pretty straightforward. For single filers, the new standard deduction is $13,850 (a $900 bump up from last year). For married couples, it is now $27,700 (up $1,800).
Since 9 out of 10 people use the standard deduction, most of you will benefit from this jump.
We have new income brackets
Ordinary Income (and most short-term gains)
The IRS has adjusted all seven marginal tax brackets for 2023. The overall 7.1% adjustment is one of the largest we’ve seen in decades (and double the adjustment from last year). Below are marginal tax brackets for 2023, as compared to 2022. The marginal tax rates remain the same, the amounts per bracket have jumped.
Source: IRS
A friendly reminder: income tax brackets work as a tiered system, not a flat tax percentage on all your income. A marginal tax rate is the rate paid on the last dollar of your income, whereas an effective tax rate is the average rate you pay in taxes. In other words, if you make $70,000 after deductions, your marginal tax bracket is 22% (between $44,725 and $95,375) . But your effective tax rate will be an average across brackets. To do the math:
Your first $11,000 will be taxed at 10%
Your next $33,725 will be taxed at 12%
And your remaining $25,275 will be taxed at 22%.
Taking the weighted average across all three brackets, your effective tax rate is15.3%
Long-term gains (and qualified dividends)
Account growth marginal tax bracket adjustments have jumped similar to ordinary income. This refers to your long-term capital gains and your qualified dividends.
Source: IRS
Higher contribution limits for tax-advantaged accounts
401(k)
If you have access to a 401(k) through work, you will be able to invest more this year. The new contribution limit is $22,500, up from $20,500 last year. If you are 50 years or older, you can make catch up contributions up to $7,500, a thousand dollar increase from last year.
IRA
You’ll be able to invest more into your IRA this year, as the limits have grown to $6,500, up $500 from last year. Unlike 401(k)s, catch-up contributions have not changed and they remain at $1,000 for those 50 years or older.
HSAs
For individual plans, you can now contribute a max of $3,850, up from $3,650 last year. For family plans, contribution limits for next year have been raised to $7,750, up from $7,300 last year.
Remember, HSAs can be used to pay for qualified medical expenses today, BUT you can also invest this money if you choose. Learn more about why you would choose to invest your HSA in our Learn to Invest course.
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All these changes will apply for the 2023 tax year when you file in April 2024.
Boost your Wallet. Wellbeing. World.
Rebecca
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