Tax brackets in America are changing thanks to inflation. That could be good news for people whose salaries have not been able to keep up with rising prices. Tax brackets tend to move along with the inflation rate. Inflation has hit Americans hard this year, and the tax brackets are shifting to accommodate that.
To understand how inflation and tax brackets are connected, let's start with the basics. Inflation is an increase in the price of goods and services accompanied by a reduction in the value of money. Inflation is measured using an index that compares the prices of goods and services over time.
Inflation is affected by many different market forces.
The record-high inflation we have seen this year is due to economic factors that converged during and following the Covid-19 pandemic. Increased consumer demand for goods and real estate had an impact on the market, as well as supply chain issues, increased wages, and decreased unemployment.
High inflation does not affect the federal tax rates. They are still 10%, 12%, 22%, 24%, 32%, and 37%. The income tax brackets that are tied to the rates are inflation-adjusted on an annual basis.
Based on adjustments made in response to soaring inflation this year, Americans may feel as though they are receiving a tax break this coming year despite their taxable income remaining consistent.
Running the Numbers
The standard deduction for married couples filing jointly for the 2023 tax year is rising to $27,700, which is $1,800 higher than last year. Single taxpayers and married individuals filing separately will see a deduction increase to $13,850, up $900 from last year.
For heads of households, the standard deduction comes in at $20,800, up $1,400 from last year.
Here's how the tax brackets will be broken down in the 2023 tax year:
- The 22% tax bracket in 2023 will now apply to married couples filing jointly with incomes above $89,450 and individuals with incomes above $44,725. The 22% tax bracket in the 2022 tax year was $83,550 for married couples filing jointly and $41,775 for individuals.
- The 24% tax bracket will apply to married couples filing jointly with an income above $190,750 or individuals with income above $95,375.
- The 32% bracket will apply to married couples filing jointly with an income above $364,200 or individuals with incomes above $182,100.
- The 35% tax bracket will apply to married couples filing jointly with incomes above $462,500 or individuals with incomes above $231,250.
- The 37% bracket will apply to married couples filing jointly with incomes above $693,750 or individuals making more than $578,125.
The earned income tax credit, which helps out low-income workers, will increase by around 7% from $6,935 in the 2022 tax year to $7,430 this coming tax year.
The alternative minimum tax exemption amount for the 2022 tax year will be $81,200 ($126,500 for married couples filing jointly), which is an increase from $75,900 for individuals and $118,100 for married couples filing jointly in the 2022 tax year.
This article was produced and syndicated by Wealth of Geeks.
Max Marvelous has coached over 250 Millennials to help take the stress out of money. When Max is not coaching, you'll find him reading financial books, indoor cycling, or visiting local pawn shops looking for swiss-made watches.