No one likes paying taxes, but they are part of life. Getting your annual taxes as low as you can is something everyone wants, but this next tax year may mean paying more taxes for some. The Internal Revenue Service (IRS) will make a tax bracket-adjustment soon—and it probably will put some people into a higher tax bracket.
According to MarketWatch, annual inflation is calculated based on the (chained) Consumer Price Index. It is recalculated each year, and the changes are usually announced in either October or November.
Cost-of-Living Adjustments
Every year, the IRS makes a cost-of-living adjustment (COLA) based on inflation. The adjustment is mandatory for the IRS because it is built into the tax code to ensure a correlation between taxes and inflation.In 2022, inflation has stayed higher than usual, ranging about 8–9 percent. This figure is higher than it has been for 40 years, which has stayed around 3 percent during that time.
After making the cost-of-living adjustment, it affects most aspects of taxes and Social Security. The following are several things that you can expect to change in light of the adjustment.
The New Tax Brackets
Your tax bracket determines the percentage of taxes you pay each year. The more money you make, the more you will pay in taxes. In order to collect fair taxes based on inflation, the IRS compensates for this problem by raising the tax brackets to compensate for inflation. Hopefully, your next pay raise will not put you into a higher tax bracket. If that happens, your raise will not give you more spending power because it will likely have to go to taxes.The IRS, has set the lowest tax bracket at 10 percent for individuals making less than $10,275 or couples making up to $20,550. It is 12 percent for singles making between $10,275 and less than $41,775 or couples filing jointly between $20,550 and $83,550. The next higher tax bracket of 22 percent ranges from $41,775 for singles and up to $178,150 for married couples filing jointly. Singles making more than $89,075 or couples filing jointly making between $178,150 and $340,100 will pay 24 percent for taxes.
Although the exact percentage increase is still speculative, one tax expert, speaking to CNBC, expects it to be around 7 percent. Whatever it is, it will affect most tax categories—but not all.
If the IRS announces a 7 percent increase in the new federal tax brackets, as expected, each bracket will have a considerable increase. Each part of the tax code will not increase by the same percentage because some parts are raised incrementally.
The new tax brackets, with an approximately 7 percent increase (remember this is speculative), are as follows—there are seven tax categories:
- 10 percent taxes start at: Singles—up to $11,000; joint filers—up to $22,000
- 12 percent taxes start at: Singles—$11,001; joint filers—$22,001
- 22 percent taxes start at: Singles—$44,701; joint filers—$89,401
- 24 percent taxes start at: Singles—$95,301; joint filers—$190,601
- 32 percent taxes start at: Singles—$181,951; joint filers—$363,901
- 35 percent taxes start at: Singles—$231,101; joint filers—$462,201
- 37 percent taxes start at: Singles—$577,701; joint filers—$93,201.
Social Security Payments
When inflation rises, seniors depending on Social Security payments suffer because of higher prices and limited income. Many of them depend on the annual COLAs to help maintain their lifestyle.Although it is a little early to know just how much the IRS will raise COLA, many Social Security recipients are already hoping for at least 7 percent—or more. If so, it would be the biggest adjustment made in a long time.
There is some concern that the increased payments may put some seniors, and others, into a higher tax bracket. It is a possibility, but since the tax brackets will also be raised, it should not affect many people.
Contribution Limits to Retirement Accounts
Because inflation affects our economy in almost every way, the amount of money you have in retirement accounts will also be affected. Its value (buying power) decreases by the percentage of inflation. To compensate for this loss, the IRS usually increases the size of contributions you can make in the next year.IRA contribution limits are expected to increase from $6,000 to $6,500. If you want a bigger nest egg by the time you retire, you need to tell your employer to make the changes for 2023.
The Standard Deduction
Along with other tax adjustments, the standard deduction will also be raised. BloombergTax says it will go from $25,900 for married couples filing jointly to $27,700 in 2023. For singles and married couples filing separately, it goes from $12,950 in 2022 to $13,850 next year.Flexible Spending Accounts
Some employers offer their employees the opportunity to set aside money in a pretax account for medical purposes. These accounts, called flexible spending accounts, empty at the end of each year, and any unused amount is lost. For 2022, the maximum allowable contribution amount is $2,850. CBSNews says that if there is a 7 percent increase, it will be $3,050.Gift Exclusion Amounts
Taxpayers can give tax-free gifts up to a certain amount each year. They can give gifts to as many people as they want. For 2022, the gift deduction was $16,000, but CPAPracticeAdvisor expects it to be raised to $17,000 in 2023.The above-projected amounts are still speculative, so when tax time comes, be sure to find out the value of the real increases. Hopefully, the COLA does not put you into a higher tax bracket.
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