New changes to the Internal Revenue Service’s policies for 2023 will see lower taxes for some Americans, as the revised rules come into effect.
Rising costs have prompted the tax service to implement several changes affecting millions of citizens, as more deal with higher prices.
Cost of living adjustments, including retirement savings, taxes, Social Security payments, and wage growth, have now become an immediate issue for many Americans, as families begin to struggle with finances.
Contribution Limits are Raised to Offset Price Gains
The IRS announced higher federal income tax brackets and standard deductions for 2023, which could offset inflation-related adjustments, with a potential boost to paychecks and lower taxes for millions of citizens.The federal tax agency will introduce higher contribution limits for 401(k) retirement plans to help people save more for retirement and lower their income tax rates in some cases.
The amount that Americans can contribute into their 401(k), 403(b) and most 457 plans, will go up to $22,500, up from the $20,500 contribution limit in 2022.
Meanwhile, annual contribution limits for IRAs have increased by $6,500 in 2023, up from last year’s limit of $6,000.
IRS Adjusts Tax Brackets Citing High Inflation
Catch-up deposit limits still remain at $1,000 this year for those 50 and above, but the “Secure 2.0” tax provision, which was part of the Omnibus bill, will allow it to index to inflation starting in 2024 and may present further options later this year.The spike in inflation also makes the curtailment of “bracket creep” a higher priority for the IRS. Bracket creep occurs when an increase in inflation moves taxpayers into a higher income tax bracket, without an increase to their real income, or reduces the value of credits, deductions, and exemptions.
The new tax adjustments will start applying to tax returns filed in 2024.
While rates remain the same for the 2023 tax year, the income limits for each tax rate are different, meaning that the top tax rate for some may go down.
The agency will additionally start bumping up the income thresholds for 0, 15, and 20 percent long-term capital gains brackets for 2023 due to inflation, which will apply to profitable assets owned for more than one year.
Standard deductions for married couples filing jointly for the 2023 tax year will be $27,700, up $1,800 from last year’s deduction, while single taxpayer deductions will rise $900 to $13,850.
In the meantime, the IRS raised the contribution limit for health related Flexible Spending Arrangements in 2023 to $3,050, up from $2,850 in 2022.