The income thresholds for the seven federal tax brackets increased by a greater than normal amount for the 2023 tax year to reflect the hyperinflation seen last year.
“It’s just the usual changes because of inflation. It’s been more dramatic this year because inflation has been so dramatic as well,” John Witten, of the Institute for Taxation and Economic Policy, told Yahoo Finance.
Inflation-adjusted amounts jumped more than 7% from 2022, according to the Tax Policy Center, compared to last year increased by 3%. The changes themselves aren’t a new development – Internal Revenue Service modify Their annual tax brackets for inflation.
One positive outcome: Taxpayers whose incomes did not rise at par with inflation last year are likely to avoid it The tax bracket creeps up in 2023 and finally pay less taxes.
Changes to federal income tax brackets for 2023
For the 2023 tax year, there are seven federal tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Your tax bracket is determined by your taxable income and filing status and the tax rate you’ll pay appears on each portion of your income.
According to the IRS, the income thresholds for all brackets will increase as follows:
Remember: these are incremental marginal rates. This does not mean that if you have $100,000 in taxable income as a single taxpayer, you will be taxed at 24% on that entire amount.
Instead, the first $11,000 is taxed at the 10% rate in 2023, the next $44,725 is taxed at 12%, the next $95,375 is taxed at 22%, and the last $95,375 is taxed at 22%. $95,375 is taxed at 24%.
What these increases mean for you
According to the most recent Bureau of Labor Statistics dataWages increased just 4.4% over the 12 months ending September 2022, up just 2.4% from the previous year. Although some people saw their paychecks jump last year, most of those gains are still held back by high levels of inflation.
said Eric Brunenkant, Head of Tax Division at to improve, for Yahoo Finance. Let’s say some people got a 10% pay raise last year, while others might not have gotten any raise at all. Arguably, people whose incomes have now exceeded the estimated 7% inflation rate may pay more taxes because their tax bracket is higher, while those with lower wage growth may pay less.
What this means is that taxpayers whose paychecks do not keep pace with inflation are able to outgrow the creeping brackets. According to the Tax Foundation, this happens when inflation pushes you into a higher income tax bracket, which reduces the value of credits, deductions, and exemptions.
“You still have to remember that increasing the tax bracket by 7% is still an approximation of inflation, and it’s never about anyone’s individual situation,” Bruninkant said. “Inflation is probably low, but you lived in a place where your landlord increased your rent by 10% and probably increased your out-of-pocket costs a lot. It’s not ideal for everyone, but it’s the best the IRS can do for average inflation for a large number of people.”
Gabriella is a personal finance correspondent at Yahoo Finance. Follow her on Twitter @employee.