The Internal Revenue Service announced the tax year 2023 annual inflation adjustments for more than 60 tax provisions, including income tax brackets.
The new inflation adjustments are for the tax year 2023, for which taxpayers will file tax returns in early 2024. Note that this article is for informational purposes only and does not answer specific questions about your tax situation or assist you in the tax filing process. If you have any questions, please contact our in-house tax service team, Prestige Wealth Accounting Group.
2023 Federal Income Tax Brackets and Rates
In 2023, the income limits for all tax brackets and all filers will be adjusted for inflation and will be as follows (Table 1-3). There are seven federal income tax rates in 2023: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. The top marginal income tax rate of 37 percent will hit taxpayers with taxable income above $539,900 for single filers and above $693,750 for married couples filing jointly.
Standard Deduction and Personal Exemption
The standard deduction will increase by $900 for single filers and by $1,800 for joint filers (Table 2).
The personal exemption for 2023 remains at $0 (eliminating the personal exemption was part of the Tax Cuts and Jobs Act of 2017 (TCJA).
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) was created in the 1960s to prevent high-income taxpayers from avoiding individual income tax. This parallel tax income system requires high-income taxpayers to calculate their tax bill twice: once under the ordinary income tax system and again under the AMT. The taxpayer then needs to pay the higher of the two.
The AMT uses an alternative definition of taxable income called Alternative Minimum Taxable Income (AMTI). To prevent low- and middle-income taxpayers from being subject to the AMT, taxpayers are allowed to exempt a significant amount of their income from AMTI. However, this exemption phases out for high-income taxpayers. The AMT is levied at two rates: 26 percent and 28 percent.
The AMT exemption amount for 2023 is $81,300 for singles and $126,500 for married couples filing jointly (Table 3).
In 2023, the 28 percent AMT rate applies to excess AMTI of $220,700 for all taxpayers ($110,350 for married couples filing separate returns).
AMT exemptions phase out at 25 cents per dollar earned once AMTI reaches $578,150 for single filers and $1,156,300 for married taxpayers filing jointly (Table 4).
Earned Income Tax Credit (EITC)
The maximum Earned Income Tax Credit (EITC) in 2023 for single and joint filers is $560 if the filer has no children (Table 5). The maximum credit is $3,995 for one child, $6,604 for two children, and $7,430 for three or more children.
Child Tax Credit
The maximum Child Tax Credit is $2,000 per qualifying child and is not adjusted for inflation. The refundable portion of the Child Tax Credit is adjusted for inflation and will increase from $1,500 to $1,600 for 2023.
Capital Gains Tax Rates & Brackets (Long-term Capital Gains)
Long-term capital gains are taxed use different brackets and rates than ordinary income (Table 6.)
Qualified Business Income Deduction (Sec. 199A)
The Tax Cuts and Jobs Act of 2017 (TCJA) includes a 20 percent deduction for pass-through businesses. Limits on the deduction begin phasing in for taxpayers with income above $182,100 (or $364,200 for joint filers) in 2023 (Table 7).
Annual Exclusion for Gifts
In 2023, the first $17,000 of gifts to any person are excluded from tax, up from $16,000. The exclusion is increased to $175,000 from $164,000 for gifts to spouses who are not citizens of the United States.
If you have any questions, please contact our in-house accounting team, Prestige Wealth Accounting Group, to discuss.