Tax Changes for 2023: A Guide to Tax Brackets for 2023

April 18 is fast approaching. That’s the official deadline for filing your 2022 federal tax return. As you gather your documents and assemble your information, it’s important to know about recent changes that have occurred.

This year, the Internal Revenue Service (IRS) adjusted many of its 2023 tax rules. While you’ll still follow 2022 rules to pay this year’s return, the new updates will go into effect in 2024. Most of these changes were implemented to help American taxpayers avoid dreaded bracket creep.

What is bracket creep and how did it influence tax changes for 2023? Today, we’re diving into the details and sharing everything you need to know as you prepare to file.

What Is Bracket Creep?

Before we dive into the new federal tax brackets for 2023, let’s take a step back and explore why these measures were put into place.

Bracket creep occurs when workers get moved involuntarily into a higher tax bracket as their taxable income increases. While making more money might sound like a good thing, the reality is that most of these “raises” are designed to account for the cost-of-living increases that inflation inevitably brings.

The real value of the salary wage doesn’t go up and the employee’s purchasing power remains the same. Yet, because their income goes up slightly, they’re forced to move up into a different tax bracket, where rates are higher.

To help offset this issue, the IRS increased each tax bracket provision by around 7% for 2023. As Americans continue to grapple with the rising costs associated with inflation, these changes come at a welcome time.

Many taxpayers could see significant savings as a result of the new bracket formations. In fact, some could even find themselves in a lower tax bracket now. Even those who rely on the standard deduction (as 87% of taxpayers do), can deduct more of their taxable income from taxation.

Why Is the Timing Important?

Why is so much emphasis being given to IRS tax brackets in the year 2023? This year and beyond, any amount of savings will be especially welcome.

This April, tax experts predict that many Americans could experience a tax refund shock when they file their returns (for the 2022 tax year). This is because pandemic-related tax credits expire this year, resulting in refunds that are substantially lower than the three years prior.

In addition to the multiple rounds of stimulus payments and the expanded Child Tax Credit (CTC), other tax breaks that are being eliminated or significantly reduced include the Earned Income Tax Credit (down to $500 in 2022 versus $1,500 in 2021) as well as the Child and Dependent Care Credit ($2,100 in 2022 versus $8,000 in 2021).

In addition, above-the-line charitable deductions, available at $300 per single taxpayer or $600 per joint return in 2021, are no longer offered. If you want to claim those deductions this year, you’ll have to itemize.

All of these changes are leaving taxpayers grappling for any other breaks that may still be available. This is where the bracket adjustments and other tax-related shifts can help. Let’s take a look at what’s new for 2023.

Increased Standard Deductions

As mentioned, most American taxpayers take the standard deduction when filing their taxes, rather than itemizing. While this has been the more popular route for years, it really ramped up after the 2017 Tax Cuts and Jobs Act (TCJA) increased the deduction.

Under this Act, the standard deduction for tax years between December 31, 2017 and January 1, 2026, was set at the following range:

• Married individuals filing a joint return: $24,000
• Head-of-household filers: $18,000
• All other taxpayers: $12,000

As mandated by the TCJA, the rates were to be adjusted annually to account for inflation. Updates for the 2023 tax year include:

• Standard deduction for married couples filing jointly: $27,700 (up from $25,900 in the 2022 tax year)
• Standard deduction for married individuals filing separately and single taxpayers: $13,850 (up from $12,950 in the 2022 tax year)

For married couples filing jointly, this represents a 7% year-over-year increase of $1,800. For married couples filing separately and single taxpayers, the increase is only slightly lower, at 6.9%, or $900 more.

While the standard deduction threshold might be higher, this isn’t exactly welcome news for those who choose to itemize their deductions. If you itemize expenditures such as your mortgage interest, tax payments, and charitable contributions, you could see a lower tax benefit next year.

Updated Tax Brackets

As mentioned, the IRS increased the tax brackets by around 7% for the 2023 tax year. The changes apply across the board and affect every type of tax filer, including those filing separately or as a married couple.

Put simply, tax brackets are categories that reveal how much you’ll pay in taxes on each portion of your income. These figures are represented as percentages. For both 2022 and 2023, the tax brackets are as follows:

• 10%
• 12%
• 22%
• 24%
• 32%
• 35%
• 37%

Although the actual brackets are staying the same, the IRS has made adjustments to the tax income thresholds for 2023. You can reference these changes when paying your federal taxes in April of 2024.

While some people mistakenly believe that the highest percentage is applied to all of their income, this isn’t the case. Rather, the process is multi-faceted in nature and takes your standard deduction into account. Here’s a quick look at how tax brackets work.

The Basics of Tax Brackets

Federal taxes in the U.S. are based on a progressive tax system. In short, this means that people who earn higher taxable incomes are required to pay higher federal income tax rates. Meanwhile, people with lower taxable incomes pay lower federal income tax rates.

However, simply belonging to a specific tax bracket doesn’t mean that you must pay that exact federal income tax rate on your entire income. Instead, the IRS determines how much you owe by breaking your earnings into smaller income ranges or chunks, which are also known as tax brackets.

For each chunk, you’ll be taxed at the corresponding tax rate. This way, no matter which tax bracket you fall into at first (the highest one), you can rest assured that you won’t have to pay that rate on your whole income.

The percentage of your overall taxable income that you owe or pay in taxes is known as your effective tax rate. To find this rate, you’ll divide your total tax owed (Form 1040, Line 16) by your total taxable income (Form 1040, Line 15).

Real-Life Example

When dealing with complicated figures, including taxes, it can help to follow a real-life example. Let’s take a look at one that uses the new rates for 2023, described below.

Say a single taxpayer has $35,000 in taxable income. That would put them in the 12% tax bracket for 2023. Yet, they will not pay 12% on the full amount of $35,000.

Instead, they’ll pay 10% on the first $11,000 of their income. This equals $1,100. Then, the remainder of the income ($24,000) would be taxed at the 12% rate, which equals $2,880.

Thus, your total tax bill would be about $3,980. This represents around 11% of your total taxable income, which is your effective tax rate.

2023 Marginal Tax Rates

The term “marginal tax rate” refers to the tax rate that you’ll pay on your last dollar of taxable income. In other words, it’s your highest tax bracket. To find your marginal tax rate for 2023, look at the bracket breakdown below.

Say you’re a taxpayer filing independently, with a total annual income of $80,000 in 2023. You would be in the 22% tax bracket. You’d stay in that bracket even if your income went up by $1,000, paying the same 22% on that additional amount.

However, say you made $96,000 that year. A majority of your taxable income ($95,375) would fall into the 22% bracket. However, you’d still have $625 over, which would move you into the next highest tax bracket of 24%. That remaining $625 would be taxdd at the 24% rate.

As such, your marginal tax rate would be 24%, not 22%.

In 2023, the highest tax rate based on income is still 37% for individual, single taxpayers who earned more than $578,125 in the prior tax year. For married couples, the marginal rate is $693,750.

At the same time, the lowest marginal rate also remains unchanged at 10%. This rate affects individuals who earned less than $11,000 in the prior tax year, or married couples earning no more than $22,000 combined.

2023 Tax Brackets for Single Taxpayers

In 2023, tax brackets for single taxpayers increased by 7%. Here’s the new breakdown:

• Taxable income bracket $0 to $11,000: 10% of taxable income
• Taxable income bracket $11,001 to $44,725: $1,100 plus 12% of the amount over $11,000
• Taxable income bracket $44,726 to $95,375: $5,147 plus 22% of the amount over $44,725
• Taxable income bracket $95,376 to $182,100: $16,290 plus 24% of the amount over $95,375
• Taxable income bracket $182,101 to $231,250: $37,104 plus 32% of the amount over $182,100
• Taxable income bracket $231,251 to $578,125: $52,832 plus 35% of the amount over $231,250
• Taxable income bracket: $578,126 or higher: $174,238.25 plus 37% of the amount over $578,125

2023 Tax Brackets for Married Taxpayers Filing Jointly

The same 7% increase applied to married taxpayers filing jointly. The new rates for the 2023 tax year are as follows:

• Taxable income bracket $0 to $22,000: 10% of taxable income.
• Taxable income bracket $22,001 to $89,450: $2,200 plus 12% of the amount over $22,000
• Taxable income bracket $89,451 to $190,750: $10,294 plus 22% of the amount over $89,450
• Taxable income bracket $190,751 to $364,200: $32,580 plus 24% of the amount over $190,750
• Taxable income bracket $364,201 to $462,500: $74,208 plus 32% of the amount over $364,200
• Taxable income bracket $462,501 to $693,750: $105,664 plus 35% of the amount over $462,500
• Taxable income bracket: $693,751 or higher: $186,601.50 + 37% of the amount over $693,750

2023 Tax Brackets for Married Taxpayers Filing Separately

The 7% increase also applied to married taxpayers filing separately. The new rates for the 2023 tax year are as follows:

• Taxable income bracket $0 to $11,000: 10% of taxable income
• Taxable income bracket $11,001 to $44,725: $1,100 plus 12% of the amount over $11,000
• Taxable income bracket $44,726 to $95,375: $5,147 plus 22% of the amount over $44,725
• Taxable income bracket $95,376 to $182,100: $16,290 plus 24% of the amount over $95,375
• Taxable income bracket $182,101 to $231,250: $37,104 plus 32% of the amount over $182,100
• Taxable income bracket $231,251 to $346,875: $52,832 plus 35% of the amount over $231,250
• Taxable income bracket: $346,876 or more: $93,300.75 plus 37% of the amount over $346,875

2023 Tax Brackets for Heads of Household

To qualify as a head of household, the IRS designates that an individual must furnish more than one-half of the costs required to maintain the household for themselves and a qualifying person. They must also be considered unmarried and must have a qualifying child or dependent.

Tax brackets for heads of household also rose by 7% for the 2023 tax year. The new rates are as follows:

• Taxable income bracket $0 to $15,700: 10% of taxable income
• Taxable income bracket $15,701 to $59,850: $1,570 plus 12% of the amount over $15,700
• Taxable income bracket $59,851 to $95,350: $6,868 plus 22% of the amount over $59,850
• Taxable income bracket $95,351 to $182,100: $14,678 plus 24% of the amount over $95,350
• Taxable income bracket $182,101 to $231,250: $35,498 plus 32% of the amount over $182,100
• Taxable income bracket $231,251 to $578,100: $51,226 plus 35% of the amount over $231,250
• Taxable income bracket: $578,101 or higher: $172,623.50 plus 37% of the amount over $578,100

Reducing Your Tax Bracket

To fall into a lower tax bracket, you’ll need to find a way to reduce your overall tax bill. The two most common ways to do so include:

• Credits
• Deductions

While tax credits can lower your overall tax bill on a dollar-for-dollar basis, they do not affect your income. As such, they cannot move you into a lower tax bracket. However, deductions can.

As these deductions reduce the amount of your income that’s subjected to taxes, it pays to maximize them when you can. In most cases, a deduction will lower your income by the percentage of your highest federal income tax bracket. For instance, if you fall into the 32% tax bracket and you have a $1,000 deduction, it could save you around $320.

Not sure what you can deduct from your taxable income? Here’s a quick list of popular ones to consider, including some that many taxpayers miss!

Learn More About Tax Changes for 2023

Do these tax changes for 2023 seem a little complex?

At Polston Tax Resolution & Accounting, we know how complicated taxes can be. They can be even more unnerving when you receive a notice in the mail that you have an outstanding tax issue to resolve.

You don’t have to shoulder that burden alone. Our professional tax resolution services can help you resolve your tax issues, conserve your finances, and lower your stress levels. From IRS appeals to tax audits, bank levies, and lien assistance, we do it all.

Contact us today to learn more and schedule a free consultation.