Each year, the IRS adjusts several provisions for the effects of inflation, ranging from individual tax brackets to how much you can save in your individual retirement account or IRA. With inflation hovering close to 40-year high, experts say some big changes are on the way for taxpayers.
The IRS makes these changes to avoid “bracket creep” from rising cost of living, noted Kyle Pomerleau of the American Enterprise Institute, an expert on taxes. Without such adjustments, workers receiving wage increases to keep up with inflation would be bumped into a higher tax bracket, even if their standard of living remained the same.
This year, taxpayers may see some of the biggest changes in decades Forecast That many tax provisions would be adjusted upwards of about 7%.Since the early 1980s, tax experts say. While the IRS will officially announce these changes in October or November, the tax agency relies on a formula based on inflation figures to calculate the new tax bracket and other limits. Based on that formula, Pomerleau
“It’s something that taxpayers can use to plan for their taxes in the next year,” Pomerleau said. “So, next year taxpayers are going to put their withholdings, businesses will make investment decisions, and it will depend on how much tax they have to pay.”
However, some taxpayers will rely on the new inflation-adjusted provisions to make changes over the next several weeks. For example, people who use flexible spending accounts to set aside money for medical expenses will need to make a decision for 2023 in October or November of this year.
Workers should also consider whether they should invest more in their IRA or 401(k) accounts, given that the IRS will further liberalize contribution limits to reflect this year’s inflation, according to financial firm Betterment. said Eric Bronenkanth, head of tax in the US.
“The IRA limit is now $6,000, so a lot of people have it set up, so they put in $500 every month, and if they’re not thinking about it and here’s the increase and they don’t adjust upwards. If so, they could be missing out on a retirement plan benefit,” he said.
New Tax Brackets for 2023
Determine the tax rate you will pay on each portion of your income.
For example, take a single employee whose taxable income this year is $40,000. They would first pay 10% tax on $10,275 and then 12% on their income between $10,276 and $40,000.
In 2023, when Pomerleau estimates that tax provisions will increase by about 7% per bracket, the same worker will pay a 10% tax on the first $11,000 of his earnings, and then a 12% tax after that.
Higher Limits for FSAs, IRAs
Pomerleau said the IRS is also likely to promote limits on flexible spending accounts (FSAs) and IRA contribution limits.
By their calculations, the new limit for flexible spending accounts would be $3,050, or a 7% increase from the current year’s top limit of $2,850.
FSAs allow workers to keep that account to the extent that it can be used to pay for medical expenses. Since the money is taken from their accounts on a pre-tax basis, it provides tax savings for many workers.
Pomerleau said the new IRA limit for 2023 is likely to be $6,500. This is an increase of about 8% from the 2022 threshold of $6,000.
“It’s likely the one time you see such a big collision,” Pomerleau said of his forecasts. “If inflation starts to ease, which I think will happen, we’ll go back to more modest annual adjustments every year. It could be a one-time thing.”