As the 2023 tax filing season gets underway, millions of American taxpayers are in for a pleasant surprise. The IRS has adjusted its 2023 income limits by approximately 7% over 2022 due to rising inflation. This adjustment means that many taxpayers may find themselves in a lower tax bracket than last year, resulting in potential tax savings and even larger refunds.
The adjustment in tax brackets comes as good news for many Americans who saw a significant decrease in their tax refunds in 2022 compared to the previous year. Following the 2022 tax filing deadline, the IRS reported that the average refund amount was only $2,753, nearly 10% less than the previous year’s average of $3,012. This decrease can be attributed to the expiration of pandemic-era benefits provided through the American Rescue Plan, such as the $1,400 per individual Economic Impact Payment.
However, tax experts are optimistic about the 2023 tax season. The adjustments in federal tax brackets, along with an increase in the standard deduction and proposed enhancements to tax credits like the Child Tax Credit, may lead to larger refunds for many Americans.
Understanding federal tax brackets is essential when determining how much tax you owe. The IRS uses tax brackets based on filing status and taxable income. The filing status can be single, married filing jointly, married filing separately, or head of household. Taxable income includes earnings from various sources, such as salary, bonuses, tips, and interest, minus any deductions like the standard deduction.
The 2023 tax brackets for single filers range from 10% to 37%, while married filing jointly brackets range from 10% to 37% as well. Married taxpayers filing separately and head of household filers also have their respective brackets. These brackets determine the applicable tax rate for different portions of taxable income.
To provide further assistance, the IRS has increased the standard deduction for 2023. Single filers can now claim a standard deduction of $13,850, married couples filing jointly can claim $27,700, and head of household filers can claim $20,800. These increased deductions can further reduce taxable income, potentially leading to lower tax liabilities.
In addition to the adjustments in tax brackets and standard deductions, the 2023 maximum Earned Income Tax Credit (EITC) has also increased. Qualifying taxpayers with three or more children can now claim a maximum EITC of $7,430, a $495 increase from the previous year.
It is important to understand that tax brackets work on a progressive system, meaning that tax rates increase as income grows. However, only the portion of income within each bracket is subject to the corresponding rate. This system allows for a fair distribution of taxes based on income levels.
To potentially lower taxable income and move into a lower tax bracket, individuals can make contributions to employer-sponsored retirement plans, individual retirement accounts (IRAs), health savings accounts, or flexible spending accounts. These contributions reduce taxable income, providing potential tax savings.
The deadline for filing 2023 taxes is Tax Day, Monday, April 15, 2024, with residents of Maine and Massachusetts having until April 17, 2024, due to state holidays.
Looking ahead, the good news continues as the 2024 tax brackets have also been adjusted for inflation, and the standard deduction has increased again, although not as significantly as in 2023.
Overall, the adjustments made to tax brackets, increased standard deductions, and potential enhancements to tax credits bring positive changes for American taxpayers in the 2023 tax season. With the possibility of lower tax liabilities and larger refunds, many individuals can expect a more pleasant filing experience this year.
