Understanding the Impact of Inflation on Income Tax Brackets and the Standard Deduction
The Internal Revenue Service has announced big changes to the 2023 income tax brackets and the standard deduction. This is due to inflation, which means that most taxpayers will be affected by these changes. Let’s take a look at what you need to know about how inflation affects taxes.
How Inflation Impacts Tax Rates
Inflation causes prices for goods and services to increase, and it can also affect income tax rates. When prices rise, wages tend to follow suit, meaning that people’s incomes often increase as well. To account for this increase, the IRS adjusts the income tax brackets each year based on inflation. For example, in 2022, taxpayers with an adjusted gross income (AGI) of $100,000 or less were taxed at a rate of 24%. By 2023, this rate will increase to 25% due to inflation.
Taxpayers should also be aware that the standard deduction is being increased by 7%, from $12,950 in 2022 to $13,850 in 2023. This deduction is available to all taxpayers who do not itemize their deductions on their tax returns. The standard deduction helps reduce taxable income, so it is important for taxpayers to understand how it works and how it may affect them when filing their taxes next year.
The bottom line is that most taxpayers will be affected by these changes in some way or another. It is important for taxpayers to understand how inflation can impact their taxes so they can plan accordingly and make sure they are taking advantage of all deductions available to them.
In conclusion, we’ve seen how inflation impacts tax rates and the standard deduction for 2023. Most taxpayers will see an increase in their taxable income due to these changes, but there are many ways for them to reduce their taxable amount if they understand how these changes work and take advantage of all deductions available to them. It is important for all taxpayers—especially entrepreneurs and small business owners—to pay attention to any updates released by the IRS regarding changes in taxation so they can plan ahead and make sure they are paying only what they owe when filing taxes next year!