Bracket Creep-- One Less Haunt This Halloween
I’ve gotten a number of questions about tax brackets since the IRS announced inflation adjustments last week. Tax brackets are a very commonly confused tax topic. Let me clear it up for you in 500 words or less.
The American tax system is a progressive tax system-- higher taxable incomes are taxed at higher rates than lower taxable incomes. It also utilizes brackets-- your first dollar is taxed at a lower rate than your last dollar.
The IRS recently made adjustments to those tax brackets for 2023 to help avoid “bracket creep”, which I’ll explain in a moment.
The new bracket is as follows for Single Filers:
10% of taxable income
$1100 + 12% of amount over $11,000
$5147 + 22% of amount over $44,725
$16,290 + 24% of amount over $95,375
$37,104 + 32% of amount over $182,100
$52,832 + 35% of amount over $231,250
$578,126 or more
$174,238.25 + 37% of amount over $578,125
If your taxable income is $8000, the entire amount will be taxed at 10%. Without any deductions or credits, you’d pay $800.
If your taxable income is $62,000, the first $11,000 will be taxed at 10%, the amount between $11,000 and $44,725 will be taxed at 12%, and the rest taxed at 22%. Without any deductions or credits, you’d pay $8947.16. Your effective tax rate is 14.4%.
Now that you know how the tax brackets work, let’s talk about “bracket creep”. This happens in inflationary environments like we’re experiencing right now. You might be earning the same as the year before or maybe you even got a small raise. The problem is, the raise means you’re paying a bit more in taxes, maybe you’re even in a higher bracket, and inflation has made your bills, groceries, and gas more expensive, too. It’s likely that you actually end up with less even though you’re earning more. To keep this from happening, the IRS makes adjustments to the tax brackets. This helps you to pay less tax to account for the increase in everyday living expenses.
In addition to the bracket adjustment, the IRS has also increased the Standard Deduction amounts. For Married Filing Joint returns, the 2023 deduction will increase to $27,700 (an $1800 increase). For Single filers, the deduction will increase by $900 to $13,850; and for Head of Household filers, the deduction will be $20,800, up from $1400 in 2022.
The maximum Earned Income Tax Credit also increased by about $500 to $7430, and earlier in the year, you might recall that the IRS increased the mileage deduction by 4 cents to 62.5 cents per mile. All of these things are an effort to make your dollars stretch just a bit further.
I did it! 499 words.