New 2023 Tax Brackets and Deductions
The federal income tax is levied by the U.S. government on the income earned by individuals. It is a mandatory tax that you pay to the government every year. Evading tax is a serious legal offense punishable by law. Therefore, it is important to stay up to date with the changing tax laws, rates, and dates for filing your income tax return.
The income bracket that you fall into can differ based on your income, age, and filing status. The Internal Revenue Service (IRS) announces the federal income tax brackets every year. The rates are determined on the basis of inflation, which is why they may be different each year. In addition to the tax brackets, the IRS also announces deductions and allowances that help you lower your tax liability for the year. Consider reaching out to a professional financial advisor who can help you lower your taxability for the year.
Keep reading to find out more about the 2023 tax brackets in the United States.
Table of Contents
The tax system explained
The U.S. follows a progressive tax system, implying that you pay a higher income tax as your income increases. The more you earn, the more income tax is levied on your income. The income tax brackets progressively increase. However, in a progressive tax system, you only pay the higher income tax rate for the portion exceeding the previous limit and not the whole amount. For instance, if you fall in the tax bracket of $11,001 to $44,725 that levies a tax rate of 12%, you will not pay a 12% tax on your total income. Instead, you will be charged 10%, which is the previous tax bracket on the amount of up to $11,001. Further, you will pay 12% on the amount over $11,001.
This will be clearer from the tables shared in the sections below.
In addition to this, there are four filing categories that you can choose from. The tax levied can differ for all of these. Therefore, it is important to understand their differences and apply them accordingly.
- Single filers
- Head of household
- Married filers filing jointly
- Married filers filing separately
What are the 2023 tax brackets?
The IRS adjusts the tax brackets according to inflation. Since inflation has been at a record high this year, taxpayers will see a tax cut in 2023. The new tax brackets will be applied to the 2023 tax year. This refers to the tax return that taxpayers will file in April 2024.
| Taxable federal income tax brackets for single filers | Tax rate |
| $11,000 or less | 10% |
| $11,001 to $44,725 | 12% |
| $44,726 to $95,375 | 22% |
| $95,376 to $182,100 | 24% |
| $182,101 to $231,250 | 32% |
| $231,251 to $578,125 | 35% |
| $578,126 or more | 37% |
| Taxable federal income tax brackets for married filing jointly | Tax rate |
| $22,000 or less | 10% |
| $22,001 to $89,450 | 12% |
| $89,451 to $190,750 | 22% |
| $190,751 to $364,200 | 24% |
| $364,201 to $462,500 | 32% |
| $462,501 to $693,750 | 35% |
| $693,751 or more | 37% |
| Taxable federal income tax brackets for heads of households | Tax rate |
| $0 to $15,700 | 10% |
| $15,700 to $59,850 | 12% |
| $59,850 to $95,350 | 22% |
| $95,350 to $182,100 | 24% |
| $182,100 to $231,250 | 32% |
| $231,250 to $578,100 | 35% |
| $578,100 or more | 37% |
As you can see, the income thresholds have risen since 2022. The lowest income threshold in 2022 was $10,275, whereas, in 2023, it has been set at $11,000. The maximum income threshold has also been increased from $539,900 to $578,125 in 2023.
However, while the tax liabilities have been cut, the power of purchasing has considerably dropped for most people due to inflation. This means that your overall savings may still not be as much as you hope, and it may be advised to boost your savings rate nevertheless. Investing and savings in inflation-beating instruments are strongly recommended to counter the effect of inflation and to secure your future financially.
Increase in Standard Deduction for 2023
Apart from federal income tax brackets, the standard deduction will also be increased in 2023. The standard dedication refers to the amount of tax deduction you can remove from your income before paying tax. This is a straight tax cut that lowers your taxable income. The standard deduction has been decreased for all taxpayer categories, as shared below:
| Filing status | Exemption amount |
| Single taxpayers | $13,850 |
| Married taxpayers filing jointly | $27,700 |
| Head of household | $20,800 |
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) is a special tax that is only levied on high-income individuals. It was introduced in the 1960s. According to the federal income tax rules, high-income individuals have to calculate their tax dues twice – once under the normal tax system and once as per the AMT system. Based on the results of both tax systems, taxpayers then pay tax as per the higher of the two.
The AMT system uses the Alternative Minimum Taxable Income (AMTI), which is different from the usual taxable income. The AMTI is used to differentiate low and middle-income individuals from high-income taxpayers.
The AMT exemption amount for 2023 is as follows:
| Filing status | Exemption amount |
| Single taxpayers | $81,300 |
| Married taxpayers filing jointly | $126,500 |
Further, the AMT will be charged at two rates for 2023:
- 26%
- 28%
The 2023 AMT exemption phaseout thresholds are as follows:
| Filing status | Threshold |
| Single taxpayers | $578,150 |
| Married taxpayers filing jointly | $1,156,300 |
The AMT exemption will phase out at 25 cents per dollar.
Increase in annual gift exclusion
The annual gift exemption is applied to any financial asset given as a gift, including cash or a physical or virtual asset. This can include a home, investments, stock holdings, etc. However, for the transaction to qualify as a gift, you must not receive anything in return for your gift that is equivalent to its fair market value. The annual gift tax exclusion has been increased to $17,000 per person in 2023. In 2022, this was $16,000. Further, the gift tax exclusion has been increased from $164,000 to $175,000 for gifts given to a spouse who is not a citizen of the country.
Estate tax exemption
Typically, when an individual dies, the estate is taxed by the federal government. The estate tax exemption refers to the limit that is exempt from any tax. In 2023, the estate tax exemption will also increase to $12,920,000, from $12,060,000 in 2022.
Amounts exceeding the estate tax exemption will be taxed as follows:
| Rate | Taxable amount on the amount of estate exceeding estate tax exemption |
| 18% | $0 to $10,000 |
| 20% | $10,001 to $20,000 |
| 22% | $20,001 to $40,000 |
| 24% | $40,001 to $60,000 |
| 26% | $60,001 to $80,000 |
| 28% | $80,001 to $100,000 |
| 30% | $100,001 to $150,000 |
| 32% | $150,001 to $250,000 |
| 34% | $250,001 to $500,000 |
| 37% | $500,001 to $750,000 |
| 39% | $750,001 to $1 million |
| 40% | Over $1 million |
Earned Income Tax Credit (EITC)
EITC is a tax credit for low and moderate-income groups. It is a refundable credit that these income groups can claim on their income tax return. The minimum income earned in a year to claim EITC is only $1. However, the income cannot be from unemployment benefits or pensions. To claim EITC, you also need to have an investment income of $10,000 or less.
The EITC is decided on the basis of whether or not the taxpayer has any children. For 2023, here is the EITC available for different categories:
Single taxpayers
| No children | One child | Two children | Three or more children | |
| Income at max credit | $7,840 | $11,750 | $16,510 | $16,510 |
| Maximum credit | $600 | $3,995 | $6,604 | $7,430 |
| Phaseout begins | $9,800 | $21,560 | $21,560 | $21,560 |
| Phaseout ends (credit equals zero) | 17,640 | 46,560 | 52,918 | 56,838 |
Married taxpayers filing jointly
| No children | One child | Two children | Three or more children | |
| Income at max credit | $7,840 | $11,750 | $16,510 | $16,510 |
| Maximum credit | $600 | $3,995 | $6,604 | $7,430 |
| Phase out begins | $16,370 | $28,120 | $28,120 | $28,120 |
| Phaseout ends (credit equals zero) | 24,210 | 53,120 | 59,478 | 63,398 |
Head of household taxpayers
| No children | One child | Two children | Three or more children | |
| Income at max credit | $7,840 | $11,750 | $16,510 | $16,510 |
| Maximum credit | $600 | $3,995 | $6,604 | $7,430 |
| Phase out begins | $9,800 | $21,560 | $21,560 | $21,560 |
| Phaseout ends (credit equals zero) | 17,640 | 46,560 | 52,918 | 56,838 |
Child tax credit
The child tax credit is a tax break that is offered to parents for qualifying children. The refundable portion of the child tax credit will be increased from $1,500 in 2022 to $1,600 in 2023.
Long-term capital gains tax rates and brackets
Long-term capital gains are taxed on stocks or other investments held for more than 24 months. Here are the tax brackets for the same in 2023:
Single taxpayers
| 2023 tax brackets | Tax rate |
| Up to $44,625 | 0% |
| $44,625 to $492,300 | 15% |
| Over $492,300 | 20% |
Married taxpayers filing jointly
| 2023 tax brackets | Tax rate |
| Up to $89,250 | 0% |
| $89,250 to $553,850 | 15% |
| Over $553,850 | 20% |
Head of household taxpayers
| 2023 tax brackets | Tax rate |
| Up to $59,750 | 0% |
| $59,750 to $523,050 | 15% |
| Over $523,050 | 20% |
Qualified business income deduction under Section 199A
Qualified business income deduction is applicable to pass-through businesses. These businesses refer to a sole proprietorship, partnership, or an S corporation that is not subject to corporate income taxes. Such types of companies file their income tax on the basis of the individual income tax returns of the owners. Hence, they pay individual income tax rates.
Here are the 2023 qualified business income deduction thresholds:
| Filing Status | Threshold |
| Single taxpayers | $182,500 |
| Married taxpayers filing jointly | $364,200 |
Additionally, there are some other highlights too:
- The maximum tax rate is 37%, and the lowest is 10%, just like last year.
- The personal exemption is 0 for the year 2023.
- The monthly limitation for the qualified transportation fringe benefit and the monthly limitation for qualified parking has been increased to $300 for 2023 from $220 in 2022.
- There is no limitation on itemized deductions in 2023, like in the previous five years.
- The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements has been increased to $3,050. The maximum amount that taxpayers can carry over is $610 for cafeteria plans in 2023.
- The foreign earned income exclusion is increased to $120,000 from $112,000 in 2022.
- The maximum credit limit for adopting a child in 2023 is increased to $15,950 from $14,890 for 2022.
- Taxpayers with a self-only cover in a Medical Savings Account can claim an annual deduction of $2,650 in 2023. The maximum limit for the same is $3,950. The maximum limit for out-of-pocket expenses for such coverage is $5,300 for 2023.
- Taxpayers with a family cover in a Medical Savings Account can claim an annual deduction of $5,300 in 2023, up from $4,950 in 2022. The maximum limit for the same is $7,900. The maximum limit for out-of-pocket expenses for such coverage is $9,650 for 2023.
To conclude
The new federal income tax brackets have been a welcome relief given the rising rates of inflation and the economic uncertainty surrounding them. However, their actual impact is still being contemplated as people continue to suffer in the aftermath of inflation. Nevertheless, it is important to account for these changes and make adjustments to your tax plans for the tax year 2023.
You can use a tax calculator to compute your tax liabilities or consult a professional financial advisor in your area. Use WiserAdvisor’s free advisor match service to find 1-3 highly qualified and vetted financial advisors that are suited to meet your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will find advisors that match your financial needs.
