Filers whose salaries have not kept pace with inflation could see savings on their federal income tax bills.
WASHINGTON — The rapidly rising cost of food, energy and other daily staples could allow many Americans to reduce their tax bills next year, the I.R.S. confirmed on Tuesday.
Tax rates are adjusted for inflation, which in typical times means incremental movements in the thresholds for what income is taxed at what rate. But after a year that brought America’s fastest price growth in four decades, the shift in rates is far more notable: an increase of about 7 percent.
Other parts of the tax code will also be affected by the inflation adjustment. Those include the standard deduction Americans can claim on their tax returns.
The shift would be slightly larger if not for a change Republicans made as part of President Donald J. Trump’s tax overhaul that was passed in 2017. It tied rates to a measure of inflation, called the chained Consumer Price Index, that typically rises more slowly than the standard Consumer Price Index. In September, chained C.P.I. was up about a quarter of a percentage point less, compared with the previous year, than standard C.P.I.
In dollar figures, the shift will be largest at the highest end of the income spectrum, although all seven income brackets will adjust for inflation. The top income tax rate of 37 percent will apply next year to individuals earning $578,125 — or $693,750 for married couples who file joint returns. That is up from $539,900 for individuals this year. The difference: Nearly $40,000 worth of individual income is eligible to be taxed next year at a lower rate of 35 percent.
Inflation F.A.Q.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
Middle-class workers and lower-income earners will also see benefits. The 35 percent rate will now start above $231,250 for individuals and $462,500 for married couples. The 32 percent rate will start above incomes of $182,100 for individuals and $364,200 for couples.
The 24 percent rate will apply above individual incomes of $95,375 — $190,750 for couples — and the 22 percent rate starts above $44,725 for individuals and $89,450 for couples. The 12 percent rate will apply to individual incomes above $11,000 and $22,000 for married couples. The lowest rate, 10 percent, will apply to incomes up to those amounts.
Further boosting filers, the standard deduction will rise to $27,700 for couples, an increase of $1,800 from this year. For individuals, it will be a $900 increase, to $13,850.
Those shifts will not affect the tax rates of Americans whose salaries have kept pace with inflation over the last year. But for many Americans, that has not been the case. Inflation-adjusted weekly earnings declined nearly 4 percent from September last year to this September, the Labor Department reported last week.
Beyond tax rates, a variety of other provisions in the code were affected by the inflation adjustments — with benefits up and down the income spectrum.
One of the government’s primary anti-poverty efforts, the earned-income tax credit for low-income workers, will be worth as much as $7,430 (for qualifying taxpayers with three or more children), up from $6,935 this year.
Benefits for tax-free public transit and parking costs will rise to a maximum of $300 a month for commuters, up $20 from this year.
And heirs of wealthy individuals who die in 2023 will not need to pay estate taxes on the first $12,920,000 they inherit — an increase of nearly $1 million from the exclusion for the estates of people who die this year.
The I.R.S. move is just the latest government response to rapid inflation. Last week, the Social Security Administration announced an 8.7 percent increase in benefits for 2023, the largest raise since 1981.
Source: Economy - nytimes.com
