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How high inflation may affect which tax bracket you are in next yr

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Typically, the IRS releases inflation adjustments for the next yr in October or November, and Pomerleau predicts 7% increases across many provisions for 2023.

“This yr, we’ll see a larger-than-average adjustment because we have experienced higher-than-usual inflation,” he said.

This includes higher tax brackets and a much bigger standard deduction.

For instance, the 24% tax bracket may rise to $190,750 of taxable income for joint filers in 2023, up from $178,150 for 2022, Pomerleau estimates.

This yr, we’ll see a larger-than-average adjustment because we’ve experienced higher-than-usual inflation.

Kyle Pomerleau

Senior fellow with the American Enterprise Institute

There might also be a better exemption for so-called alternative minimum tax, a parallel system for higher earners, and more generous write-offs and phaseouts for the earned income tax credit for low- to moderate-income filers and more.

And the estate tax exemptions may rise to $12.92 million and $25.84 million for single and joint filers, respectively, up from $12.06 million and $24.12 million, Pomerleau predicts.

Nonetheless, that is not a guarantee of smaller tax bills for 2023.

“It will rely on the taxpayer,” Pomerleau said, pointing to several types of income, how much earnings have inflated and which provisions may apply.

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Retirement account contribution limits may increase

Higher inflation adjustments might also profit retirement savers, with larger contribution limits for 401(k) and individual retirement accounts, Pomerleau said.

While it’s too early to predict 401(k) deferral caps, he expects annual IRA limits to leap to $6,500 for savers under 50, up from $6,000 for 2022.

“The jump for the IRA contribution limit is closer to eight% or 9% this yr due to the way in which it interacts with the rounding rule,” he said, explaining it adjusts in $500 increments.

Some tax provisions still won’t adjust for inflation

Despite above-average inflation adjustments for a lot of provisions, several remain the identical every yr, experts say.

“It is a hodgepodge of things that get overlooked,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina.

There is a 3.8% surcharge on investment income, kicking in when modified adjusted gross income passes $200,000 for single filers and $250,000 for couples, which hasn’t been adjusted.  

And the $3,000 limit for capital loss deductions has been fixed for about 30 years. “Inflation is eroding that away,” Pomerleau said.

While the $10,000 limit on the federal deduction for state and native taxes, generally known as SALT, will sunset after 2025, the set cap is “having a bigger impact within the meantime,” he said.

Nonetheless, it’s difficult to gauge exactly how much any single provision may affect someone’s tax bill without running a 2023 projection, Harris said.

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