Dec 05, 2022
Inflation's effect on taxes – the good and the bad
Many federal tax provisions are adjusted for inflation annually, but not all. Rising inflation may result in lower tax bills for many taxpayers in 2023. Unfortunately, the impacts of inflation on taxpayers will not lower their 2022 tax bills even though inflation is at the highest level in the past 40 years.
The standard deduction is indexed for inflation. In 2023, for married couples filing joint tax returns, the standard deduction increased by $1,800 to $27,700; and for single taxpayers the standard deduction increased by $900 to $13,850.
The tax rates for individual tax filers have not changed (with the highest tax rate remaining at 37%), but the income levels have increased between the brackets. For example, in 2023, the 32% tax bracket starts at $364,200 for married couples filing jointly (up from $340,100 in 2022); and the 35% bracket for married couples filing jointly starts at $462,500 (up from $331,900 in 2022).
Estates of decedents who die in 2023 will have an estate tax exemption of $12,920,000 (up from $12,060,000 in 2022). The gift tax exclusions also increased to the same amounts and the annual gift exclusion increased to $17,000 per donee, which allows a married couple to gift $34,000 using their annual exclusion with no limit on the number of donees.
Social security recipients will enjoy an 8.7% increase in their monthly benefits in 2023 compared to 2022.
Other increases, as a result of rising inflation, include higher maximum contributions to retirement plans, health savings accounts and flexible spending accounts.
Inflation will impact taxpayers, employees and employers negatively as well. Employees, employers and self-employed individuals will be subject to social security taxes on earnings of $160,200 (up from $147,000 in 2022).
The limitation on itemized deduction for state and local tax has not increased, although state and local taxes have generally increased and the personal exemption continues to remain at zero. Finally, there has been no reduction in the long-term capital gains tax rate or increase in the deduction for capital losses which remains limited to $3,000 per year in excess of capital gains.
The business and tax lawyers at Chuhak & Tecson will be pleased to assist you with your individual or organizational tax questions.
Client alert authored by: Edwin I. Josephson (312 855 4349), principal and leader of Chuhak & Tecson’s Corporate Transactions & Business Law practice group.
This Chuhak & Tecson communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.