Will high inflation help you pay less tax for 2023?

Inflation got you down? An unlikely hero is here to help.

The Internal Revenue Service (IRS) announced tax rates and standard deductions for 2023, adjusted for 2022’s extreme inflation.

The new tax rates for income earned in 2023 are:

35% for married couples filing jointly with incomes over $462,500 ($231,250 for single filers);
32% for joint filers with incomes over $364,200 ($182,100 for single filers);
24% for joint filers with incomes over $190,750 ($95,375 for single filers);
22% for joint filers with incomes over $89,450 ($44,725 for single filers);
12% for joint filers with incomes over $22,000 ($11,000 for single filers); and
10% for joint filers with incomes of $22,000 or less ($11,000 for single filers), according to the IRS.

The 2023 standard deduction is:

$27,700 for joint filers, up from $25,900 in 2022;
$20,800 for heads of households, up from $19,400 in 2022; and
$13,850 for individual filers, up from $12,950 in 2022.

Tax brackets for Capital Gains tax has also increased to:

0% for joint filers with incomes up to $89,250 ($44,625 for single filers);
15% for joint filers with incomes over $89,250 ($44,625 for single filers); and
20% for joint filers with incomes over $553,850 ($492,300 for single filers).

The alternative minimum tax (AMT) exemption amount has increased to $126,500 for joint filers ($81,300 for single filers). The phaseout threshold beyond which filers are no longer eligible for the AMT exemption has increased to $1,156,300 for joint filers ($578,150 for single filers).

The AMT is a supplemental income tax targeting high-income earners who have a high ratio of standard income tax (SIT) deductions.

Some relief — but not enough

While 2023’s adjusted tax rates will offer a measure of relief to taxpayers who have seen their purchasing power battered away by high inflation, it falls short of what’s needed today.

Further, the adjustments would have been more favorable for taxpayers prior to the Trump-administration’s 2018 tax changes.

The 2018 changes tied tax bracket adjustments to the chained consumer price index (CPI) — which rises more slowly than the traditional CPI measure. In turn, tax brackets will also rise more slowly. This means, when household incomes rise, taxpayers are shifted into higher tax brackets more quickly than under the old measure when inflation elevated these brackets more in line with rises in personal incomes.

The new CPI measure alone will equal an additional $125 billion in tax revenue by the year 2027, paid mostly by middle-income earners, according to the Tax Policy Center.

Over time, taxpayers are suffering what is termed bracket creep, when they move up into a higher tax bracket despite no real increase in income (after deducting for inflation). True, their income may have increased from the previous year, but not enough to actually increase their purchasing power since consumer inflation exceeded their income increase.

Still, any bit will help as real estate professionals come off the high earnings of 2020-2021 and look ahead to the significant losses expected in 2023.

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