You can keep more money from the IRS next year, thanks to inflation

[BumRushDaShow]

Source: Washington Post

The Internal Revenue Service will allow Americans to shield more of their income from taxes in 2023 because of higher inflation, the agency announced Tuesday, raising income thresholds for all tax brackets and increasing the standard deduction.

The top tax rate of 37 percent will apply to individuals with income exceeding $578,125 and married couples filing jointly with income more than $693,750. Both of those amounts are up 7 percent from 2022 to track with increases in the consumer price index.

The standard deduction — the baseline amount of income that filers can collect tax free — will increase to $13,850 for individuals and $27,700 for married couples. It is the largest adjustment to deductions since 1985, when the IRS began annual automatic inflationary adjustments.

Certain parts of the tax code are tied to inflation to prevent rising prices from causing higher taxes. Taxpayers will see the new figures reflected in withholding statements on paychecks beginning in January, with workers securing more take-home pay.


Read more: https://www.washingtonpost.com/us-policy/2022/10/18/irs-deductions-brackets-inflation/

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No paywall

[Fiendish Thingy]

1. Well, c'mon Dems, start talking about this in ads and on the campaign trail!

I didn’t know the IRS could do this without legislation…unless it was part of the IRA?

[doc03]

2. They increase the standard deduction every year but it is more this year

due to the inflation. Since I have lost so much on my IRA my RMD (Required Minimum
Distribution) will be lower this year. That will lower my tax somewhat.

[FBaggins]

3. Why would they talk about something they can't take credit for?

The new standard deductions being indexed for inflation isn’t new or something they passed… and the only reason they’re going up is because of inflation (definitely not something they want to draw attention to).

There’s also a good chance that the most recent vote on the issue was a bill they voted against (though not for that reason)

[Skittles]

10. it's becoming a theme around here

I saw one yesterday thanking Biden for the SS COLA increase

[Igel]

6. It was legislated.

The House and Senate passed the law, the President signed it.

Pure democracy, elected representatives acting as such--nothing much done by one-man executive fiat or small-group judicial order. All that's left is being uncorrupt in crunching the numbers.

It'll help me because my income's significantly less than the inflation-driven increase. A small percentage of my loss to earned income will be compensated. Hip, hip, hoo...meh.

My 403(b) and pension get no such reprieve. I'll have to work 2-3 more years to make up for the 12% or so loss to date. Was going to retire at 67. Now? If inflation pretty much flatlines in November, when I'm 69, maybe 70.

[progree]

4. People should realize that the tax brackets are adjusted by the CHAINED CPI

which rises more slowly than the CPI. And over time, the difference grows very large.

The below report from 2017 says its expected to make a $134 billion difference over the next 10 years in taxes paid, citing the congressional Joint Committee on Taxation. And this was written when inflation expectations were around 2% or thereabouts. With the high inflation of the last nearly 2 years, that's going to make that number quite a lot larger.

https://www.brookings.edu/blog/up-front/2017/12/07/the-hutchins-center-explains-the-chained-cpi/

That was intentional -- it was part of the 2017 Trump "tax cuts".

For some reason, it is not a topic that DU discusses. I don't know why.

By the way, automatically indexing the tax brackets and standard deduction for inflation began with Reagan.

(Note: not all numbers in the tax code are adjusted for inflation, for example, the AGI threshold of taxation of Social Security benefits -- $25,000 for individuals and $34,000 for married couples -- has never been adjusted since that began in the 1980s (under Reagan). Those were well above median income back then, but now it is bare-bones survival mode. If those numbers had been indexed for inflation (I used 1984 as a starting point), they would by $71,000 and $97,000 respectively.

[Bluethroughu]

5. Very well stated.

[Bayard]

7. I'll take any good news I can get these days

[progree]

8. I think the headline is very misleading, at best

Last edited Wed Oct 19, 2022, 12:52 PM - Edit history (3)

You can keep more money from the IRS next year, thanks to inflation

Let's say inflation was 7%. Let's say someone's income increased by 7%, just enough to keep up with inflation.

The idea is, thanks to indexing taxes for inflation (a law that has been in effect since 1985), this person will pay 7% more taxes. But in inflation-adjusted terms they will pay the same taxes as last year. That's the idea anyway.

So indexing for inflation is not some wonderful gift, nor is it a wonderful side benefit of inflation. It's just to keep incomes from being taxed at a higher rate because of inflation.

Except that it's not really all this neat and pretty - this post explains that tax brackets and the standard deduction are adjusted by the Chained CPI which is always less than CPI. It also explains that not all numbers in the tax code are inflation-adjusted, and so many will effectively have a higher tax rate.

The bottom line is on average, we're paying more taxes because of inflation, even in inflation-adjusted terms. Another way to state it is, on average, we're paying a higher effective tax rate because of inflation.

Now look at the headline again (at the top of the post). Is that headline conveying any of this?

Edited to add

They say they are adjusting tax brackets by 7%. But these are the year over year inflation numbers for the regular CPI:
http://data.bls.gov/timeseries/CUSR0000SA0
(Click on More Formating Options, and then check the check box for 12 month changes)

Year Jan Feb Mar etc.
2021 1.4 1.7 2.7 4.2 4.9 5.3 5.3 5.2 5.4 6.2 6.8 7.1
2022 7.5 7.9 8.6 8.2 8.5 9.0 8.5 8.2 8.2

So for example, the latest number is the year over year number of September 2022 over September 2021, is 8.2%

7% my ass. Every month in 2022 so far is 7.5% or more than the corresponding month in 2021.

[progree]

9. I just read the article. It sucks as bad as the headline.

The thing that pissed me off the most was that graph of the standard deduction

First: A higher standard deduction is a good thing. Always. (I know a lot of people in DU complain about I can't deduct this or that anymore because they raised the standard deduction, and so I can't itemize anymore. Well, that's a good thing -- more of your income is not taxed than before than when you had to itemize. In other words, with the higher standard deduction, it is already deducted. (Leaving aside the exemptions issue that I get to in a moment).

And yes, Trump greatly increased the standard deduction with the 2017 Trump "tax cuts"! Yeah, yeah, thank you Orange Slob Father!

***** BUT ***** and here is the BUT part:

The 2017 Trump tax cut took away the personal and dependent exemptions.

It used to be that that the amount of untaxed income was the sum of the exemptions plus deductions (the latter being the higher of itemized deductions or the standard deduction)

Now, the amount of untaxed income is just the deductions (again being the higher of itemized deductions or the standard deduction).

But that graph doesn't convey that. It just makes it look like everyone got a free gift -- a big jump to a higher standard deduction, which by itself, is a gift. But not when it came at the price of eliminating the exemptions.

The graph is also wrong. The standard deduction did not drop for singles in 2018 like the graph shows. The single standard deduction has been half the married standard deduction in every year of the time period shown (2010-present). It was $12,000 in 2018, not $1,000 or so like the graph shows. https://en.wikipedia.org/wiki/Standard_deduction

In fact the graph is wrong for marrieds too in 2018. The correct standard deduction is $12,000 single and $24,000 married in 2018.

And the DUers that complain about the higher standard deduction are for the most part right, when one considers that the personal and dependent exemptions were eliminated, plus some other provisions like the $10,000 SALT deduction cap.