Ongoing and unpredictable changes to federal tax brackets have the potential to alter the take-home pay of hardworking individuals significantly. For 2023, the bracket thresholds will increase to more than 6% from 2022 due to ongoing inflation.
Read on to learn more about the inflation tax adjustments. And for your tax preparation needs, reach out to the Sensible Services ABC team.
Tax Inflation Adjustments to Note in 2023
In mid-October, the Internal Revenue Service publicized the inflation tax adjustments that will change income tax brackets in 2023.
Such adjustments will result in an increase in employee paychecks through the taxation of earnings at reduced rates. The logic here is to compensate for surprisingly high inflation that continues at a pace unseen since the 70s.
In total, the thresholds of tax brackets have increased between 6% and 8%. As a result, hardworking people across the country will enjoy an increase in take-home pay beginning in January.
However, this benefit can increase income subject to Social Security payroll taxes. Maximum earnings taxed this way will spike by more than 8%, rising to $160,200. The increase is a whopping $13,200 more than the maximum in the previous year.
To better understand the inflation tax adjustments, here’s a quick look at a hypothetical income tax rates scenario. A single tax filer from the 22% bracket will pay 10% of taxable income up to $11,000, 12% from $11,000-44,725, and 22% above that in 2023.
Why the Tax Changes Matter in the Context of Withholdings
The amount of income taxed at a higher bracket will shape employees’ decisions. For example, withholdings from paychecks and independent contractors’ quarterly estimated taxes can change.
Employee decisions on earnings deferrals into 401(k) investment plans or HSAs (Health Savings Accounts) might also be affected by the tax bracket adjustments. The money contributed to such accounts decreases the income taxable for the year. This creates an opportunity to sidestep arguably punitive higher tax brackets.
Employees are also empowered to engage in non-qualified deferred income plans should their employer make such opportunities available. Though Congress can alter the tax ranges and rates over time, the new adjustments will be the norm unless egregious inflation or deflation occurs.
Sensible Services ABC is Here for You and Your Business
If you own or manage a business, you should be aware of inflation tax adjustments and the dynamics of tax law. However, keeping your finger on the pulse of taxes is difficult.
It would be helpful to have a tax expert and enrolled agent on your side. At Sensible Services ABC in Hammond, LA, we can help you maneuver through the maze of tax twists and turns through 2023 and beyond.
We are here to help business owners, managers, and employees throughout the U.S. We provide nationwide services to help you maximize your personal and business worth within the legal confines of dynamic taxation laws.