Does Inflation Impact Your Taxes?
Updated: Jan 4
In a simple word … YES!
Are we having enough inflation yet? More is coming. It took several years to settle down the last time we had this kind of inflation, so hold on.
Now when inflation is high, per Congress’ instruction, the IRS makes some rather large adjustments to certain parts of the tax law to adjust for inflation. Such things as auto miles (currently at 62.5 cents per mile, in 2021 it was 56 cents per mile); 401(k) max contributions up $1,000 to $20,500; HSA contribution limits family limit is now $7,300, $8,300 if you’re older than 55; Refundable portion of Child Tax Credit went up a whopping $100 to $1,600; Adoption credit went up from $14,440 to $14,890; Earned Income credit up in 2023 to $560 for eligible filers with no children, $3,995 if one child, $6,604 if two children, and $7,430 for three or more children.
A couple of direct tax impact inflation adjusted changes are, the standard deduction and tax tables.
First, the Standard Deduction. For 2022, the standard deduction will go to $12,950 if your are single. (That’s a $450 increase from 2021.) $25,900 for married folks. (an increase of $800.) In 2023, the single standard deduction will go up again to $13,850 and married to $27,700.
Second, the tax tables changed. Each tax bracket had an increase in the cutoff income amount, basically taxing more of your income at lower tax bracket rates. In 2022, for example, single filers with $41,776 to $89,075 of taxable income are in the 22% federal income tax bracket. For 2023, that bracket will apply to single filers with taxable income from $44,725 to $95,375. So, if you have $41,000 of taxable income in both 2022 and 2023, you will move from the 22% federal tax bracket to the 12% bracket when you file your 2023 tax return. Because the tax brackets are inflation adjusted, the 12% tax bracket ends up applying to single filers making $11,000 to $44,725 for 2023.
Some other changes due to inflation. Annual gift exclusion is going up from $16,000 to $17,000 in 2023. That means you can give up to $17,000 to any individual in 2023 and not have to file a Gift Tax return. Also, the Estate Tax exclusion goes up to $12,920,000. That’s an increase of $860,000.
Now there is one very glaring item that is not inflation adjusted. That is because Congress doesn’t want it to be. IRAs are still $6,000 if you’re under 50 and $7,000 if your 50 or older. Comon Congress! Let people put more away for retirement.
I already mentioned last week that Social Security will be increased by 8.7% for 2023. Classical too little, too late. Poor Social Security recipients have had little increase over the last few years even though the main component of their family budget, food and gas, has been rising rapidly.
Have you heard? Psalm 35:2 says, “Take hold of shield and buckler and rise for my help!” Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook