Inflation causes changes in tax brackets: Here's what you need to know

The IRS is making big changes to the 2023 income tax brackets and the standard deduction.

Earlier this year, the IRS announced that the income tax brackets and the standard deduction would be adjusted upward to account for the impact of inflation. For some people, this could mean they owe less in taxes.

Below, Select walks you through what you need to know about these changes.

The IRS changes the tax brackets and the standard deduction each year due to changes in the cost of living, but this year's changes are more significant than usual.

Taxpayers will see these changes reflected in their 2023 paychecks and 2024 tax returns. The goal of the changes is to avoid 'bracket creep' or what occurs when inflation causes people to owe more in income taxes due to increases in salaries.

For 2023, the standard deduction will increase by 7% from the previous year. The standard deduction for single filers is increasing to $13,850, up $900 from 2022. For households, the standard deduction will be $20,800, up $1,400.

This is the largest automatic inflation-adjusted increase to the standard deduction since 1985, according to the WSJ. Deductions reduce your taxable income, thereby reducing the amount that you owe in taxes.

Taxpayers will also see changes in their marginal tax rate. The marginal tax rate is the tax you pay on every additional dollar you earn past a certain threshold.

For example, in 2023, a single-filer would have the first $11,000 of their income taxed at a rate of 10% and then the income they earn between $11,000 and $44,725 would be taxed at a rate of 12%. This would apply to every other bracket.

Depending on if your income has increased because of inflation, you may end up saving money because of the new changes.

Inflation also caused the IRS to increase the earned income tax credit, the alternative minimum tax exemption and the amount workers can deduct for contributions to health flexible spending accounts. The Social Security Administration also announced that retirees would be getting larger Social Security paychecks because of inflation.

When tax season rolls around, consider using a service like TurboTax or H&R Block to help you file your taxes so you can maximize deductions and increase your refund. Although these changes don't kick in until next year, make sure you have April 18 marked on your calendar because that's when 2022 taxes are due.

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