Nov 8, 2022
You may have heard that the IRS is adjusting its tax income brackets for next year. Tax consolidation is the reason behind these changes. The IRS is trying to simplify the tax code.
What does this mean for you? The adjusted tax brackets should make it simpler for you to figure out how much you owe. It should also make it easier and faster for the IRS to process tax returns, and it will allow you to pay less in taxes.
Let's get into a little more detail about these tax bracket changes, so you'll know what to expect next year.
How Do Tax Brackets Work in the U.S.?
The U.S. has what is called a graduated or progressive tax system in place. That's the opposite of a flat tax rate or system.
You're taxed at different rates depending on how much you make each year. Currently, the rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These are referred to as brackets or thresholds.
How Will 2023's Tax Rates Differ from 2022's?
In 2023, the amount of money you can get paid before you ascend into a higher tax bracket will rise. That's good news for you since you'll likely have to pay less in taxes, even if you're making more money next year.
Again, the reason the federal government wants to make this change is to simplify the tax code, but it's also to provide families and individuals with relief who are feeling the pinch because of inflation. The cost of many goods and services are rising, and this action should help to counteract that.
An Example of This Change
Let's look at an example of how your 2022 tax rate might differ from next year's. In 2022, we'll say you're a single filer, and you make $41,776. That is as much as you can make to qualify for the bracket where you must pay 22% in taxes.
In 2023, you can make as much as $44,726, and you'll still qualify for that 22% bracket. That means you can make an additional $2,950, and you will not have to pay more tax on it in 2023 than in 2022.
You can pocket those savings in any of the tax brackets. The more money you make, the more you'll potentially save under the new tax code.
What About If You File Jointly?
If you file your taxes jointly, you can still benefit from changes to the tax brackets next year. For instance, using the 22% tax bracket as a threshold again, if you file jointly in 2022, you can stay in that threshold up to $83,551. Next year, you can make a joint amount of up to $89,451 and remain in that 22% bracket. That's a difference of $5,900.
These Changes Mean You'll Keep More of Your Money
All this might sound a little confusing, but the main takeaway is that when the IRS changes the tax code next year and adjusts each of the brackets, you can keep more of your money. No matter which adjusted tax bracket you fall into, you'll have to give the IRS less.
If you go to the IRS website, you'll find detailed tables that show the tax brackets as they stand right now and how they will change in 2023. You can probably estimate how much you'll make next year. When you do, you can apply that number to the table and estimate how much more of your money you'll be able to keep.
In the face of inflation, a bear market, and other economic concerns, it's nice to know that the IRS is taking steps to alleviate some pain for the average American. The money you pocket from paying less in taxes next year could amount to hundreds of dollars or even thousands.
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