At the end of every year the Internal Revenue Service (IRS) announces all the changes, significant or not, that it will implement to tax rules for the following tax year. Making them early means that impacted Americans will have enough time to understand which ones will impact them, be it in a positive or negative way. One of the changes this year means that thanks to the changes, Americans will earn approximately 2.8% more next year.
This can seem surprising to many, as inflation has ravaged many people’s savings with the additional cost of living impact it has brought. As the prices of goods and services rise, the real value of people’s income decreases, but to offset this impact, the IRS has made a few adjustments to its tax tables and other tax parameters.
The adjustments the IRS has made to tax parameters
Not all money is taxed the same. Most Americans may not know this, but the IRS uses tax brackets to tax the income which it deems taxable. These tax brackets determine the rate at which each dollar of income is taxed and are periodically adjusted upward to reflect the rising cost of living. This is so that those whose income keeps up with the cost of living do not end up in a higher tax bracket being penalized while not earning comparatively more money.
To also aid in that regard, standard deductions, which allow taxpayers to reduce their taxable income were also increased for all filing statuses. Itemized deductions will stay the same, but since the quantities to deduct will probably have risen, the effect is maintained the same.
Other changes made include those to the Earned Income Tax Credit, a refundable tax credit designed to help low- and moderate-income families. The new year will bring an increase in the refund to help these working families. Most of the families who qualify have children, which can make some think that you must have children to qualify, but some families without children may still fulfill the conditions. To qualify for this credit, you must:
- Have worked and earned income under $63,398
- Have investment income below $11,000 in the tax year 2023
- Have a valid Social Security number by the due date of your 2023 return (including extensions)
- Be a U.S. citizen or a resident alien all year
- Not file Form 2555, Foreign Earned Income
- Meet certain rules if you are separated from your spouse and not filing a joint tax return
The Alternative Minimum Tax (AMT) also got an adjustment. It is a tax that applies to those with certain tax benefits and high income, which can lead to high tax deductions. The AMT sets a limit on those benefits and helps to ensure that those taxpayers pay at least a minimum amount of tax.
The IRS calculates this tax by “The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax for the year is greater than the regular tax for that year. The tentative minimum tax is figured separately from the regular tax. In general, compute the tentative minimum tax by: Computing taxable income eliminating or reducing certain exclusions and deductions, and taking into account differences with respect to when certain items are used to compute regular taxable income and alternative minimum taxable income (AMTI), Subtracting the AMT exemption amount, Multiplying the amount computed in (2) by the appropriate AMT tax rates, and Subtracting the AMT foreign tax credit.”
Most of these changes made by the IRS are conditioned by the inflation index known as the Chained Consumer Price Index (C-CPI). This index measures changes in the prices of a basket of goods and services consumed by American households and it supplements the existing indexes already produced by the Bureau of Labor Statistic: the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W).
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