Inflation Could Put More Money in Your Paycheck Next Year: Tax Changes for 2023

Inflation may be bumping up what you pay at the pump and in the store right now, but it could also boost the amount you take home in your check next year.

Last week's release of inflation data for September triggered several cost-of-living adjustments, or COLA, for 2023. These included the biggest increase in Social Security benefits in 42 years. High inflation in 2022 also means major changes to the federal income tax code for 2023, including 7% increases to the standard deduction and income thresholds for tax brackets.

The IRS has been adjusting tax brackets yearly for inflation since 1985. These COLA changes are designed to eliminate "tax bracket creep," where inflation creates a rise in income taxes without an increase in real income. By adjusting credits, deductions and exemptions for inflation, the IRS maintains their real value from year to year.

So what does that mean for you? If your income stays the same from 2022, you could be paying a lower base rate for federal income taxes in 2023, and less money would be withheld from your paycheck, resulting in more take-home pay. The changes to the tax code would then give you a bigger payday starting January 2023.

Inflation adjustments increase a wide range of tax exemptions and deductions, including annual and lifetime gift tax exclusions, the foreign earned income exclusion and the "kiddie tax" limit, or the amount of unearned income a child can earn before it's taxed. Read on to learn all of the inflation-related tax changes for 2023.

For more about income taxes, see if your state is sending a tax rebate check this fall and learn whether you need to pay taxes on your student loan debt forgiveness.

What are the new tax brackets for 2023?

Tax bracket thresholds are going up about 7% for 2023. For example, the lowest tax bracket for married joint filers is increasing from a limit of $20,550 in 2022 to a limit of $22,000 in 2023, or an increase of 7.1%. The highest tax bracket for married joint filers is rising from $647,851 in 2022 to $693,750 in 2023, another 7.1% hike.

Federal income tax brackets are mostly sorted into four buckets: single filers, married joint filers (which also includes surviving spouses), married separate filers and heads of household, who are unmarried filers who pay more than half of their household expenses and have qualifying dependents like children. (The IRS also maintains separate tax brackets for estates and trusts.)

See the new 2023 tax brackets and income thresholds for tax filers below.

How are the standard deduction and earned income tax credit changing in 2023?

Standard deductions for most taxpayers will increase 6.9% in 2023. The standard deduction for single filers and married people filing separately will rise from $12,950 in 2022 to $13,850 in 2023, and for married taxpayers filing jointly, the deduction will increase from $25,900 to $27,700. 

Heads of household will get a larger percentage increase to their standard deduction, a 7.2% hike from $19,400 in 2022 to $20,800 in 2023.

The earned income tax credit is a tax break for Americans with lower incomes, particularly parents. To qualify for the EITC you must earn less than a certain amount, depending on your filing status and how many children you have.

At a certain income threshold, the EITC will begin phasing out, paying less and less the more you earn. At a further income threshold, the EITC phases out completely. The maximum incomes for EITC qualification in 2023 all increased by rates between 7% and 7.1%.

The maximum dollar amount available from the EITC will also rise in 2023. based on inflation in 2022. The maximum credits for no children, two children or three children will all increase 7.1%, while the maximum credit for one child will rise 7% in 2023.

Along with income limits, the IRS also restricts the amount of money a taxpayer can earn from investments and still qualify for the EITC. The EITC limit for investment income in 2023 is $11,000, up 6.8% from $10,300 in 2022.

What other inflation adjusted tax changes are happening in 2023?

Along with higher thresholds for tax brackets, an increased standard deduction and a bigger earned income tax credit, IRS inflation adjustments will impact a long list of federal income tax rules in 2023. Some of the most notable changes are:

• The Alternative Minimum Tax exemption amount for 2023 will be $81,300, up 7.1% from $75,900 in 2022, and the exemption will start to phase out at $578,150 in 2023 compared to $539,900 in 2022.
• Annual contribution limits to health flexible spending arrangements will increase to $3,040 in 2023, up 6.7% from $2,850 in 2022. The maximum carryover for plans that allow it will be $610 in 2023, up from $570 in 2022.
• The foreign earned income exclusion will also rise 6.7% in 2023, to $120,000 from $112,000 in 2022. 
• The annual gift tax exclusion will increase to $17,000 in 2023 from $16,000 in 2022, a 6.3% rise. 
• The estate tax exemption will grow from $12,060,000 in 2022 to $12,920,000 in 2023, a 7.1% increase.
• The IRS will increase the maximum adoption credit 7.1% in 2023, up to $15,950, compared to $14,890 in 2022.
• The standard deduction for the "kiddie tax," or the amount of unearned income from a child that can be excluded from taxes, will be $1,250, up 8.7% from $1,150 in 2022.

Will the child tax credit be higher in 2023?

The child tax credit is one of the credits in the income tax code that isn't connected to inflation. The child tax credit will remain the same in 2023 as it is in 2022 -- $2,000 per child, which starts phasing out at incomes of $200,000 for single filers and $400,000 for married and filing jointly.

In 2021, the child tax credit was temporarily increased to $3,000 for each child aged 6 to 17 and $3,600 for each child under 6. Families were also able to collect half of their child tax credit in advance with monthly checks during the final six months of 2021.

The expanded child tax credit kept 3.7 million children out of poverty in December 2021, according to the Center on Poverty and Social Policy at Columbia University, and many activists and politicians have urged Congress to expand it yet again. However, an amendment to include an expanded child tax credit in the Inflation Reduction Act failed in a 1-97 Senate vote.

In the absence of an expanded federal child tax credit, several states have stepped up to replace some of that missing money with additional child tax credits of their own.

For more about tax changes, learn how the IRS has to pay more interest on money it owes you and new tax laws about income earned via Venmo or other online payment services.