The standard deduction — the amount of basic income that filers can receive tax-free — will increase to $13,850 for individuals and $27,700 for married couples. This is the largest adjustment to the deduction since 1985, when the IRS began the annual automatic inflation adjustment.
Some parts of the tax code are linked to inflation to prevent higher prices from causing higher taxes. Beginning in January, taxpayers will see the new data reflected in their payroll withholding slips, and workers will receive more take-home pay.
Last week, the Social Security Administration announced a massive cost-of-living adjustment (COLA) to compensate for inflation, so the tax system changed. Social Security benefits will increase by 8.7% through 2023, the largest increase in 40 years.
Several other elements of the tax code are also linked to inflation. One of the federal government’s major anti-poverty measures, the top-earning income tax credit will increase to $7,430 in 2023 from $6,935 in 2022.
Annual Gift Tax Exemption – the maximum amount one person can give to another person without incurring a tax penalty — Will increase from $16,000 to $17,000. The estate tax threshold, which is often used by the wealthiest Americans to protect inherited assets from taxation, will jump from $12.1 million to $12.9 million.
The IRS will also allow adoptive parents to provide tax protection of $15,950 per child, up from $14,890 in 2022.