The Internal Revenue Service (IRS) makes all of the changes to the tax laws for the upcoming year known at the end of each year, whether they are major or not. By making them early, affected Americans will have ample time to choose which ones will positively or negatively impact them. According to one of the modifications made this year, Americans will see an increase in income of about 2.8% the next year.
Many people may find this surprising because inflation has severely damaged their savings due to the increased cost of living it has brought about. The real value of people’s income declines as prices for goods and services rise, but the IRS has made several changes to its tax tables and other tax parameters to counteract this effect.
IRS Adjustments: The way that money is taxed varies. The IRS taxes the income it determines to be taxable using tax brackets, something that most Americans may not be aware of. The rate at which each dollar of income is taxed is determined by these tax brackets, which are periodically raised to account for the growing cost of living. This is to prevent those whose income stays up to date with the cost of living from being penalized for not earning a higher tax rate.
Standard deductions, which enable taxpayers to lower their taxable income, were also raised for all filing statuses to help with that. The amount to deduct will likely have increased, but the itemized deductions will remain the same, maintaining the same effect.
The Earned Income Tax Credit, a refundable tax credit intended to assist low- and moderate-income families, has also undergone adjustments. To assist these working families, the refund will be increased in the upcoming year. Since the majority of qualifying families have children, some people may assume that having children is a requirement for eligibility; nevertheless, some families may still meet the requirements without having children. To be eligible for this credit, you need to:
- 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
Additionally, the Alternative Minimum Tax (AMT) was modified. Those with high incomes and specific tax perks are subject to this tax, which may result in significant tax deductions. These benefits are limited by the AMT, which also helps to guarantee that those taxpayers pay a minimal 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, taking into account differences concerning 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.”
The IRS bases the majority of these adjustments on the Chained Consumer Price Indicator (C-CPI), an inflation indicator. In addition to the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which are already produced by the Bureau of Labor Statistics, this index tracks changes in the costs of a basket of goods and services that American households purchase.
