What are income tax brackets and how do they work?
Your IRS bill could fall after the income tax thresholds were altered to ensure that the taxation system reflects the soaring inflation recorded this year.
The Internal Revenue Service (IRS) has announced the latest round of tax bracket alterations in response to the high rate of inflation recorded during 2022. Each year the agency amends the income thresholds and increases the standard deduction to keep tax burdens in line with inflation.
The tax system in the United States operates at various different levels, known as tax brackets, to ensure that low earners pay a smaller proportion of their income. The theory is that groups with less disposable income should not be required to contribute as much.
The highest rate of income tax in the United States is 37%, and for 2023 that rate will only be applied to individuals earning more than $578,125 and joint filers who earn more than $693,750.
Here’s the full breakdown of income tax brackets for 2023, as confirmed by the IRS…
| Income tax rate | Income threshold (single filer) | Income threshold (joint filer) |
|---|---|---|
| 12% | Above $11,000 | Above $22,000 |
| 22% | Above $44,725 | Above $89,450 |
| 24% | Above $95, 375 | Above $190,750 |
| 32% | Above $182,100 | Above $364,200 |
| 35% | Above $231,250 | Above $462,500 |
| 37% | Above $578,125 | Above $693,750 |
A change has also been made to the standard deduction, the amount of income that all filers are able to earn without paying tax on it. For everyone in the US, the first $13,850 ($27,700 for couples) will not be subject to income tax.
This is the greatest adjustment to the standard deduction introduced since 1985 when the annual inflation alteration was first introduced.
Will I be able to keep more of my income with the new tax brackets?
If your wages have remained the same then you may find that you have dropped into a lower tax bracket and could end up paying less tax than you did last year. If your wages have not kept up with inflation, currently above 8% year-on-year, then you will have a lower income in real terms.
However your 2023 saving may not be as significant as you thought.
For example, if you are a single filer earning $75,000 per year then your tax liability would be calculated at a series of different tax rates. As mentioned the first $13,850 is tax deductible, so you would pay 0% tax on that.
Your next $30,880 of earnings (taking you up to $44,730) would then be taxed at a rate of 12%. The remaining $30,270 of your $75,000 salary would then be subject to income tax at 22%.
In simple terms an individual earning $75,000 in 2023 would owe $11,807.50 in 2023, compared to $12,117 in 2022. This represents a saving of just over $300.
The majority of your income will be subject to the same tax rates as in previous years with only a small proportion pushed into a different tax bracket. It may not provide the tax relief to entirely offset the effects of inflation, but it does ensure that the tax system reflects rising prices across the country.