The standard deduction — the amount of basic income that filers can collect tax-free — will increase to $13,850 for individuals and $27,700 for married couples. It is the largest adjustment to deductions since 1985, when the IRS began annual automatic inflation adjustments.
Certain parts of the tax code are linked to inflation to prevent rising prices from causing higher taxes. Taxpayers will see the new numbers reflected in withholding tax returns on paychecks starting in January, with workers securing more take-home pay.
The changes to the tax system follow a major cost-of-living adjustment, or COLA, announced by the Social Security Administration last week to compensate for inflation. Social Security benefits are set to jump 8.7 percent in 2023, the biggest increase in four decades.
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Several other elements of the tax code are also indexed to inflation. The maximum Earned Income Tax Credit for 2023, one of the federal government’s main anti-poverty measures, will be $7,430, up from $6,935 in 2022.
The annual gift tax exclusion – the maximum amount one person can give to another without incurring a tax penalty — will rise to $17,000 from $16,000. The estate tax threshold, often used by the wealthiest Americans to shield inherited assets from taxes, will jump to $12.9 million from $12.1 million.
The IRS will also allow parents who adopt a child to shelter $15,950 per child from taxes, up from $14,890 in 2022.