Inflation has devastated many Americans’ buying power, forcing them to make choices between necessities like food and gasoline. Some Americans though will receive a tax cut thanks to the high levels of inflation. It’s counterintuitive, but it may happen to you. Ashlea Ebeling reports on who will be getting a tax cut next year and why in The Wall Street Journal, writing:
One ripple effect of the high inflation eating into Americans’ spending power may be lower tax bills.
Many workers will get bigger paychecks in January and be able to stash more money in their retirement accounts when the Internal Revenue Service makes its annual inflation adjustments to dozens of tax provisions. Normally these are minimal modifications, but given August’s persistently high inflation data, tax experts estimate a significant impact on 2023 taxes.
More of Americans’ income will be taxed at lower rates next year, when the thresholds for income-tax brackets and the standard deduction are raised, thanks to automatic inflation adjustments built into the tax code, tax professionals say. A single taxpayer with $100,000 of adjusted gross income in 2023, could see a tax savings of about $500 compared to someone with the same income this year, according to Jim Young, an accounting professor at Northern Illinois University.
Estate- and gift-tax thresholds are expected to go up, too, allowing a couple to shelter nearly $2 million more from these taxes. And the contribution limits will likely be raised for retirement plans, meaning more tax-advantaged savings.
“Over the last decade, inflation has been moderate, so we only saw minor increases in tax parameters each year,” said Kyle Pomerleau, a federal tax policy expert at the American Enterprise Institute. “This year, we will see a much larger adjustment as prices have risen much faster.”
These inflation adjustments can hardly be called a silver lining, as Americans are paying more for everything from housing to food and energy.
The IRS makes the adjustments based on formulas set out in federal law that are somewhat different from headline inflation numbers. The Labor Department on Tuesday reported its consumer-price index was 8.3% higher in August than the same month a year ago.
The tax-provision adjustments are tied to an alternate inflation measure called the chained consumer-price index, which takes into account the substitutions shoppers make as costs rise. The average of the chained CPI from September 2021 to August 2022 is used to calculate the 2023 adjustments, which the IRS will announce in October or November. These ultimately affect tax returns for the 2023 tax year filed in early 2024.
“Adjusting tax-return data for inflation was a purposeful decision by Congress intended to shield taxpayers from annual inflation,” said Mr. Young. “This will hopefully help taxpayers cope with rising prices.” The benefits of these changes could be offset by inflation in other ways. If your wages have gone up, your total tax bill may not go down, Mr. Young said.
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