As inflation intensifies, the IRS is increasing the standard deductions for 2023
LEILA FADEL, HOST:
With everything costing more - food, gas, daily expenses - the IRS announced inflation adjustments. Those adjustments mean many Americans could shield more of their money from taxes next year. The IRS is raising income thresholds for all tax brackets and increasing the standard deduction Americans can claim on their tax returns. To explain what this all means for people's bank accounts, we're joined by Washington Post reporter Jacob Bogage. Good morning, Jacob.
JACOB BOGAGE: Good to be with you.
FADEL: Thanks for being here. OK. So if you could just start by explaining what this inflation adjustment means for Americans come tax seasons. This isn't a tax cut, right?
BOGAGE: No, it's not a tax cut. Inflation means the price of ordinary consumer goods and services is increasing.
BOGAGE: And that's often because wages are increasing along with it. So folks have more money. So these are automatic adjustments that happen every year to combat inflation. So proportionally, Americans will, in theory, be paying around the same amount in taxes in 2023 but by dollar value, maybe a little bit less.
FADEL: OK. So people might get a little bit of a break. How is the standard deduction changing, and who's going to benefit there?
BOGAGE: Yeah. The standard deduction is the baseline amount of income filers can collect tax free, and that's getting a big jump, a 7% jump. But, again, this is adjusted to inflation. So it's not meant to be some sort of a tax cut. Rather, it's just to make sure that raising wages and higher prices aren't forcing people into some sort of a tax hike.
FADEL: OK. So really kind of bridging the gap so that everything kind of stays the same. But will people be taking home more money in their paycheck?
BOGAGE: Yeah, folks should start seeing that as soon as this January. And that should come in the form of lower withholdings on pay statements.
FADEL: Now, raising income thresholds for all tax brackets, what does that look like, and who really gains the most from the change there?
BOGAGE: Yeah, you know, a tax bracket is the amount of income that somebody brings in and at what percent that is taxed. And that is what we call a progressive tax system. So as you make more money, more of your income is taxed. So again, the deal with inflation this past year has been a lot of folks are making more money, but a lot of that money has just headed out the door to pay for higher things like housing and gas and child care and food and all of these basic consumer goods and services.
So the highest wage earners who pay 37% in tax, that number is not really moving that much. But for folks who make anywhere beneath $500,000, you are getting a little bit of relief because those income thresholds have moved upward. So just because you are now making more money but some of your take-home pay is going out the door to cover expenses whose prices are rising, you won't be taxed at a higher rate.
FADEL: That's Washington Post business reporter Jacob Bogage. Thank you so much.
BOGAGE: Thanks. Transcript provided by NPR, Copyright NPR.