Many of the dollar amounts upon which federal taxes are based must, by law, be adjusted to reflect the impact of inflation.
Not adjusting those value-based provisions within the Internal Revenue Code (IRC) for inflation could cause strange results.
For instance, each year many employees receive a cost-of-living adjustment (essentially an inflation adjustment) to their salary. If the income tax brackets were not also adjusted for inflation, over time the employee who receives only cost-of-living adjustments would be pushed into a higher marginal tax rate even though the real purchasing power of the employee’s salary had not increased.
Inflation adjustments can be found in various pronouncements from the Internal Revenue Service (IRS). The adjustments discussed in this alert can be found in Notice 2022-55 and Revenue Procedure 2022-38. Both are available at www.irs.gov.
Following are selected inflation adjustments that could impact your tax calculations.
Income Tax
Income Tax Rates
The IRS has released tax rates for 2023. Table 1 shows the rates for certain individuals and estates and trusts. Rates other than those shown in this alert can be found in Section 3.01 of Rev. Proc. 2022-38.
Table 1: 2023 Federal Income Tax Rates For Married Individuals Filing Jointly
| If Taxable Income Is | The Marginal Tax Rate Is |
|---|---|
| Not over $22,000 | 10% |
| Over $22,000 through $89,450 | 12% |
| Over $89,450 through $190,750 | 22% |
| Over $190,750 through $364,200 | 24% |
| Over $364,200 through $462,500 | 32% |
| Over $462,500 through $693,750 | 35% |
| Over $693,750 | 37% |
For Unmarried Individuals Other Than Heads of Households and Surviving Spouses
| If Taxable Income Is | The Marginal Tax Rate Is |
|---|---|
| Not over $11,000 | 10% |
| Over $11,000 through $44,725 | 12% |
| Over $44,725 through $95,375 | 22% |
| Over $95,375 through $182,100 | 24% |
| Over $182,100 through $231,250 | 32% |
| Over $231,250 through $578,125 | 35% |
| Over $578,125 | 37% |
Estate and Trusts
| Not over $2,900 | 10% |
| Over $2,900 through $10,550 | 24% |
| Over $10,550 through $14,450 | 35% |
| Over $14,450 | 37% |
Source: IRS
Capital Gain Tax Rates
The thresholds at which capital gain tax rates apply have also been adjusted for inflation. Table 2 lists the rates for certain individuals and estates and trusts. Rates other than those shown in this alert can be found in Section 3.03 of Rev. Proc. 2022-38.
A 20% capital gain tax rate applies if taxable income is greater than the taxable income cap shown in the foregoing table for which a 15% rate applies.
Table 2: 2023 Capital Gain Tax Rates
| Tax Payer Type | 0% Rate Applies if Taxable Income is Less Than or Equal to | 15% Rate Applies if Taxable Income is Less Than or Equal to |
|---|---|---|
| Married Individuals Filing Jointly or Surviving Spouse | $89,250 | $553,850 |
| Head of Household | $59,750 | $523,050 |
| All Other Individuals | $44,625 | $492,300 |
| Estates and Trusts | $3,000 | $14,650 |
Source: IRS
Tax on Net Investment Income
A taxpayer is subject to a tax on net investment income when such taxpayer’s modified adjusted gross income exceeds a certain threshold. The threshold amount for individuals is not indexed for inflation. Table 3 lists the threshold amounts for 2023.
Table 3: 2023 Threshold Amounts on Net Investment Income
| Taxpayer Type | Threshold Amount (MAGI) |
|---|---|
| Married Individuals Filing Jointly or Surviving Spouse | $250,000 |
| All Other Individuals Except Married Filing Separately | $200,000 |
| Married Filing Separately | $125,000 |
| Estates and Trusts | $13,450 |
Source: IRS
Additional Medicare Wage Tax
Taxpayers (other than estates and trusts) are subject to an additional 0.9% Medicare tax on wages (and self-employment income) that exceed a certain threshold. The thresholds are not adjusted for inflation. For 2023, the thresholds are listed in Table 4.
Table 4: 2023 Medicare Wage Tax
| Taxpayer Type | Threshold Amount (MAGI) |
|---|---|
Married Individuals Filing Jointly or Surviving Spouse |
$250,000 |
All Other Individuals Except Married Filing Separately |
$200,000 |
| Married Filing Separately | $125,000 |
Source: IRS
Standard Deduction
When determining taxable income, taxpayers may elect to itemize deductions or take the standard deduction. The Tax Cuts and Jobs Act of 2017 substantially increased the standard deduction, with the result that many more taxpayers are taking the standard deduction rather than itemizing deductions. The standard deduction amount is indexed for inflation. For 2023, the standard deduction amount can be found in Table 5.
Table 5: 2023 Standard Deduction Amounts
| Taxpayer Type | Standard Deduction |
|---|---|
Married Individuals Filing Jointly or Surviving Spouse |
$27,700 |
| Heads of Households | $20,800 |
Unmarried Individuals Other than Surviving Spouses and Heads of Households |
$13,850 |
Married Individuals Filing Separately |
$13,850 |
Source: IRS
For 2023, the standard deduction amount for an individual who may be claimed as a dependent cannot exceed the greater of $1,250, or the sum of $400 and the individual’s earned income.
For 2023, the additional standard deduction amount for the aged or the blind is $1,500. The additional standard deduction amount is increased to $1,850 if the individual is also unmarried and not a surviving spouse.
Unearned Income of Minor Children (colloquially known as the Kiddie Tax)
Parents may elect to include a minor child’s income on their own federal income tax return (and not file a separate return for the child) if certain conditions are met including that the child had income only from interest and dividends for the tax year. For 2023, a parent may make this election if the child has gross income between $1,250 (the child’s standard deduction amount as adjusted for 2023) and $12,500. Above that threshold, the child must file a separate return.
Also, the threshold for taxing a child’s net unearned income at the parent’s rates (the Kiddie Tax) is increased to twice the child’s standard deduction amount or $2,500.
See IRS Publication 929 for more details.
Tax Credits
Certain tax credits such as the adoption credit, the child tax credit, the earned income credit and others have phase out amounts and other tests dependent upon income thresholds. The inflation adjustments for these thresholds can be found in Section 3.04 et. seq. of Rev. Proc. 2022-38.
Alternative Minimum Tax
Taxpayers may limit the amount subject to income tax by using deductions, exemptions, losses and tax credits. It is possible to use those items to produce a federal income tax of zero dollars. The alternative minimum tax (AMT) is a separate way of calculating income tax by adding back some of those items (known as tax preference items) to calculate a different base amount on which tax is calculated (alternative minimum taxable income or AMTI).
Although the details are beyond the scope of this alert, a taxpayer’s AMT is the amount by which AMT exceeds regular federal income tax. A certain amount of AMTI is exempt from the AMT, this amount is adjusted annually for inflation (Table 6). AMT exemption amounts are phased out or reduced 25% for each dollar of AMTI over certain threshold amounts. These thresholds are also adjusted for inflation (Table 7). The AMT rate is 26% for taxpayers below and 28% for taxpayers above a threshold amount (Table 8).
Table 6: 2023 AMT Exemption Amounts
| Taxpayer Type | Exemption Amount (AMTI) |
|---|---|
Married Individuals Filing Jointly or Surviving Spouse |
$126,500 |
| Unmarried Individual (other than Surviving Spouses) | $81,300 |
| Married Filing Separately | $63,250 |
| Estates and Trusts | $28,400 |
Source: IRS
Table 7: 2023 AMTI Exemption Phaseout Amounts
| Taxpayer Type | Threshold Phase-out Amount (AMTI) | Complete Phase-out Amount (AMTI) |
|---|---|---|
Married Individuals Filing Jointly or Surviving Spouse |
$1,156,300 | $1,662,300 |
Unmarried Individuals Other than Surviving Spouses |
$578,150 | $903,350 |
Married Individuals Filing Separately |
$578,150 | $831,150 |
| Estates and Trusts | $94,600 | $208,200 |
Source: IRS
Table 8: 2023 AMTI Threshold over which the 28% AMT Rate Applies
| Taxpayer Type | Exemption Amount (AMTI) |
|---|---|
| All Taxpayers Other than Married Filing Separately | $220,700 |
| Married Filing Separately | $110,350 |
Source: IRS
Qualified Business Income (QBI); IRC Section 199A
The Tax Cuts and Jobs Act of 2017, enacted IRC section 199A. Owners of passthrough entities, such as partnerships and S corporations, may receive a deduction of up to 20% of qualified business income (QBI) from qualifying pass-through entities.
For taxpayers with taxable income below a threshold amount the full 20% deduction is available. Above that taxable income threshold amount, the deduction phases out. For taxpayers above the maximum taxable income threshold amount engaged in a specified trade or business (SSTB) the QBI deduction is eliminated. For taxpayers above the maximum taxable income threshold amount, not engaged in an SSTB other rules apply to determine the amount of the QBI deduction. The threshold amounts are indexed for inflation (Table 9).
Table 9: 2023 QBI Deduction Thresholds
| Taxpayer Type | Threshold Amount | Phase-in/Phase-out Amount |
|---|---|---|
| Married Individuals Filing Jointly | $364,200 | $464,200 |
| Married Individuals Filing Separately | $182,100 | $232,100 |
| All Other Returns | $182,100 | $232,100 |
Source: IRS
Federal Estate, Gift and Generation- Skipping Transfer Taxes
For 2023, the basic exclusion amount for estate and gift taxes will be $12,920,000.
For 2023, the aggregate decrease in the value of qualified real property resulting from a special use valuation election will be $1,310,000.
For 2023, the annual exclusion amount for gifts will be $17,000. For gifts to non-citizen spouses, for 2023, the annual exclusion amount will be $175,000.
For 2023, the GST Exemption will be $12,920,000.
For 2023 a United States person must report foreign gifts received from certain foreign persons if the aggregate value of gifts received in the taxable year exceeds $18,567.
Retirement Plan Limits
Inflation adjustments for many qualified retirement plans and accounts are found in Notice 2022-55. Below are selected inflation adjustments. For specific inflation adjustments not included in this alert, refer to Notice 2022-55.
For 2023, the deductible amount for contributions to IRAs and Roth IRAs will be $6,500. For taxpayers aged 50 years and older, the $1,000 deductible catchup contribution remains the same.
For 2023, basic deferral amounts for employer provided 401(k), 403(b) and many 457 plans will increase to $22,500. For taxpayers age 50 years and older, the additional catchup contribution limit increases to $7,500. The overall limit for contributions to an employer provided 401(k) plan (which includes employer contributions) increases to $66,000.
For 2023, the contribution limit to SEP IRAs increases to $66,000.
For 2023, the contribution limit to SIMPLE plans increases to $15,500. For taxpayers age 50 years and older, the additional catchup contribution limit will be $3,500.
For taxpayers who are covered by an employer plan, the ability to make deductible contributions to a traditional IRA phases out at certain levels of adjusted gross income (AGI) (Table 10). Taxpayers are prohibited from contributing to a Roth IRA if their AGI exceeds certain thresholds (Table 11).
Table 10: 2023 Deductible IRA Contribution Thresholds for Taxpayers Covered by Employer Plans
| Taxpayer Type | Threshold Phase-out Amount (AGI) | Complete Phase-out Amount (AGI) |
|---|---|---|
| Married Individuals Filing Jointly; Covered Spouse Contributing | $116,000 | $136,000 |
| Married Individuals Filing Jointly; Non-covered Spouse Contributing | $218,000 | $228,000 |
| Unmarried Individuals; Heads of Households | $73,000 | $83,000 |
| Married Individuals Filing Separately | $0 | $10,000 |
Source: IRS
Table 11: 2023 Roth IRA Contribution AGI Thresholds
| Taxpayer Type | Threshold Phase-out Amount (AGI) | Complete Phase-out Amount (AGI) |
|---|---|---|
| Married Individuals Filing Jointly | $218,000 | $228,000 |
Unmarried Individuals; Heads of Households |
$138,000 | $153,000 |
| Married Individuals Filing Separately | $0 | $10,000 |
Source: IRS
Plan for Inflation Adjustments
Annual adjustments for inflation can impact your tax and retirement planning for the year 2023.
Your PNC Private Bank team can help you plan for inflation-adjusted amounts throughout the year.
If you would like to adjust your plans to take account of inflation adjustments or just check their impact on your current plan, please contact any member of your PNC Private Bank team.
For more information, please contact your PNC Private Bank advisor.
