[Updated with IRS Adjustments for 2023] Per the federal tax code the IRS is required to adjust dozens of tax related items for inflation on an annual basis.
Given the persistently high levels inflation as evidenced in the recent COLA increases, the IRS has again announced significant increases (~7%) to federal tax bracket ranges and standard deductions for the coming year. There was no change to the actual tax rates.
2023 vs 2022 Standard Deductions by Filing Status
The standard deduction is a flat amount that allows taxpayers to reduce their taxable income (AGI), which could put them in a lower income tax bracket. Those who claim the standard deduction in their tax return cannot itemize to claim a broader range of deductions, or vice-versa.
The latest standard deduction by filing status are shown in the table below.
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| Filing Status | 2023 SD | 2022 SD |
|---|---|---|
| Married Filing Jointly / Surviving Spouses | $27,700 | $25,900 |
| Heads of Household | $20,800 | $19,400 |
| Single / Unmarried Individuals | $13,850 | $12,950 |
| Married Individuals Filing Separately | $13,850 | $12,950 |
Because the US tax system is a progressive one, as standard deductions and tax bracket ranges expand more of your current income is taxed in a lower bracket.
Hence the latest increase in standard deductions should be especially helpful to lower and middle-income taxpayers who often get hit by tax bracket creep when they see flat or higher incomes – which should be the case given average wages are expected to increase by a similar amount in the next 12 months.
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The 2022 standard deduction rose from $25,100 to nearly $25,900 (married) and to $12,950 (from $12,550) for singles. Similarly 2022 tax brackets (not tax rates) expanded by around 3%.
In 2023, the standard deduction increase was of a similar magnitude per the table above.
The above changes will act like an automatic tax cut for many W2 workers and should result in larger (take home) paychecks, after the IRS and payroll providers update paycheck-withholding calculations, which will result in less money being withheld for taxes.
Naturally if you get big raise or bonus next year, your taxes may go up due to you higher overall gross/taxable income. But your current or existing wages should be taxed less.
The tax related adjustment will happen automatically for most active employees but if your life situation (marriage, divorce or kids) or employer changes you may want to submit a new or updated IRS W4 form to your HR/Payroll department.
Because of higher than average inflation any pay raise in real terms will be quickly eaten up the higher cost of goods and services, making the gain from higher tax brackets and standard deduction savings even more important to millions of Americans in the coming years.
Dependent and Additional Standard Deductions
In 2023, the dependent standard deduction, for individuals claimed by another taxpayer, rose to $1,250 from $1,150 in 2022. The limit is also capped to $400 + the individuals earned income (up to the basic standard deduction).
For aged or blind filers, an additional standard deduction of $1,500 is provided. This amount is increase to $1,850 if the individual is also unmarried and not a surviving spouse.
Standard Deduction vs Itemized Deductions
The standard deduction level is also important when claiming certain deductions. For example, you need to itemize your deductions to claim charitable donations. This assumes your total deductions exceed your standard deduction amount.
You can make this determination when filing your return, which most leading tax software can guide you through.