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The Internal Revenue Service recently announced the 2023 inflation adjustments for dozens of tax provisions. These cost of living adjustments affect everything from the standard deduction and marginal tax rates to contribution caps for health savings accounts (HSAs), individual retirement accounts (IRAs), and 401(k)s. The adjustments also impact the estate tax exclusion and the annual exclusion amount for gifts. While tax rates are adjusted for inflation every year, the cost-of-living adjustment for tax year 2023 are fairly generous, generally about 7%.
Inflation Adjustments for Income Tax
The IRS issues an annual cost of living adjustment to income tax brackets to prevent “bracket creep,” in which inflation pushes a taxpayer’s income into a higher tax bracket, resulting in higher income taxes without an increase in real income.
There are seven tax brackets, ranging from 10% to 37%. The brackets themselves will remain the same, but the marginal tax rates within each bracket have been adjusted upward.
| Tax Rate | Single | Joint | Head of Household |
| 10% | Less than $11,000 | Less than $22,000 | Less than $15,700 |
| 12% | More than $11,000 | More than $22,000 | More than $15,700 |
| 22% | More than $44,725 | More than $89,450 | More than $59,850 |
| 24% | More than $95,375 | More than $190,750 | More than $95,350 |
| 32% | More than $182,100 | More than $364,200 | More than $182,100 |
| 35% | More than $231,250 | More than $462,500 | More than $231,250 |
| 37% | More than $578,125 | More than $693,750 | More than $578,100 |
The standard deduction will also be adjusted for inflation for 2023. Single filers will be able to take a standard deduction of $13,850, up $900 from the 2022 amount. Married couples filing jointly will be able to take a standard deduction of $27,700 (an increase of $1,800) and individuals filing as head of household will have a standard deduction of $20,800 (an increase of $1400).
Increase in Alternative Minimum Tax (AMT) Exemption
The Alternative Minimum Tax (AMT) was created decades ago to prevent wealthy taxpayers from using loopholes in the tax code to legally avoid paying federal income tax. Taxpayers with higher income must calculate their taxes twice: once under the standard income tax system and once under the Alternative Minimum Taxable Income (AMTI) system. The taxpayer must pay tax due under whichever system yields the higher amount.
Taxpayers may exempt a portion of their income from AMTI. For 2023, that exemption amount is $81,300 for single filers and $126,500 for married couples filing jointly. Estates and trusts can exempt $28,400.
Cost of Living Adjustments for Retirement Contributions
Individuals saving for their retirement will be able to contribute more to their retirement plans in 2023. Individual taxpayers will be able to contribute $6,500 to their IRAs, up from $6,000 the year before. This is noteworthy, as there has not been an increase in the contribution amount since 2019. The “catch-up” contribution amount is $1,000 and does not adjust for inflation. Together with the regular contribution amount, the catch-up amount means that workers over 50 can contribute $7,500 to their IRAs.
The employee contribution limit will also increase to $22,500 for 401(k)s and similar workplace retirement plans. This is the largest inflation adjustment ever, both in terms of percentage increase and absolute dollars—the new figure is $2,000 more than the 2022 contribution limit. Catch-up contributions are allowed for older workers with 401(k)s, and unlike catch-ups for IRAs, these extra contributions do get adjustments for inflation. Workers who are 50 and up can make catch-up contributions of $7,500 to their 401(k)s, an increase of $1,000 over 2022.
Social Security Cost of Living Adjustments
The Social Security Administration (SSA) has announced that benefit checks will increase by 8.7% in 2023, which is a larger increase even than the significant 5.9% bump benefits received in 2022. The cost-of-living adjustment for Social Security retirement benefits in 2023 is the largest since 1981. The increase will add an average of $146 to monthly benefits for retirees, raising the average check from $1,681 to $1,827 for an individual.
Adjustment for Annual Gift Tax Exclusion
Taxpayers are permitted to make gifts up to a certain amount each year to individual recipients without having to report those gifts on a gift tax return. In 2023, the annual gift tax exclusion will be $17,000, up from $16,000 in 2022. A married couple can make a gift of double that amount, or $34,000, to an unlimited number of individuals without being required to file a gift tax return for tax year 2023.
Estate Tax Exclusion Increase for 2023
The estates of individuals who die in 2023 will be able to exclude $12,920,000 of value from estate taxation. This represents an increase of $860,000 from the basic estate tax exclusion amount for tax year 2022.
The Tax Cuts and Jobs Act (TCJA) of 2017 nearly doubled the exclusion amount, and the amount has continued to be adjusted for inflation each year since. However, the increase in the estate tax exclusion is due to “sunset” on December 31, 2025, after which it will return to the pre-TCJA amount, adjusted for inflation. Accordingly, if you expect to have an estate valued at more than $6.8 million in 2026, you should speak to your estate planning attorney about tax planning for your estate.
If you have questions about cost-of-living adjustments, annual exclusion amounts, or other estate or tax issues, please contact Estate Planning & Elder Law Services to schedule a consultation.