How The New Standard Deduction Will Affect You

As the year comes to an end, it is vital to take note of all the changes made by the Internal Revenue Service (IRS) for the coming year. 2023 may be a challenging year, with the economy speculated to go into recession soon. Financial planning is of utmost importance at this time to ensure that you do not lose money and are able to maintain your savings.

Income tax is one of the things that can damage your financial security. The income tax is a mandatory tax that you pay to the government if you have an earned income in a given financial year. The rate of income tax can differ based on your filing status and the amount of money you make in a year. There are seven income tax rates in the U.S.: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Depending on your income and filing status, you can fall into any of these tax brackets. However, you are not directly taxed on your income. The government offers a standard deduction that you can use to lower your income tax for the year. Consider reaching out to a professional financial advisor who can guide you on how to manage your taxes and what impact the new standard deduction will have on your finances.

Here are some things you need to know about the new standard deduction rates and how they can impact your finances in 2023.

The new income tax bracket for 2023

Before moving to the standard deduction, it is first essential to take note of the new tax brackets for the coming year. There are four filing categories in the country for the purpose of tax. Your taxability will be determined based on the category you fall into from the following:

1. Single filing:

Individuals who are unmarried or legally separated from their spouse by divorce or separate maintenance decree on the last day of the year can file under this status.

2. Married filing jointly: 

Individuals who are married and willing to file a joint return by combining their incomes and deductions can file under this status.

3. Married filing separately: 

Individuals who are married but willing to file their taxes differently can use this status.

4. Head of household: 

Individuals who wish to file under this status need to meet the following criteria:

  • You should be unmarried on the last day of the year
  • You need to pay for more than half the cost of your household for the year
  • A qualifying family member should have lived with you in the same home for more than six months in a year
  • You can also choose the status if you have a dependent parent who is living separately

2023 tax brackets 

The IRS determines the new tax brackets for 2023 on the basis of inflation. These tax rates will be applicable to taxpayers who will file their returns in April 2024. The income thresholds have been increased for 2023 compared to 2022. The lowest income threshold for 2023 is $11,000 compared to $10,275 in 2022. The maximum income threshold for 2023 is $578,125 compared to $539,900 in 2022. Here are the tables for each filing status and income group:

Federal income tax brackets for single filers Tax rate
$11,000 or less 10%
$11,001 to $44,725 12%
$44,726 to $95,375 22%
$95,376 to $182,100 24%
$182,101 to $231,250 32%
$231,251 to $578,125 35%
Over $578,126  37%

Federal income tax brackets for married filing jointly Tax rate
$22,000 or less 10%
$22,001 to $89,450 12%
$89,451 to $190,750 22%
$190,751 to $364,200 24%
$364,201 to $462,500 32%
$462,501 to $693,750 35%
Over $693,751  37%
Federal income tax brackets for married filing separately Tax rate
$11,000 or less 10%
$11,001 to $44,725 12%
$44,726 to $95,375 22%
$95,376 to $182,100 24%
$182,101 to $231,250 32%
$231,251 to $346,875 35%
Over $346,876 37%
Federal income tax brackets for heads of households Tax rate
$0 to $15,700 10%
$15,701 to $59,850 12%
$59,851 to $95,350 22%
$95,351 to $182,100 24%
$182,101 to $231,250 32%
$231,251 to $578,100 35%
Over $578,101  37%

IRS new standard deduction for 2023

2022 has been a challenging year because of the continuously increasing inflation. The rate of inflation reached a record of 8.2%, the highest since. Additionally, consumer prices were up by 9.1% in June 2022. To accommodate these events and more, the IRS has proposed new tax brackets and increased the standard deduction exemption amount for all filing statuses. 

The standard dedication is the amount of tax you can deduct from your income before paying income tax. You can straightaway reduce your taxable income using the standard deduction if you have not itemized your deduction with Schedule A of Form 1040.

For example, if your taxable income is $231,250, you will not necessarily pay tax at the rate of 35%. You will first deduct the standard deduction and then pay tax depending on which tax slab you fall into.

The standard deduction for 2023 has been increased from 2022 as follows:

Filing status Exemption amount
Single taxpayers $13,850
Married taxpayers filing jointly $27,700
Married taxpayers filing separately $13,850  
Head of household taxpayers $20,800

The standard deduction in 2022 was as follows:

Filing status Exemption amount
Single taxpayers $12,950
Married taxpayers filing jointly $25,900
Married taxpayers filing separately $12,950
Head of household taxpayers $19,400

Standard deduction vs itemized deduction

In order to claim the standard deduction, you need to first understand the difference between itemized deduction and standard deduction. The IRS offers two options to taxpayers. Itemized deductions are certain expenses that you can deduct from the Adjusted Gross Income (AGI) in a year. These expenses comprise a set of approved expenses like:

  • Unreimbursed medical and dental expenses
  • Home mortgage
  • Long-term care insurance premiums
  • Home equity loan
  • Charity
  • Losses from theft and, in some cases, gambling

You can choose either itemized deductions or standard deductions to lower your taxable income for the year. If you choose the latter, you will get a straight tax cut depending on your filing status irrespective of whether you have had the expenses listed above or not.

The biggest benefit of the standard deduction is that you do not have to keep a tab on your expenses. You can apply for a deduction directly. However, in the case of an itemized deduction, you need to keep track of all qualified expenses and mention them on Schedule A and attach the form to your tax return.


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How to benefit from the new IRS standard deduction for 2023

The new tax bracket can help you overcome inflation. The power of purchasing has dropped considerably due to the rise in prices for most people. Inflation can impact you in several ways. It affects your lifestyle, forces you to let go of your dreams, and causes stress. It also impacts your savings and investment rate, which impacts your future. If you are behind your retirement planning schedule due to inflation, you may be forced to postpone your retirement or downsize considerably to meet your needs. Inflation also makes it harder to send you kids to college, cater to medical needs, and more.

Measures like the standard deduction can be helpful in lowering your expenses. Here are some ways in which the proposed new tax brackets for standard deductions are beneficial:

1. Easy to use

Claiming and calculating the standard deduction is simple. You can refer to the new table and compute your tax liability for the year. The process is pretty much automatic and the deduction added to your tax return without any elaborate formalities. Unlike the itemized deduction, where you need to fill out the Schedule A form, you do not need any such formalities here.

2. High deduction limits 

The standard deduction can differ for different ages and filing statuses, which extends the benefits to most people. You can claim this at any age and use it to lower your taxes substantially. Moreover, there is a significant margin in the deduction limits for 2023 compared to the previous year. This means higher savings for everyone. If you use this money wisely to invest and save, you will be able to insulate yourself from inflation and other looming issues of an impending recession. 

3. No need for expenses

The biggest limit with itemized deduction is that you need to have made the qualifying expenses to be eligible. However, in the case of standard deduction, there is no such rule. Anyone can claim a standard deduction even if they have no losses to show, do not own a home, or donate to a charity. This makes it more inclusive.

4. Higher standard deduction in the case of disaster losses

The IRS offers an additional standard deduction if you have suffered a loss due to a disaster that occurred in a federally declared disaster area. You need to fill out the IRS Form 4684 to use this additional deduction. The qualified disaster loss can be explained as theft, loss of personal property, or a casualty. For example, losses incurred by hurricanes like Harvey, Irma, Maria, etc., have been used to claim a higher standard deduction in the past. Likewise, the California wildfires in 2017 and 2018 also qualified for the deduction. These qualified losses can differ for each year based on the national events of the concerned time.

5. Higher standard deduction if you are over 65

Taxpayers who are aged 65 years or more at the end of the tax year can get an additional standard deduction of $1,500 in 2023. The value is further increased to $1,850 if you are filing your tax as a single filer or the head of household. An additional standard deduction is a valuable tool that can help you lower your retirement tax brackets. 

6. Higher standard deduction if you are blind

Taxpayers who are blind can claim an additional deduction of $1,500 in 2023 if they are medically declared blind on the last day of the tax year. The value is further increased to $1,850 if you are filing your tax as a single filer or the head of household. To claim the increased standard deduction as a blind person, you need a certified letter from an eye doctor stating that you have a non-correctable vision of 20/200 or 20 degrees or less. 

Things to keep in mind when claiming the standard deduction in 2023

The new IRS standard deduction for 2023 cannot be claimed in the following cases:

  • Only individuals can use the standard deduction to lower their taxes. Trusts, partnerships, or estates are not eligible to use the standard deduction. 
  • If you are married and filing your taxes separately, you can only claim the standard deduction if both spouses use it. If one spouse itemizes their deductions, the other cannot use the standard deduction. This is primarily because spouses can have joint expenses, such as home mortgage interest, home equity loan interest, etc. 
  • If you are a non-resident or dual-status alien during the financial year, you will not qualify for a standard deduction. 
  • You will not qualify if you file a return for less than 12 months due to a change in your annual accounting period.

In addition to this, it is essential to note that if you are claimed as a dependent on another individual’s tax return, you will be able to claim a standard deduction of only up to $1,250 or your earned income in a year plus $400, whichever is greater of the two. However, the total amount cannot exceed the basic standard deduction limit set by the IRS for your filing status.

Further, the standard deduction can only be claimed if your taxable income is more than the standard deduction. The standard deduction is subtracted from the AGI. You will not pay any tax that year if the remainder is zero or negative. In a way, the standard deduction also determines whether or not you need to file a return in a particular year.

To summarize

The income tax laws are evolving continually year after year. It is crucial to make a note of these and use them to your advantage. The standard deduction is an excellent way to lower your tax liability. However, be mindful of the latest slabs. Moreover, it is also vital to assess whether an itemized deduction is more valuable to you compared to the standard deduction. Select the one that offers a greater tax break. Also, remember that saving tax alone is not sufficient. It is also essential to invest the money you save for your future financial goals. A financial advisor can help you with the same, along with tax planning.

Use the free advisor match service to connect with 1-3 financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and the match tool will help connect you with advisors suited to meet your financial needs and goals.

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