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How inflation could affect 2023 tax brackets: You may get an unexpected ‘tax cut,’ in a way

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As you probably know, the federal income tax rate brackets, and many other federal tax parameters, are indexed for inflation using a factor based on the monthly average of changes in the chained Consumer Price Index, or chained CPI. Due to the way they are calculated, upticks in the chained CPI numbers during inflationary times, like now, are a bit lower than upticks in the regular CPI numbers that you read about in the media. But the differences are relatively trivial. To keep things simple in this column, let’s just call the chained CPI the CPI and go with it. OK? Onward.  

As you may have noticed, inflation has been surging this year, and that will be reflected in the monthly CPI numbers that will be used to calculate the inflation adjustment factor for your 2023 federal income tax brackets. Those brackets, and other inflation-adjusted federal tax parameters, will probably be announced in November. They will be based on the monthly average of CPI changes during the federal government’s fiscal year that began in October of last year and will end in September of this year.  

Impact of inflation on 2022 and 2023 tax brackets

For the 12 months that were used to calculate the inflation adjustment factor for the 2022 tax year, inflation was mild in the first half and started running hotter only in the second half. As a result, the inflation adjustment factor for 2022 was only about 3.1%. For example, the beginning of the 24% rate bracket for a married joint-filing couple is $178,150 of taxable income for 2022. That’s 3.13% higher than the corresponding number of $172,750 for 2021. Basically, ho hum.   

That was then. This is now. You’ll not be surprised to hear that there will be a much-higher inflation adjustment factor for the 2023 tax year. According to my calculations, we are headed for about a 7% inflation adjustment. Maybe more depending on how inflation pans out through September. For the eight months taken into account so far, we are looking at a factor of about 7.1%. Let’s assume that the inflation adjustment factor for the 2023 tax year will be 7%. 

How would that affect your personal federal income tax situation? Please keep reading.  

Inflation-adjusted guesstimates for your 2023 tax year

With an assumed 7% inflation adjustment factor, all the federal income tax bracket boundaries would increase by about 7%. It won’t be exactly 7%, because federal tax parameters are adjusted in certain dollar increments with rounding. For example, the tax bracket numbers are adjusted in $25 increments, but the standard deduction numbers are adjusted in $50 increments. Annual contribution limits for your 401(k) account are adjusted in $500 increments. The unified federal estate and gift tax exemption numbers are adjusted in $10,000 increments. 

Moving right along, an assumed 7% inflation adjustment factor would increase the 2023 tax rate brackets as follows:

Joint Filers

Singles

Heads of Household

End of the 10% bracket

$22,000

$11,000

$15,650

Beginning of 12% bracket

$22,001

$11,001

$15,651

Beginning of 22% bracket

$89,401

$44,701

$59,800

Beginning of 24% bracket

$190,601 

$95,301    

$95,301

Beginning of 32% bracket

$363,901

$181,951

$181,951

Beginning of 35% bracket

$462,201

$231,101 

$231,101 

Beginning of 37% bracket

$693,201

$577,701 

$577,701 

 Impact: Other things being equal, you could have 7% more taxable income next year and have the same federal income tax bill as this year. Nice. While almost nobody likes inflation, it’s an ill wind that blows no good, as the saying goes.

An assumed 7% inflation adjustment factor would increase the 2023 standard deduction amounts as follows: 

Joint Filers

Singles

Heads of Households

$27,700

$13,850

$20,750

Impact: If you don’t itemize deductions, your standard deduction would shelter 7% more income from the federal income tax next year. Good. 

An assumed 7% inflation adjustment factor will increase the top of the 0% federal income tax bracket for 2023 long-term capital gains and qualified dividends as follows: 

Joint Filers

Singles

HOH

$89,200

$45,600

$59,700

Impact: Other things being equal, you could have 7% more in federal-income-tax-free long-term capital gains and dividends next year. Good.

An assumed 7% inflation adjustment factor would increase the beginning of the 20% maximum federal income tax bracket for 2023 long-term capital gains and qualified dividends as follows: 

Joint Filers

Singles

HOH

$553,401

$491,901 

$522,701

Impact: You would have a better chance of avoiding the 20% maximum rate next year. Good.

And there’s more

An assumed 7% inflation adjustment factor would increase the maximum 401(k) contribution from the current $20,500 to $21,950 next year. Good. 

An assumed 7% inflation adjustment factor would also increase lots of other federal tax parameters, such as the 2023 phase-out ranges for deductible contributions to traditional IRAs, the 2023 phase-out ranges for contributions to Roth IRAs, the 2023 phase-out ranges for the qualified business income (QBI) deduction for small business owners, and the unified federal gift and estate tax exemption for you 17 dear readers who will be affected by that. 

It’s all good — as long as you would prefer to pay less taxes next year rather than more.   

Can you take this “good news” to the bank?

Uh, no. The preceding taxpayer-friendly guesstimates assume there will be no new legislation that affects your 2023 federal tax position. However, there are rumblings from D.C. that some Democrats, including West Virginia Senator Joe Manchin, are discussing a scaled-down version of President Biden’s ill-fated Build Back Better (BBB) bill. A resurrected BBB could include federal tax increases — such as jacking up the top income tax rate from the current 37% to 39.6%, starting next year. There could be other unfavorable changes for certain taxpayers if anything gets through our beloved Congress. 

The bottom line

Don’t get cocky. Stay tuned for possible negative developments. Needless to say, we will keep you informed.

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BofA Securities maintains Amazon.com at ‘buy’ with a price target of $154.00

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Six people in critical condition, one still missing after Paris blast – prosecutor

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5/5

© Reuters. French firefighters and rescue forces work after several buildings on fire following a gas explosion in the fifth arrondissement of Paris, France, June 21, 2023. REUTERS/Gonzalo Fuentes

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PARIS (Reuters) – Six people remained in a critical condition and one person was believed still missing on Thursday, one day after a blast ripped through a street near Paris’ historic Latin Quarter, the city’s public prosecution office said. “These figures may still change,” prosecutor Maylis De Roeck told Reuters in a text message, adding that around 50 people had been injured in the blast, which set buildings ablaze and caused the front of one to collapse onto the street. Of two people initially believed missing, one has been found in hospital and is being taken care of, the prosecutor said, adding: “Searches are ongoing to find the second person.” Authorities have not yet said what caused the explosion, which witnesses said had followed a strong smell of gas at the site. The explosion led to scenes of chaos and destruction in the historic Rue Saint Jacques, which runs from the Notre-Dame de Paris Cathedral to the Sorbonne University, just as people were heading home from work. It also destroyed the facade of a building housing the Paris American Academy design school popular with foreign students. Florence Berthout, mayor of the Paris district where the blast occurred, said 12 students who should have been in the academy’s classrooms at the time had fortunately gone to visit an exhibition with their teacher.
“Otherwise the (death toll) could have been absolutely horrific,” Berthout told BFM TV. She said three children who had been passing by at the time were among the injured, although their lives were not in danger.

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4 big analyst cuts: Alcoa & DigitalOcean shares drop on downgrades

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Here is your Pro Recap of the biggest analyst cuts you may have missed since yesterday: downgrades at Alcoa, DigitalOcean, Teleflex, and Xcel Energy.InvestingPro subscribers got this news in rapid fire. Never be left in the dust again.Alcoa stock drops on Morgan Stanley downgrade Alcoa (NYSE:) shares fell more than 3% pre-market today after Morgan Stanley downgraded the company to Underweight from Equalweight and cut its price target to $33.00 from $43.00, as reported in real time on InvestingPro.The firm sees a significant decline in consensus estimates, and as negative earnings revisions materialize, it believes the stock will face downward pressure and underperform.The analyst’s estimates for EBITDA in Q2, 2023, and 2024 are substantially lower than the consensus. The stock is currently trading above its historical average. The firm said its downward revisions in earnings estimates and price target are attributed to the company’s high operating leverage to aluminum prices.DigitalOcean stock plunges on downgradePiper Sandler downgraded DigitalOcean (NYSE:) to Underweight from Neutral with a price target of $35.00. As a result, shares plunged more than 5% pre-market today.The company reported its last month, with revenue beating the consensus estimate, while EPS coming in worse than expected. Furthermore, the company provided a strong outlook, which was above the Street estimates.2 more downgradesTeleflex (NYSE:) shares fell more than 3% yesterday after Needham downgraded the company to Hold from Buy, noting that UroLift expectations may still be too high.According to Needham, their checks indicate that urologists are reducing their use of UroLift due to its retreatment rates, reimbursement cuts, and increasing use of competing procedures. This is also supported by their Google Trends data analysis, which indicates decreasing search interest in UroLift.BMO Capital downgraded Xcel Energy (NASDAQ:) to Market Perform from Outperform and cut its price target to $64.00 from $69.00 to reflect the lower-than-expected terms of the company’s regulatory settlement in Colorado.Amid whipsaw markets and a slew of critical headlines, seize on the right timing to protect your profits: Always be the first to know with InvestingPro.Start your free 7-day trial now.

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