Many Americans hate and fear the IRS, and a survey by the Pew Research Center found that it is one of the least-popular federal agencies.

But, while the IRS may conjure up negative emotions for many and fall short of some taxpayers’ expectations, they are doing some positive work behind the scenes to help limit the impact of inflation. And with recent inflation growing at one of the fastest clips since the 1980s, the new changes by the IRS should provide some much-needed relief for American households.

According to Joseph Erickson, a CPA in Mukilteo, Washington, overall, the IRS is trying to help. Joseph writes:

“While most people are scared of the IRS, the truth is that as long as you are not committing financial crimes or downright evading your tax obligations, the governing tax boards do want to see you succeed in life. While it may seem that they want to bleed you dry, the truth is that they are well aware of the economic impact that inflationary and recessionary periods put on the average American family and they do their best to keep from sending Americans into poverty.”  

Here’s what the IRS is doing to help:

The IRS Has Adjusted The Income Amounts For Each Tax Bracket.

For 2023 the IRS has adjusted the income amounts for each tax bracket to keep up with the ever-changing cost of living driven by inflation. Essentially, the IRS has made each bracket a little “wider” than before, so you can earn a little bit more without bumping into the next bracket.

As inflation increases, many taxpayers have received a raise to help account for the increase in their cost of living. But, with an increase in income comes a possible increase in taxes. And if that raise was just to help match inflation, an increase in taxes could put taxpayers in an even worse situation than before after accounting for inflation. To combat this, the IRS has adjusted the income limits to account for inflation so that as your income goes up for inflation, your tax stays the same. 

This move should be viewed in a positive light, as this change intends to help Americans out. Allowing people to make more money before being subjected to higher tax brackets will help keep more money in their pockets throughout the year.

For 2023, the income tax brackets for single filers and married filing jointly are as follows:

2023 Income Tax Brackets: Single and Married Filing Jointly

Source: Tax Foundation

In essence, the IRS increased the tax brackets by 7% across the board, allowing taxpayers to increase their earnings at a similar pace to inflation, without being subject to higher tax rates.

They’ve Also Increased The Contribution Limits For Tax-Advantaged Retirement Plans. 

Also, to combat the effects of inflation, the IRS has recently released updates that increase the contribution limits to tax-advantaged retirement plans. 

The reason for this is simple: as costs rise, so does the amount you need to set aside for retirement. But, if the contribution limits don’t increase, savers cannot set aside the amounts they need to reach a healthy and secure retirement nest egg. So, to keep pace with high inflation, the IRS has increased contribution limits across the board. 

This welcome addition will help people save more for their future, and it's one of several positive changes the IRS is making. In many cases, these increases in contribution limits mean that individuals and families can set aside significantly more money than before and be better prepared for retirement, especially as costs are rising. 

The announcements include fairly significant increases for 401(k)s, 403(b)s, 457s, Traditional and Roth IRAs, SEP IRAs, HSAs, and more. Here are some highlights from the IRS:

• The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $22,500, up from $20,500

• The limit on annual contributions to an IRA (Traditional and Roth) increased to $6,500, up from $6,000.

• The limit on Health Savings Account (HSA) contributions increased to $3,850 for self-only coverage and $7,750 for family coverage, up from $3,650 and $7,300 in 2022.

• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $7,500, up from $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $30,000 starting in 2023. The catch-up contribution limit for employees aged 50 and over who participate in SIMPLE plans is increased to $3,500, up from $3,000.

These increases present a significant opportunity for taxpayers to set aside more money into tax-advantaged retirement plans, effectively combating the rising costs of goods and services. Here’s a list of benefits that people who take advantage of family offices (that were once only reserved for the extremely wealthy) have as well.

Next, They’ve Increased The Standard Deduction For Taxpayers.

The IRS has taken another step that benefits many US taxpayers by increasing the standard deduction amount to account for inflation. 

When you file your taxes, you get to take a standard deduction based on your filing status. This standard deduction is available to everyone and is a flat amount you can deduct from your income. This new amount will help millions of people lower their taxable income when filing their 2023 taxes, and with this larger standard deduction, the effects of inflation on your tax situation could be minimal.

According to the IRS, the new standard deductions amounts are:

• Married Filing Jointly: $27,700 for 2023 (up $1,800 from the prior year)
• Single and Married filing separately: $13,850 for 2023 (up $900 from the prior year)
• Head of Household: $20,800 for 2023 (up $1,400 from the prior year)

Again, this is a major benefit to American taxpayers who may have seen their taxable income increase, but who may not have “felt” an increase in income because of the higher costs they have due to inflation. By increasing the standard deduction, the IRS limits the effect inflation will have on your tax liability. Where taxes could get complicated, however, are during changes in one’s life, such as a divorce or the introduction of a new side hustle in one’s household.

Lastly, They’ve Significantly Increased The Lifetime Estate-And-Gift Tax Exemption.

A critical figure for wealthy Americans is the lifetime estate-and-gift tax exemption.

Essentially, it’s the amount you can pass on to your heirs during your lifetime without paying estate or income taxes. And, with the rise in inflation, the IRS has significantly increased the exemption amounts. This can greatly benefit America’s wealthiest families by allowing them to avoid estate and income taxes when passing money to their heirs.

There are a couple of important numbers to note.

First, for 2023, a couple can now pass close to $26 million to their heirs, estate, and income tax-free. That’s up from roughly $24 million in 2022. 

Second, the annual gift tax exclusion limit has increased to $17,000 for 2023, up from $16,000 in 2022. 

That’s the amount you can give to others each year without counting against your lifetime gifting limit. For example, a wealthy couple could each give $17,000 to their child each year for a total of $34,000 in tax-free gifts. Or, a wealthy couple could give $34,000 to their adult child and $34,000 to their adult child’s spouse for a total of $68,000 in tax-free gifts for 2023. Again, because these gifts are under the annual gift tax exclusion limit, they are tax-free and do not count against the wealthy couples' total lifetime estate-and-gift tax exemption of roughly $26 million.

In conclusion, while many fear or despise the IRS, they are doing great work to help Americans during these difficult times. 

“Many people think that messing up on their taxes may lead them to prison time,” says Leonard Kim of AdvisorCheck. Instead, what the IRS usually does is they will send you a notice stating that the taxes were wrong and request the difference, and if that isn’t done in a timely manner, they will garnish your wages instead. The IRS also has programs to help people get back on track with their taxes as well if they fall behind, but they aren’t really out to get you as most people think they might be,” Leonard continued.

By adjusting income amounts for each tax bracket, contribution limits for tax-advantaged retirement plans, and increasing the standard deduction, many taxpayers will benefit from keeping more of the hard-earned money they make. Finally, they have significantly increased the lifetime estate-and-gift tax exemption so taxpayers can provide a secure future for their children and grandchildren. 

At the very least, these changes should help limit the effects of inflation on American taxpayers who have received a raise but may not have felt that raise due to the increase in costs of goods and services.

If you’re interested in crafting and executing a financial plan that can help you save money in taxes each year while securing a healthy retirement, consider hiring a trusted financial advisor. You can use our search tool to find the best financial advisor in your area. Get your free AdvisorCheck membership to stay up to date with all of the latest resources to improve your financial health as well.

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Written by Anders Skagerberg, CFP

Fact checked by Billy Quirk

Reviewed by KJ Kim

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