COLAs for 2023 Tax Rates, Standard Deductions, and More

The IRS adjusts more than five dozen items annually for inflation. Due to significant inflation over the past year, the tax brackets and many items have been increased—sometimes dramatically—for 2023 (Rev. Proc. 2022-38). The following are highlights of some key changes:

Standard deduction amounts. The standard deduction for joint filers rises to $27,700 (up from $25,900 in 2022). For single taxpayers and married individuals filing separately, the standard deduction in 2023 will be $13,850 (up from $12,950 in 2022), and for heads of households, the standard deduction will be $20,800 (up from $19,400 in 2022). The additional standard deduction amount for age or blindness increases to $1,500 for joint filers (up from $1,400 in 2022) and to $1,850 (up from $1,750 in 2022) for unmarried individuals who are not surviving spouses. The standard deduction for dependents for 2023 is the greater of $1,250 (up from $1,150) or the sum of $400 and the dependent’s earned income amount (but not more than the standard deduction amount for the dependent’s filing status.

Gross income of a qualifying relative. To claim head-of-household status or certain other tax breaks based on having a qualifying relative, there is a gross income limit. For 2023, it’s $4,700 (up from $4,400 in 2022).

Health FSAs. The salary reduction contribution limit for 2023 to a health flexible spending account (FSA) increases to $3,050 (up from $2,850 in 2022). The carryover limit will be $610 (up from $570 in 2022).

Transportation fringe benefits. The tax-free monthly amount for parking, transit passes, and vanpooling in 2023 will be $300 (up from $280 in 2022).

Educator deduction. The deduction for classroom expenses and career development of teachers and certain other educators in 2023 will be $300, which is one of the few items unchanged from 2022. The deduction cap had been $250 for 2021 and earlier years.

Deduction for student loan interest. The maximum deductible amount remains up to $2,500, which is fixed by law. But the income limits for claiming the above-the-line deduction have been increased for 2023. The deduction will start to phase out once modified adjusted gross income (MAGI) exceeds $75,000 if single, or $155,000 on a joint return, up from $70,000 or $145,000 in 2022. The deduction will be completely phased out when MAGI reaches $90,000 if single, or $185,000 on a joint return, up from $85,000 or $175,000 for 2022.

Foreign earned income. The exclusion for foreign earned income from a job or self-employment abroad will be $120,000 in 2023 (up from $112,00 in 2022).

Annual gift tax exclusion. The amount that can be given per beneficiary in 2023 will be $17,000 ($34,000 for a spouse who consents to split the gift). This is up from $16,000 ($32,000) in 2022.