The IRS is finally doing something about inflation.
In a report published Tuesday, the IRS announced that it’s making adjustments to the tax code in about 60 provisions, from tax brackets to the standard deduction, to ease the rising inflation rate.
This year’s high inflation pushed many Americans into higher tax brackets, even though their standard of living hadn’t changed. The IRS estimates that these adjustments will lower taxes for many Californians in 2023 by an average of 3%.
The Shift in Taxes
It’s not just you. That tax return you’re getting this year is smaller than it would have been without the Trump administration’s 2017 tax overhaul.
The Bureau of Economic Analysis recently announced that California’s per capita income in 2021 was $76,614—not exactly a paltry sum, but not something to write home about either. That number doesn’t reflect reality for many Californians, though. Inflation-adjusted weekly earnings were down nearly 4% from September 2021, the Labor Department said last week.
The changes affect 2024 tax returns and will likely also impact 2025 returns as well.
Why are taxes getting smaller? Well, the shift in tax rates would have been higher without a provision in the Trump administration’s 2017 tax overhaul that tied the tax rate to increases in the chain-weighted Consumer Price Index (CPI), based on the products consumers actually buy.
The chained CPI rose by a quarter of a percentage point less than the standard CPI in September (the most recent data available).
So if it seems like your paycheck isn’t going as far as it used to, or if you’re suddenly having trouble paying off debt—don’t worry! You’re not alone!
It’s that time of year again: open enrollment season!
And if you’re one of the Americans who have a flexible spending account (FSA), it’s a good idea to use the new tax brackets to figure out how much you should set aside for medical expenses.
The standard deduction is up slightly this year, at $27,000 for married couples and $13,850 for singles. The head of the household deduction is also up, to $20,800. These numbers are based on the new tax brackets.
For example, if your family earns $50,000 per year between the two of you—and this is a pretty low-income household—you could deduct $12,600 in medical expenses with an FSA.
That would leave your taxable income at about $37,400 (the difference between $50K and $37K). If only 10% of your income is going toward medical expenses ($3,750), then you’d only owe taxes on that amount and not on all of it.
But what if you earn more than that? Say you earn $250K per year—that’s right around where most households start paying 37% in income tax (as opposed to 32%).
In short, this means that if you’re a California resident, your tax bill will go down. This is great news for all of us who live in California and have been paying taxes that are higher than they should be!
Let’s hope that the cost-of-living adjustment stays at least this high—and maybe even goes up—for years to come.