RALEIGH, N.C. (WNCN) — Adjustments by the IRS to fight inflation probably will leave you with more money in your pocket next year.
And some North Carolina State University researchers have broken down just how much more.
A married couple making $50,000 a year and taking the standard deduction will face 10 percent less in federal tax liability in 2023 than it does this year, according to an analysis by Nathan Goldman, a tax expert and assistant professor of accounting at N.C. State’s Poole College of Management, and four graduate students.
These changes won’t apply until 2023, and they have no effect on the 2022 tax return that you must file by mid-April.
The IRS adjusted the federal tax brackets and increased the standard deduction by $900 for single filers, and by $1,800 for those who are married filing jointly.
“This means that taxpayers are going to be seeing lower overall tax burdens in 2023, relative to 2022, because they’re going to be paying taxes at these lower rates,” Goldman said.
People making the least money tend to receive the biggest benefit from the adjustments — at least from a percentage standpoint — according to the analysis, and the hefty increase to the standard deduction is a big reason why, Goldman said.
They found a single filer making $1 million and taking the standard deduction would have about 0.9 percent less tax liability. Those drops in tax liabilities range between 2 and 4 percent for filers who are either single or married filing jointly and making $100,000 or $250,000.
“As you get to the higher-earning taxpayers, they’re going to see significant increases in the amount of the total dollars that they’re saving, even though the percentage differences aren’t quite as big,” Goldman said.
Why is the IRS getting involved in the inflation fight in the first place?
It goes back to the early 1980s, Goldman says, when then-Sen. Bob Dole, R-Kansas, noticed his constituents were being hit hard by inflation and by something called “bracket creep.”
“Which meant that (if) your income was slowly raising, but if the tax brackets and the standard deduction stay the same, then really you’re just giving back a lot of your pay increases to higher tax brackets,” Goldman said.
So the agency began adjusting the tax brackets to rise and fall with inflation.
“Most years, we’re talking like 2 to 3 percent, so it’s not necessarily some huge bracket creep that we’re talking about,” he said. “But in a year like this, where we’re seeing record levels of inflation, this actually does play a significant role.”
Could the state of North Carolina do something similar?
No — because our state only has one tax bracket.
The state Department of Revenue says the individual income tax rate is a flat 4.99 percent for 2022 — down slightly after it was at 5.25 percent for the 2019-21 tax years.
But it’s a possibility for other states, especially those that follow federal tax rules, Goldman said.
“States that do have a progressive tax structure will actually need to go in and decide whether or not they are going to follow the (federal) government’s lead and index-adjust their tax brackets,” Goldman said.
The students who teamed up for the study included Anna Lattimore, Alexis Kapocius, Mario Massarelli, and Jovani Mendez-Sandoval.