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Inflation can save you money on taxes

by SuperiorInvest

“If it hadn’t been amended, they would have said, ‘What the hell happened to my tax return?'” he said. “That’s a big tax increase.

To avoid tax creep, the government began adjusting, or indexing, tax brackets for US inflation early eightiesafter a long period of raging inflation.

Daniel T. Massey, principal of the Walz Group accounting firm in Lititz, Pa., said people whose income has kept up with inflation will see no change in their tax bracket, while someone with a stagnant or fixed income may have a lower tax bill due to inflation adjustments .

Mr. Massey gave this example: A single filer in 2021 who earned $100,000 and took the standard deduction would pay $15,009 in taxes, at an effective tax rate of 15 percent. Under the projected 2023 brackets, a taxpayer with the same income would pay $14,383 — a savings of $626 — for an effective rate of 14.4 percent.

The standard deduction, which lowers your taxable income without having to itemize deductions, is expected to rise to $13,850 next year from $12,950 this year for singles and to $27,700 from $25,900 for couples.

Here are some questions and answers about income tax inflation adjustments:

Next year, you’ll be able to contribute an estimated $6,500 to an individual retirement account, up from $6,000 this year. Limits are $1,000 higher if you’re over 50; this “catch-up” amount is not indexed to inflation, but would be subject to legislation pending in Congress known as the Secure Act 2.0. (Adjustments for workplace 401(k) accounts are calculated differently based on data that will be available next month, Mr. Pomerleau said).

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