The Internal Revenue Service (IRS) is planning to increase tax brackets by approximately 7% for each type of tax filer, such as those filing separately or as married couples. This is in accordance with the law, which requires the IRS to adjust tax rates every year. This could provide relief to some taxpayers who are in lower tax brackets, according to Tim Steffen, Baird's director of tax planning. Before the approval of the tax reform, about 31% of taxpayers itemized their taxes.
However, this number dropped to 14% after the law was passed, according to the Tax Foundation. The higher limits are intended to prevent the increase in brackets due to inflation, which can push workers who received annual wage increases due to the cost of living to higher tax categories, even though their standard of living has not changed. Approximately one in five eligible workers lose this valuable tax benefit, which is credited with reducing poverty for working families along with the child tax credit. Rate adjustments also prevent what is known as flowing between tranches, a scenario in which a taxpayer is forced to move to a higher tax bracket simply because their income increased to keep up with inflation.
So, will tax refunds be bigger in 2023? It is too early to tell for sure, but it is likely that taxpayers who are in lower tax brackets will benefit from the increased limits and may receive larger refunds than they would have otherwise.