IRS releases 2023 tax inflation adjustments

TAX ALERT | October 19, 2022

Authored by RSM US LLP

Executive summary: 2023 Inflation-adjusted items

The IRS revenue procedures provides the amount for inflation-adjusted items for 2023. Amounts adjusted for inflation include the individual tax brackets, the section 199A qualified business income thresholds, the amount of average annual gross receipts to qualify as a small taxpayer, the limitations for section 179 expensing, estate and gift exemptions, as well as several other provisions.

2023 Inflation-adjusted items

On Oct. 18, 2022, the IRS released its annual revenue procedure containing the inflation-adjusted items for 2023. There are multiple provisions in the Internal Revenue Code that require the IRS to adjust the applicable dollar amounts for inflation – many of these relate to individual income taxes, while others relate to business income. Selected inflation-adjusted items are listed below. For the full listing, please review the linked revenue procedure:

Individual tax rate tables -The highest tax rate remains at 37%. This rate is applicable for taxable income over:

•  $693,750 for married filing jointly
•  $346,875 for married filing separately
•  $578,125 for single filing taxpayers
•  $578,100 for head of household

The top capital gains rate of 20% is applicable for taxable income over:

•  $553,850 for married filing jointly
•  $276,900 for married filing separately
•  $492,300 for single filing taxpayers
•  $523,050 for head of household

Estate and trust tax rate table - The estate and trust income tax rate is 37% for taxable income over $14,450. The 20% capital gains rate is applicable for estates and trusts with taxable income over $14,650.

Cafeteria plans – The annual limitation under section 125 for contributions to a health flexible spending account increased from $2,850 to $3,050.

Qualified transportation fringe benefit – The section 132(f) monthly limitation for qualified transportation (in a commuter vehicle or mass transit passes) and qualified parking increased from $280 per month to $300 per month.

Election to expense certain depreciable assets under section 179 - Rev. Proc. 2022-38 raises the section 179 expensing limit under section 179(b)(1) to $1,160,000. The cost limit for sport utility vehicles expensed under section 179 will be $28,900. Under section 179(b)(2), the $1,160,000 limitation gets reduced by the amount that section 179 property placed in service during the 2023 taxable year exceeds $2,890,000.

Energy efficient commercial buildings deduction - the dollar value of the maximum allowance for the deduction under section 179D(b)(2) is set at 54 cents, which gets increased by 2 cents for every percentage point of certified energy and power reduction over the 25% threshold. Rev. Proc. 2022-38 raises the cap on the deduction to $1.07. The increased deduction for certain property under section 179D(b)(3)(A) (i.e., building projects meeting certain prevailing wage and apprenticeship requirements) is set at $2.68 increased by 11 cents for every percentage point of certified energy and power reduction over the 25% threshold, with a $5.36 maximum.

Qualified business income – the threshold amount and phase-in range are adjusted as follows:

(An increase of $24,100 for both threshold and phase-in range for joint returns, and an increase of $12,050 for both threshold and phase-in range for separate returns.)

Limitation on use of cash method of accounting - the section 448(c) threshold for certain taxpayers to use the overall cash method of accounting, as well as other small business taxpayer simplified methods, is set at $29,000,000 in annual gross receipts averaged over the three taxable years ending prior to tax year 2023.

Threshold for excess business loss limitations – the excess business loss limitation threshold is increased to $289,000 ($578,000 if married filing jointly), an increase of $19,000 ($38,000 for joint returns).

Unified credit against estate and gift tax - the basic exemption amount is increased to $12.92 million for determining the amount of the unified credit for estate and gift tax.

Annual exclusion for gifts - the annual exclusion for gifts is increased to $17,000 per donee for present interest gifts.

Note that certain other annually adjusted limitations, such as qualified retirement plan limitations, will be the subject of separate guidance.