Recent IRS Policy Change Could Put Money in Your Wallet

A recent update from the IRS is changing a standard deduction rule for the 2023 tax year, which could put more money in your pocket.

Standard deductions rise with inflation. Since inflation has remained at 3.1 percent for January, the IRS is giving Americans a helpful break on their taxes.

“By adjusting the deduction upwards, the IRS helps ensure that taxpayers’ purchasing power is not eroded by inflation,” Zack Hellman, the owner of Tax Prep Tech, told Newsweek.

The pandemic caused the country to lock down for an extended time, causing unemployment to rise and the number of job vacancies to increase. While the inflation rate has since declined, its effects on the economy have not.

Even though that was only ten years ago it seems like a far cry from the current inflation rate this year of 3.1%. During the height of the pandemic lockdowns, the inflation rate soared to 7% in 2021. In 2022 it decreased to 6.5% before falling down to 3.4 percent in 2023.

As demand rises in the economy, prices naturally go up in response. However, the problem with inflation occurs when this price jump happens in a short period of time. This phenomenon is often called hyperinflation.

The danger of hyperinflation is that since prices are rising so quickly, people also spend money as soon as they can. People want to lock in a better price because if they wait, the price of what they want will go up. Unfortunately, people spending more only further fuels the price increases that happen as a response to demand, causing inflation to skyrocket.

This metric referred to as the Consumer Price Index, uses data points from things the average American spends money on. There are many categories but some of the common expenditures include things like the cost of gas, groceries, and rent.

The Bureau of Labor Statistics will average the price of goods and services in specific categories to get a more accurate reflection of the cost for Americans to exist in the country. The Consumer Price Index is not as helpful for this because it often gives an upper limit to the cost of living and not a reasonable average.

Inflation can push people into a higher tax bracket, but they don’t feel any richer because the power of their money has not also increased. This can lead to a situation where you are paying more on your taxes but aren’t enjoying the benefits of a higher income.

However, because of inflation and rising prices, the amount of things you can purchase with your money has diminished in recent years. This is called purchasing power and this buying ability of Americans has been weakened thanks to recent high levels of inflation.

The United States government through the central banking authority known as the FED can set interest rates higher or lower. Higher interest rates can have the effect of slowing down or stopping inflation that is growing out of control, but this process is delicate.

Since inflation grows when consumers are spending, the idea is that a higher interest rate will lower consumer spending and inflation. As consumers hold off on making purchases this will lower demand and the price of goods and services in the economy as a response.

If interest rates are changed too much or too quickly it can cause a shock to sectors in the economy. For example, these rate changes can cause instability in the stock market leading to investors losing money. Experts also warn that raising interest rates can send the country into a recession.

For many, it may make the difference between being able to afford their taxes or going into further debt by having to pay interest over time.

“The extra $900 this year won’t necessarily come to you in money back like a refund, but it will help to lower your taxable income and, more importantly, make the process of filing taxes vastly easier,” Beene said.

“Renters now have a larger deduction without the ownership issue,” Eric Green, top national tax attorney at Green & Sklarz and owner of The Tax Rep, told Newsweek. “I don’t know that it equalizes it, but it certainly helps those who don’t own a home or financially are blocked out of home ownership.”

Along with a new standard deduction rate, the IRS has updated its income tax bracket, which could help taxpayers save even more money.

Also known as fiscal drag, the tax bracket creep is a phenomenon that occurs in progressive tax systems like the one in the United States that could push you into a higher tax bracket due to your wages.

Even if you make more money in 2024, the recent inclusion of inflation into the tax code could keep you safe from that tax bracket that could have you paying more at the end of the day.

According to CNET, this “means you’ll be on the hook for less federal tax next year and will have less money withdrawn from your paycheck.”

This perk comes with an additional perk. Since the first of January falls on a holiday, there will be an increased SSI payment at the end of December.

These changes will include a higher maximum for the Earned Income Tax Credit, adjustments to the gift tax exclusion, and an increase to the foreign earned income exclusion.

While these changes may not directly translate into immediate refunds for everyone, they serve to ease taxable income and simplify the tax-filing process for millions of Americans.