Inflation has a way of affecting almost every aspect of our finances. Big jumps in tax brackets can save you money, especially if you’re working and your increases — like those of most workers — haven’t kept pace with inflation. Plus, a $2,000 increase in 401(k) limits means you can put away more money for retirement. On the other hand, a huge increase in the maximum income taxed by Social Security means that higher earners will pay more in FICA taxes. If you’re a homeowner, you’ll want to review your coverage because there’s a good chance you’re underinsured.
By now, you are probably familiar with the more obvious ways inflation affects your finances. Your money doesn’t go as much to the grocery store, for example. Credit cards and other variable-rate debt are getting more expensive as the Federal Reserve raises short-term interest rates to fight inflation. Rates are also rising, albeit more slowly, on savings accounts.
But other ways inflation helps or hurts have gotten less attention. Here are some of the key changes to watch out for in 2023.
BIG TAX CHANGES BENEFIT MOST PAYERS
The IRS raised the standard deduction, which is taken by more than 90% of taxpayers, by $1,800 for married couples filing jointly and by $900 for single filers. The standard deduction amounts in 2023 will be $27,700 for married couples and $13,850 for singles.
In addition, the IRS adjusted the federal tax thresholds upward by approximately 7%. The larger deduction, higher brackets and other changes mean that many taxpayers will pay less in 2023, especially if their income has not kept pace with inflation.
“This is putting more money back in people’s pockets,” says Edward Karl, vice president of tax policy and advocacy for the American Institute of CPAs.
The IRS adjusted dozens of other tax provisions, increasing the maximum earned income tax credits by $495 to $7,430 for a qualifying family with at least three children and increasing the credit maximum for adoption by $1,060 to $15,950.
The annual gift exclusion — the amount you can give to an individual before you are required to file a gift tax return — increases by $1,000 to $17,000. You won’t owe gift taxes as long as the amount you give above that annual limit exceeds the lifetime estate and gift exemption limit, which is now $12,920,000, up over $860,000 by 2022.
Higher earners, however, may pay more FICA taxes in 2023. The maximum salary taxed by Social Security will increase by $13,200 to $160,200.
Consider using a tax refund calculator or consulting a tax professional to see how these changes are likely to affect you. Mid-year is often a good time to run these numbers and make adjustments so that you are keeping the appropriate amounts.
RETIREMENT CONTRIBUTIONS MAY RISE
The amount people can contribute to 401(k) plans, 403(b) plans and other workplace retirement plans will increase by $2,000 to $22,500 for those younger than 50. Contributions catch-up for people 50 and older increased by $1,000 to $7,500, meaning seniors could contribute $30,000 in 2023.
Income limits have also been increased for contributing to Roth IRAs. The phase-out range for 2023 is $138,000 to $153,000 for singles and heads of household, compared to the 2022 range of $129,000 to $144,000. For married couples filing jointly, the phase-out range is $218,000 to $228,000, from $204,000 to $214,000. In addition, income limits have been increased for claiming the savings credit and for reducing a traditional IRA contribution if you have access to a workplace plan.
If you can, boost your retirement contributions to take advantage of these changes. In addition to the potential tax benefits, you will be helping to make your future more comfortable.
THE PREMIUM WILL GO UP, BUT MAY HAVE MORE COVERAGE
Consider shopping around for cheap auto insurance. Auto insurance premiums have risen as auto repair and replacement have become more expensive, but you may be able to find a better deal, especially if you’ve been with your current insurer for a while. Rather than rewarding loyalty, insurers can rely on your inertia to charge you more.
Homeowners insurance premiums are also rising, but a bigger concern may be inadequate coverage, says Amy Bach, executive director of United Policyholders, a consumer advocacy group focused on insurance. The cost of building materials has increased more than 35% since the start of the pandemic, according to the National Association of Home Builders. Unfortunately, the software that insurers use often underestimates the costs of rebuilding which means many homeowners are underinsured, says Bach. She suggests talking to a local builder for a realistic, current estimate of what you might pay to replace your home. Compare this with your insurer’s figure, and consider increasing your cover.
Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of “Your Credit Score.” Email: [email protected] Twitter: @lizweston.
