Inflation can affect almost every aspect of our finances. Big jumps in tax brackets can save you money, especially if you’re working and your raises, like most workers, don’t keep pace with inflation. Plus, the $2,000 increase in 401(k) limits means you can put more money away for retirement. On the other hand, the huge increase in the maximum earnings taxable by Social Security means that higher earners will pay more in FICA taxes. If you’re a homeowner, you’ll want to review your insurance because there’s a good chance you’re underinsured.
By now, you’re probably familiar with the more obvious ways inflation affects your finances. Your money doesn’t go as far as, say, the grocery store. Credit cards and other variable-rate debt are rising in price as the Federal Reserve raises short-term interest rates to fight inflation. Interest rates are also rising, albeit more slowly, on savings accounts.
But inflation helps or hurts other ways that have received less attention. Here are some key changes to watch for in 2023.
BIG TAX CHANGES BENEFIT MANY TAXPAYERS
The IRS raised the standard deduction, which more than 90% of taxpayers take, by $1,800 for married couples filing jointly and $900 for single filers. The standard deduction amounts in 2023 will be $27,700 for married couples and $13,850 for single filers.
In addition, the IRS adjusted federal tax brackets upward by about 7%. The larger deduction, higher brackets and other changes mean most taxpayers will pay less in 2023, especially if their incomes haven’t kept pace with inflation.
“It puts more money back in people’s pockets,” said Edward Karl, vice president of tax policy and advocacy at the American Institute of CPAs.
The IRS tweaked dozens of other tax provisions, raising the maximum earned income tax credit by $495 to $7,430 for a family with at least three children and increasing the maximum adoption credit from $1,060 to $15,950.
The annual gift exclusion—the amount you can give to an individual before you’re required to file a gift tax return—is increasing from $1,000 to $17,000. You won’t owe gift taxes unless the amount given above that annual limit exceeds the lifetime estate and gift exemption limit, which is now $12,920,000, up from $860,000 in 2022.
However, higher earners may pay more FICA taxes in 2023. The maximum salary taxable by Social Security will increase by $13,200 to $160,200.
Consider using a tax refund calculator or consult a tax professional to see how these changes may affect you. Mid-year is often a good time to run these numbers and make adjustments to keep the appropriate amounts.
LICENSED INVESTMENTS COULD INCREASE
The amount people can contribute to 401(k) plans, 403(b) plans and other workplace retirement plans will increase from $2,000 to $22,500 for people under 50. means older people can contribute $30,000 in 2023.
Income limits were also raised for investing in Roth IRAs. The phase-out range for 2023 is $138,000 to $153,000 for singles and heads of households, compared to a range of $129,000 to $144,000 for 2022. For married couples filing jointly, the threshold is $218,000 to $228,000, $204,000 to $214,000. In addition, income limits have been increased to claim the saver’s credit and to withdraw a traditional IRA contribution if you have access to a workplace plan.
If you can, increase your pension contributions to take advantage of these changes. In addition to potential tax benefits, you’ll be helping to make your future more comfortable.
PREMIUMS ARE GOING UP BUT MAY NEED MORE COVERAGE
Consider buying cheaper auto insurance. Car insurance premiums have risen as car repairs and replacements 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. Far from rewarding loyalty, insurers may count on your inertia to charge you more.
Homeowners insurance premiums are also on the rise, but a bigger concern may be inadequate coverage, said Amy Bach, executive director of United Policyholders, a consumer-focused advocacy group. Since the start of the pandemic, the cost of building materials has increased more than 35%, according to the National Association of Home Builders. Unfortunately, the software that insurers use often underestimates the cost of rebuilding, which means many homeowners are underinsured, Bach said. He 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 for NerdWallet, a certified financial planner, and the author of Your Credit Score. Email: [email protected] Twitter: @lizweston.
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