Inflation has a way of affecting nearly every aspect of our finances. Big jumps in tax brackets can save money, especially if you’re working and your raises — like the ones most workers get — haven’t kept up with inflation. Plus, the $2,000 increase in your 401(k) limits means you can set aside more money for retirement. On the other hand, the massive increase in the maximum earnings taxable by Social Security means that higher earners will pay more in FICA taxes. If you own a home, you will need to check your coverage because there is a good chance that you are insured.
By now, you are probably aware of the more obvious ways that inflation affects your finances. Your money doesn’t go far at the grocery store, for example. The cost of credit cards and other variable rate debt increases as the Federal Reserve raises short-term interest rates to combat inflation. Rates are also rising, albeit more slowly, on savings accounts.
But other ways in which inflation helps or hurts has received less attention. Here are some of the major changes to watch for in 2023.
Big tax changes benefit most taxpayers
The IRS has raised the standard deduction, which is charged by more than 90% of taxpayers, to $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 people.
In addition, the IRS adjusted the 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 don’t keep up with inflation.
“It puts more money back into people’s pockets,” says Edward Carle, vice president of tax policy and advocacy at the American Institute of Certified Public Accountants.
The IRS has amended dozens of other tax provisions, raising the maximum earned income tax credits by $495 to $7,430 for an eligible family with at least three children and increasing the maximum adoption credit by $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 — increases by $1,000 to $17,000. You won’t owe gift taxes until the amount you give above that annual limit exceeds the estate and gift exemption limit, which is now $12,920,000, a whopping $860,000 increase from 2022.
However, higher earners may pay more in FICA taxes in 2023. The maximum paycheck tax paid by Social Security will rise by $13,200 to $160,200.
Consider using a tax refund calculator or consulting a tax expert to see how these changes will affect you. The middle of the year is often a good time to run those numbers and make adjustments so you book the right amounts.
Retirement contributions can go up
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 under 50. Compensatory contributions for people age 50 and over increased by $1,000 to $7,500, which means seniors can contribute $30,000 in 2023.
The income limits for contributing to Roth IRAs have also gone up. The 2023 phase-out range is $138,000 to $153,000 for individuals 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, up from $204,000 to $214,000. In addition, the income limits for claiming the savings credit and deducting a Traditional IRA contribution have increased if you have access to a workplace plan.
If you can, increase your retirement contributions to take advantage of these changes. In addition to the potential tax benefits, it will help make your future more comfortable.
Premiums are higher, but you may need more coverage
Consider shopping for cheaper auto insurance. Car insurance premiums have gone up as the cost of repairing and replacing cars has risen, but you may be able to find a better deal, especially if you’ve been with your current insurance company for a while. Beyond rewarding loyalty, insurance companies may be counting on your inertia to charge you more.
Homeowners’ insurance premiums are also on the rise, but the biggest 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 risen more than 35% since the start of the pandemic, according to the National Association of Home Builders. Unfortunately, the program used by insurance companies often underestimates remodeling costs which means many homeowners are underinsured, says Bach. She suggests talking to a local builder to get a realistic current estimate of what you can pay to replace your home. Compare that to your insurance company’s number, and consider increasing your coverage.
Liz Weston is a columnist for NerdWallet, a certified financial planner, and author of “Your Credit Score.” Email: firstname.lastname@example.org. Twitter: @lizweston.