There is no way to ignore the inflation we are seeing in our economy. We are seeing increasing costs in housing, food, and almost everything we buy. Reports show that Consumer prices rose 8.2% for the 12 months ended September 2022. These numbers are painful, but not everything with inflation is a negative to your financial position.
Some of the positives and opportunities that have come about due to inflation include:
- For those receiving Social Security payments, they will see an increase to their 2023 payment of 8.7%. On the average benefit, that’s a $141 per month increase or an annual benefit increase of almost $1,700. That is significant considering the prior year’s increase was 5.9% making for a combined 14.6% over the last two years. For the approximately 70 million Social Security beneficiaries, this should make the impact of inflation a little less on their monthly budget.
- Higher yields on fixed income investments: We have been living with historically low interest rates since 2007-2008. These low rates have made income production in conservative portfolios challenging, but we are now seeing rates that often allow for sufficient income production in retirement. If you’ve not talked with us about the opportunities we’ve identified, now would be a great time for us to have a conversation.
As inflation percentages are established, the IRS adjusts many of their items on a yearly basis to match that escalation. There are over 60 tax provisions that were addressed in Revenue Procedure 2022-38. Some of the more impactful to the average person’s tax situation are:
- The Standard Deduction: This popular deduction for many taxpayers has seen significant increases starting with the Tax Cuts and Jobs Act of 2017 under Donald Trump. The 2023 married filing jointly standard deduction will see a jump of $1,800 from the 2022 amount to $27,700. In my practice, this has been one of the most significant items to tax returns over the last few years, and it’s only growing in amount.
- Gift Tax Exclusion: The annual exclusion for gifts will increase to $17,000 which is a $1,000 increase over the 2021 & 2022 amount. This is a very effective way to transfer wealth across generations, so it should be explored with your advisor on an annual basis.
- Estate exclusion: The exclusion amount increases to $12,920,000 from $12,060,000 in 2022. This is almost a million dollar increase in the exclusion per person. If your estate would be affected by this exclusion, now is the time to take advantage of some opportunities, and we would appreciate the chance to discuss it with you.
- Retirement plan deferral limits: A major challenge for many people is where to save for retirement. The IRS has allowed the tax-free growth in qualified retirement plans for years, but the annual contribution limits can be a hurdle. For the common 401(k) and 403(b) participants, the annual limit is increasing by $2,000 to $22,500 for tax year 2023. For those with SIMPLE plans, the limit is increasing from $14,000 to $15,500. The catch-up contribution amount for those 50 and over is going to be $7,500 for 401(k)/403(b) plans. That puts the potential limit for those 50 or over at $30,000. That’s an extra $2,000 to $3,000 per year towards retirement.
These specific increases due to inflation provide wonderful opportunities. Whether your benefit is receiving more money on a monthly basis, reducing the taxability of your dollars, or being able to save more for retirement – the ball is now in your court. If you need assistance in determining how you can convert a potential negative into a positive and capitalize on the opportunities for your household, please let us know!