Sneaky Ways Inflation Will Affect Your Money in 2023

By now, you’re probably familiar with the more obvious ways inflation affects your finances. Your money doesn’t go as far in the grocery store, for example. Credit cards and other variable-rate debt are becoming 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 received less attention. Here are some of the big changes to look out for in 2023.

Major tax changes benefit most taxpayers

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 federal tax brackets up by approximately 7%. The larger deduction, higher brackets and other changes mean most taxpayers will pay less in 2023, especially if their incomes haven’t kept up with inflation.

“It’s putting more money back in people’s pockets,” said Edward Karl, vice president of tax policy and spokesman for the American Institute of CPAs.

The IRS adjusted dozens of other tax provisions, increasing the maximum tax credits by $495 to $7,430 for a qualifying family with at least three children and increasing the maximum adoption credit by $1,060 to $15,950.


The IRS announces adjustments in response to inflation

03:17

The annual gift exclusion — the amount you can give away to an individual before you have to file a tax return — increases by $1,000 to $17,000. You won’t owe gift tax until the amount you give away above the annual limit exceeds the lifetime estate and gift exemption limit, which is now $12,920,000, up a whopping $860,000 from 2022.

However, higher earners 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 you’re withholding the correct amounts.


MoneyWatch: What you should know about changing investment strategies for retirement

04:52

The pension tax may increase

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. Starting contributions for people 50 and older rose by $1,000 to $7,500, meaning that seniors can contribute $30,000 in 2023.

Income limits also rose for contributing to Roth IRAs. The 2023 phase-out range is $138,000 to $153,000 for singles and heads of household, compared to 2022’s 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 saver’s credit and deducting a traditional IRA contribution if you have access to a workplace plan increased.

If you can, increase your pension contributions to take advantage of these changes. In addition to the potential tax benefits, you will help make your future more comfortable.

Premiums rise, but you may need more coverage

Consider buying cheaper car insurance. Auto insurance premiums rose as auto repairs and replacements became 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 can count on your indolence to charge you more.

Homeowners insurance premiums are also rising, but a bigger concern may be inadequate coverage, said Amy Bach, executive director of United Policyholders, an insurance-focused consumer advocacy group. 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 software that insurance companies use often underestimates rebuilding costs, which means many homeowners are underinsured, Bach said.

She suggests talking to a local builder to get a realistic, current estimate of what you can pay to replace your house. Compare that with the insurance company’s figures and consider increasing your coverage.

This column was provided to The Associated Press by the personal finance website NerdWallet. The content is for educational and information purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of “Your Credit Score.”

Leave a Reply

Your email address will not be published. Required fields are marked *