The sneaky ways inflation will affect your money in 2023

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By now, you’re probably familiar with the more obvious ways inflation affects your finances. Your money doesn’t go that far in 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 in which inflation helps or hurts have received less attention. Here are some major changes to watch out for in 2023.

Big tax changes benefit most taxpayers

The IRS has increased the standard deduction, which more than 90% of taxpayers take, by $1,800 for married couples filing jointly and by $900 for individual filers. The standard deduction in 2023 will be $27,700 for married couples and $13,850 for singles.

In addition, the IRS adjusted the federal tax brackets upward 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 puts more money back in people’s pockets,” says Edward Carl, vice president of tax policy and advocacy for the American Institute of CPAs.

The IRS adjusted 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 by $1,060 to $15,950.

The annual gift exclusion — the amount you can give to a person before you need to file a gift return — increases by $1,000 to $17,000. You won’t owe gift tax as long as the amount you give over this annual limit doesn’t exceed the lifetime estate and gift exemption limit, which is now $12,920,000, a whopping $860,000 more than in 2022 .

However, those who earn more may pay more FICA taxes in 2023. The maximum earnings subject to Social Security tax will rise by $13,200 to $160,200.

Try using a tax refund calculator or consult a tax professional to see how these changes may affect you. The middle of the year is often a good time to check these numbers and make adjustments so that you are withholding the appropriate amounts.

Pension contributions may increase

The amount people can contribute 401(k) plans403(b) plans and other workplace retirement plans will increase by $2,000 to $22,500 for those younger than 50. Catch-up contributions for people aged 50 and over rose by $1,000 to $7,500, meaning that in 2023 seniors could contribute $30,000.

Income limits have also increased for contributing to Roth IRAs. The 2023 phase-out range is $138,000 to $153,000 for singles and heads of households, 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, which is $204,000 to $214,000. In addition, income limits have been increased for the Contributor’s Credit and the Traditional IRA contribution deduction if you have access to a work plan.

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

Premiums go up, but you may need more coverage

Consider shopping around for cheaper car insurance. Auto insurance premiums have risen as auto repairs and replacements have become more expensive, but you can do it find the best deal, especially if you have been with your current insurer for a while. By not rewarding loyalty, insurers can rely on your inertia to charge you more.

Homeowners insurance premiums are also rising, but a bigger concern may be insufficient coverage, says Amy Bach, executive director of United Policyholders, an insurance consumer advocacy group. According to the National Association of Home Builders, the cost of building materials has increased by more than 35% since the start of the pandemic. Unfortunately, the software used by insurers often underestimates the cost of remodeling, which means many homeowners are underinsured, Bach says. She suggests talking to a local builder to get 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.

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