Standard deduction, pension, insurance: inflation changes 2023

By now you’re probably familiar with the more obvious effects of inflation on your finances. In the supermarket, for example, your money doesn’t get that far. Credit cards and other adjustable-rate debt are becoming more expensive as the Federal Reserve hikes short-term interest rates to fight inflation. Interest rates are also rising on savings accounts, albeit at a slower pace.

TIED TOGETHER: Global food prices hit record highs in 2022

But other ways that inflation helps or hurts have received less attention. Here are some of the key changes to watch out for in 2023.

The IRS increased the standard deduction, which is claimed by more than 90% of taxpayers, by $1,800 for married couples filing together and $900 for single parents. The standard deduction amounts in 2023 are $27,700 for married couples and $13,850 for singles.

In addition, the IRS adjusted federal tax brackets upwards by about 7%. The bigger deduction, higher tax rates, 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,” says Edward Karl, vice president of tax policy and advocacy at the American Institute of CPAs.

The IRS adjusted dozens of other tax rules, increasing the maximum earned income tax credit by $495 to $7,430 for an eligible family with at least three children and the maximum adoption credit by $1,060 to $15,950.

The annual gift exclusion — the amount you can give to someone before you have to file a gift tax return — increases by $1,000 to $17,000. You don’t owe gift taxes until the amount you gift beyond that annual limit exceeds the lifetime estate and gift exemption limit, which is now $12,920,000, a whopping $860,000 from 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 consulting a tax professional to see how these changes are likely to affect you. Mid-year is often a good time to review these numbers and make adjustments so that you retain the appropriate amounts.

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. Catch-up contributions for those 50 and older increased by $1,000 to $7,500 meaning older people can contribute $30,000 in 2023.

Income limits also increased for contributions to Roth IRAs. The 2023 phase-out range is $138,000-$153,000 for singles and heads of household, compared to the 2022 range of $129,000-$144,000. For married couples applying together, the phase-out range is $218,000-$228,000, from $204,000 to $214,000. Additionally, the income limits for claiming the savings loan and deducting a traditional IRA contribution have been increased if you have access to a workplace plan.

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

Consider buying cheaper car insurance. Auto insurance premiums have increased as cars have become more expensive to repair and replace, 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 be relying on your inertia to charge you more.

Home insurance premiums are also rising, but a bigger problem could be insufficient coverage, says Amy Bach, chief executive of United Policeholders, an insurance-focused consumer advocacy group. According to the National Association of Home Builders, the cost of building materials has increased by more than 35% since the pandemic began. Unfortunately, the software insurers use often underestimates the cost of rebuilding, which means many homeowners are underinsured, Bach says. She suggests speaking to a local contractor to get a realistic, up-to-date estimate of what you could pay to replace your home. Compare this to your insurer’s number and consider increasing your coverage.

This column was provided to The Associated Press by personal finance site NerdWallet. Content is provided for educational and informational 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. Email: lweston@nerdwallet.com. Twitter: @lizweston.