Trick or Treat? Inflation Adjustments for 2023
Psst… I have a secret to tell you. Are you ready? Can you promise not to tell anyone? Ok, here goes:
Inflation is real, it is terribly sticky, and it never was going to be “transitory”.
Ok ok, so maybe it’s not much of a secret, but it is a reality that is, directly and indirectly, impacting markets, the economy, and you. Now as we approach both the end of the year AND a mid-term election, the US Government is scrambling to buy your vote (ahem, excuse me) “ease the impacts of inflation” with even more inflationary policy. Woohoo!
The changes set to take place in the new year, while seemingly positive for each of us as individuals, are terrible in terms of combating the inflation problem we are currently confronting. But as they say, “It is what it is.” For this reason, I wanted to bring these changes to your attention so you are aware of the opportunities that may exist to benefit your financial well-being.
The following notable changes were recently announced by the Social Security Administration (SSA), the Centers for Medicare & Medicaid Services (CMS), and the Internal Revenue Service (IRS):
From the SSA:
8.7% increase in Social Security Benefits and Supplemental Security Income (SSI)
From the CMS:
Medicare Part B premium will decrease by $5.20, to a standard monthly premium of $164.90
The annual deductible for all Medicare Part B beneficiaries is $226.00, reduced by $7 from 2022 levels
From the IRS:
Annual 401(k) maximum contribution limit will be raised by 9.76% or $2,000, to a total of $22,500 in 2023
For 401(k) participants over the age of 50, the total contribution limit is $30,000 including the $7,500 catch-up provision which increased by 15.38% or $1,000
The Individual Retirement Account (IRA) contribution limit will increase by 8.3% or $500, to a total of $6,500 for 2023
The Individual Retirement Account (IRA) catch-up provision for those age 50 and up is not adjusted for inflation. Therefore, it remains $1,000 for a total contribution limit to an IRA of $7,500 for those age 50 and older.
The standard deduction for married couples filing jointly for tax year 2023 rises to $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022
The annual exclusion for gifts increases by $1,000, to $17,000 for calendar year 2023.
There are slight increases to the marginal tax bracket income limits
There are additional changes to less common items such as Alternative Minimum Tax, Foreign Earned Income, Earned Income Tax Credit, etc. which can be found in the source link (below).
One very significant item of note, regarding social security, is that this massive 8.7% COLA for 2023 comes on top of the 5.9% increase in benefits in 2022. While those who are under the age of 50 should not focus or rely too heavily on Social Security as a planning tool, those who are much closer to beginning benefits should be very strategic in assessing whether taking benefits early is truly in your best interest. Yes, politicians will use this as a fear-stoking mechanism, leading you to take benefits early in fear of the Social Security benefit pool (OASDI) running dry, but this is a very low (< 2 standard deviation) probability. Therefore, for someone whose full retirement benefit age (FRA) is 67, starting benefits at the earliest age possible will lead to a 30% reduction in benefits. However, someone who waits will also receive the COLA adjustment to their implied benefit, even if they are not yet receiving it. Therefore, taking benefits early means you would have had an increase of 5.9% and then the upcoming increase of 8.7% on an initial base that was reduced by 30%. The compounding of these COLA increases is dramatically reduced as compared to the individual who waits until full retirement age to access their benefits. While this is not specific to you or your individual plan, and there are many circumstances that should be considered when planning around social security, this is something that should be taken into account for anyone who is close to applying for benefits.
If you would like to speak specifically about your social security benefits, and how to optimally plan to maximize the benefit you are entitled to, after years of paying social security taxes, please give me a call. Or if you have any questions about any of the other changes noted above, I invite you to please reach out by phone or email. Have a great day and Happy Halloween!
Source Links:
SSA: https://blog.ssa.gov/social-security-benefits-increase-in-2023/
IRS: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
