If there’s a silver lining to above average inflation, it’s that we may end up paying a bit less in taxes because of it.
Below we list out 6 ways that inflation could cut your taxes in 2023.
Given high inflation in 2022, the IRS has increased the amounts that taxpayers can contribute into their retirement plans. Below are graphics highlighting the increase in contribution limits and income ranges where phaseouts begin for each type of account:
Retirees may have more room to harvest capital gains at a 0% tax rate as we head into 2023. Capital gain taxes are based on total taxable income so the larger standard deductions in 2023 will also reduce total capital gains tax.
The IRS links the tax brackets to inflation each year and with the previous 12 months of inflation, taxpayers will see expanded tax brackets heading into 2023.
As we can see, taxpayers now have more room to run in their marginal tax bracket. Notice the 24% tax bracket for a married couple; with taxable income of $364,200, they will pay almost $2,000 less in income tax in 2023 than in 2022 assuming their income stays the same. Taxpayers should enjoy these increased brackets as they are currently set to revert at the end of 2025.
For 2023, a married couple (both over age 65) will be eligible to receive a $30,700 standard deduction on their income. This will encourage even more taxpayers to take the standard deduction in 2023 and beyond until the tax law expires at the end of 2025.
The increase in the estate and gifting exemption will allow taxpayers to pass more money on to their families each year going forward. The IRS has ruled that if taxpayers apply their current estate credit before 2025 when the exemption is set to revert, there will be no claw back. In other words, the IRS is basically informing taxpayers that the current estate exemptions are a “use it or lose it” benefit.
Approximately 70 million Americans will see an 8.7% increase in their Social Security benefits in 2023. The average monthly increase will be $140 / monthly. In addition to increased Social Security benefits, US taxpayers on Medicare will also see their monthly premiums decline in 2023 adding a bit of extra cash to their pockets.
Perhaps, but not nearly as much as you may think. Up to 85% of one’s Social Security benefits can be subject to taxes and if payments increase, taxpayers may be subject to more tax on their benefits. Let’s run through a quick calculation and see that this is not necessarily the case:
Above we notice that in 2022, 64.7% of the taxpayers Social Security benefit was taxable. In 2023 after receiving an 8.7% raise, 62.9% of the benefit was subject to tax. Under these circumstances, the taxpayer benefited from a higher Social Security check and was taxed on a smaller portion of that amount, not including the reduction in the Medicare monthly premium.
Increased inflation has hampered economic growth and reduced assets prices in 2022. Looking forward, not all is lost as investors & taxpayers now have more room to save, potentially lower tax liabilities and higher yields on fixed income investments. Revisiting your savings plans and tax projections should be top of mind as 2023 kicks off.
Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a tax professional or your personal financial advisor before implementing any tax strategies.
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