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Sneaky Ways Inflation Affects Your Money in 2023

Inflation has a way of affecting almost every aspect of our finances. Big jumps in tax brackets could save you money, especially if you’re working and your increases, like those of most workers, haven’t kept pace with inflation. Plus, a $2,000 increase in 401(k) limits means you can save more money for retirement. On the other hand, a huge increase in the maximum income taxed by Social Security means that people with higher incomes will pay more FICA taxes. If you’re a homeowner, you’ll want to review your coverage because there’s a good chance you’re underinsured.

By now, you’re probably familiar with the most obvious ways inflation affects your finances. His money doesn’t go that far at the 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 combat inflation. Rates are also rising, albeit more slowly, on savings accounts.

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

BIG 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 joint returns and by $900 for single taxpayers. The standard deduction amounts 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 income hasn’t kept pace with inflation.

“It’s putting more money back into people’s pockets,” says Edward Karl, vice president of tax policy and advocacy at the American CPA Institute.

The IRS adjusted dozens of other tax provisions, raising the maximum earned income tax credit 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 annual gift exclusion, the amount you can give to someone before they must file a gift tax return, increases from $1,000 to $17,000. You won’t owe gift tax until the amount you give over that annual limit exceeds the lifetime gift and estate exemption limit, which is now $12,920,000, an increase of $860,000 starting in 2022.

However, people with higher incomes may pay more FICA taxes in 2023. The maximum wage taxed by Social Security will increase from $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 usually a good time to calculate these numbers and make adjustments to retain the proper amounts.

RETIREMENT CONTRIBUTIONS 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 under age 50. means seniors can contribute $30,000 in 2023.

Income limits have also increased for contributing to Roth IRAs. The 2023 phaseout 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 phaseout range is from $218,000 to $228,000, 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 work plan have been increased.

If you can, increase your retirement contributions to take advantage of these changes. In addition to the potential tax benefits, you’ll be helping to make your future more comfortable.

PREMIUMS ARE RISING, BUT YOU MAY NEED MORE COVERAGE

Consider buying cheaper auto insurance. Auto insurance premiums have increased as auto repair and replacement have become 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 inertia to charge you more.

Homeowners insurance premiums are also rising, but a bigger concern may be inadequate coverage, says 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 insurers use often underestimates rebuild costs, which means many homeowners are underinsured, Bach says. She suggests talking to a local builder to get a current and realistic estimate of what she might pay to replace her house. She compares that to her insurer’s number and considers increasing her coverage.

Liz Weston is a columnist for NerdWallet, a Certified Financial Planner, and the author of “Your Credit Score.” Email: lweston@nerdwallet.com. Twitter: @lizweston.

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