Sneaky ways inflation could affect your money in 2023
By now, you’re probably familiar with the more obvious ways inflation affects your finances. Your money doesn’t go as far at the grocery store, for example. Credit card and other variable-rate debt is 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 inflation helps or hurts have gotten less attention. Here are some of the major changes to watch 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 jointly and by $900 for single filers. The standard deduction amounts in 2023 will be $27,700 for married couples and $13,850 for singles.
In addition, the IRS adjusted federal tax brackets upward by about 7%. The larger deduction, higher brackets and other changes mean most taxpayers will pay less in 2023, especially if their incomes haven’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 for the American Institute of CPAs.
The IRS adjusted dozens of other tax provisions, raising the maximum earned income tax credits by $495 to $7,430 for a qualifying family with at least three children and boosting the maximum adoption credit by $1,060 to $15,950.
The annual exclusion for gifts — the amount you can give away to an individual before you’re required to file a gift tax return — goes up by $1,000 to $17,000. You won’t owe gift taxes until the amount you give away above that annual limit exceeds the lifetime estate and gift exemption limit, which is now $12,920,000, up a whopping $860,000 from 2022.
Higher earners, however, may pay more FICA taxes in 2023. The maximum salary taxed by Social Security will rise by $13,200 to $160,200.
Consider using a tax refund calculator or consulting a tax pro to see how these changes are likely to affect you. Midyear is often a good time to run these numbers and make adjustments so you’re withholding the appropriate amounts.
Retirement contributions can rise
The amount people can contribute to 401(k) plans, 403(b) plans and other workplace retirement plans will rise by $2,000 to $22,500 for those younger than 50. Catch-up contributions for people 50 and older rose by $1,000 to $7,500, which means older people can contribute $30,000 in 2023.
The income limits also rose for contributing to Roth IRAs. The phaseout range for 2023 is $138,000 to $153,000 for singles and heads of household, compared with 2022’s range of $129,000 to $144,000. For married couples filing jointly, the phaseout range is $218,000 to $228,000, up from $204,000 to $214,000. In addition, income limits increased for claiming the saver’s credit and deducting a traditional IRA contribution if you have access to a workplace plan.
If you can, boost 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 rising, but you may need more coverage
Consider shopping for cheaper auto insurance. Auto insurance premiums rose as repairing and replacing cars got 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 may count on your inertia to charge you more.
Premiums for homeowners insurance are rising as well, 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 beginning of the pandemic, according to the National Association of Home Builders. Unfortunately, the software that insurers use often underestimates rebuilding costs which means many homeowners are underinsured, Bach says. She suggests talking to a local builder for a realistic, current estimate of what you could pay to replace your house. Compare that with your insurer’s figure, and consider increasing your coverage.
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If you haven't received a notice yet that your auto insurance rate is increasing, you can likely expect one is coming.
The General compiled a list of factors that may contribute to higher car insurance rates, including data from the Insurance Information Institute, the Bureau of Labor Statistics, the National Highway Traffic Safety Administration, and other industry sources and news coverage.
Shortages of parts and new vehicles, waves of retiring mechanics, and deadlier roadways are changing the automotive insurance landscape for insurers and you—the driver. That's on top of the fact that the value of new vehicles has skyrocketed since 2020, charting their largest gains in 2021 as Americans returned to offices, restaurants, and social events again, pushing up demand for both new and used vehicles.
New vehicles have sold for above sticker price for nearly a year and a half now, according to Kelley Blue Book. New cars cost 18% more in October 2022 than they did in October 2020, according to the BLS. Meanwhile, used car prices increased by 29% over the same time period.
Generally speaking, any form of insurance is premised on complicated financial schemes that balance cost and risk while also turning a profit and sheltering consumers' exposure to financial ruin. Most states have laws that require drivers to carry a minimum level of automotive insurance to help spread out risk.
When an insurer has to pay out more in claims than it takes in through premiums, the company could become insolvent and collapse. Therefore, insurance companies are constantly evaluating and adjusting the amount of money they need to collect in premiums—either semiannual or annual charges, often paid in monthly installments—to avoid taking losses.
Of course, insurers also evaluate how much to charge a client based on their assessment of how likely it is the client will trigger reimbursement for damages. And those factors can extend well beyond just the client's driving record to include their education level and occupation.
"Underwriting losses are expected to continue as more rate increases are needed to offset catastrophe and economic and social inflation loss pressures," Jason B. Kurtz, a principal at financial consulting firm Milliman, said at a virtual industry conference in November.
The Insurance Information Institute's chief insurance officer is projecting rates will have risen 8.8% over the course of 2022 and are on pace to rise another 8.9% in 2023. The institute points to difficult economic conditions as well as climate disasters as reasons companies are anticipating losses in the coming year. Hurricane Ida's impact has already bankrupted 11 insurance agencies since it made landfall in August 2021, and the aftermath of 2022's Hurricane Ian could do further damage.
