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The Sneaky Ways Inflation Will Affect Your Money in 2023

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By now, you’re probably already familiar with the more obvious ways inflation affects your finances. Your money doesn’t go that far, like at the grocery store. Credit cards and other floating-rate debt are getting more expensive as the Federal Reserve raises short-term interest rates to fight inflation. Rates are also rising, albeit more slowly, on savings accounts.

But other ways in which 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 has increased the standard deduction, which more than 90% of taxpayers receive, by $1,800 for married couples filing jointly and by $900 for single filers. The standard deduction in 2023 will be $27,700 for married couples and $13,850 for singles.

In addition, the IRS adjusted the federal tax upwards by about 7%. A larger deduction, higher brackets and other changes mean most taxpayers will pay less in 2023, especially if their incomes can’t keep up with inflation.

“It gives people pockets,” says Edward Karl, vice president of tax policy and advocacy for the American Institute of Certified Public Accountants.

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

The annual gift exemption—the amount you can give to an individual before you need to file a gift tax return—is increased by $1,000 to $17,000. You will not pay taxes on gifts until the amount you give in excess of this annual limit exceeds the lifetime inheritance and gift exemption limit, which is currently $12,920,000, a whopping $860,000 more than in 2022.

However, those with higher incomes may pay more FICA taxes in 2023. The maximum wage subject to Social Security tax will increase by $13,200 to $160,200.

Consider using the tax refund calculator or consult with a tax professional to find out how these changes may affect you. The middle of the year is often the right time to review these numbers and make adjustments so you withhold the appropriate amounts.

Pension contributions may rise

The amount people can contribute to 401(k), 403(b), and other workplace retirement plans will increase by $2,000 to $22,500 for those under 50. Catch-up contributions for people aged 50 and over have risen by $1,000 to $7,500, meaning seniors could contribute $30,000 in 2023.

Income limits have also gone up for Roth IRA contributions. The 2023 phase-out range is $138,000 to $153,000 for singles and heads of household, compared to the 2022 range of $129,000 to $144,000. For married couples applying jointly, the phase-out range is $218,000 to $228,000, increasing from $204,000 to $214,000. In addition, income limits have increased for a saver loan and a traditional IRA contribution deductibility if you have access to a plan in the workplace.

If you can, increase your pension contributions to take advantage of these changes. In addition to potential tax benefits, you will help make your future more comfortable.

Premiums are rising, but you may need more coverage

Consider buying cheaper auto insurance. Auto insurance premiums have risen as car repairs and replacements have become more expensive, but you may be able to find a better deal, especially if you’ve been with your current insurance company for a while. Far from rewarding loyalty, insurers can count on your momentum to charge you more.

Homeowner insurance premiums are also on the rise, but inadequate coverage may be a bigger problem, 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 Home Builders Association. Unfortunately, the software that insurers use often underestimates restoration costs, which means many homeowners aren’t half-insured, Bach says. She suggests talking to a local developer to get a realistic current estimate of how much you could pay to replace your home. Compare this to your insurance company’s figure and consider increasing your coverage.

This article was written by NerdWallet and originally published by The Associated Press.

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