Finding the Silver Lining Amidst Rising Interest and Inflation Rates

Times are tough, but it's not all bad. Here are some specific ways to improve your financial situation in 2023.
Kenny Eliason Majdojsmmoo Unsplash

Between bear markets in both stocks and bonds and mortgage rates doubling in 2022, is there any good news out there? Believe it or not, there is. Because of the massive rise in inflation this year, starting January 1, 2023, the Federal government is increasing Social Security payouts, raising 401k and IRA contribution limits, expanding the standard tax deduction, and increasing estate tax and annual tax-free gifts limits. For the first time in 14 years, you can also earn 4% on short-term treasury bills. Taking advantage of these changes next year could help you financially. According to the Wall Street Journal, here are some specific ways to improve your financial situation in 2023.

READ — What Does a Recession Mean for Your Finances? 

Social Security and Payroll Tax

Thanks to inflation this year, Social Security checks will be 8.7% higher than in 2022, the biggest increase in 40 years. For retirees, the average check will go up from $1,669 to $1,814. The Social Security payroll tax, which applies to W2 earnings, will go up 8.9% from $147,000 to $160,200, allowing taxpayers to shield an extra $13,200 from being taxed.

READ — Mapping Out Financial Success with Retirement Planning

Bigger Standard Tax Deduction, Higher Tax Brackets Limits, and Higher HSA Amounts

The standard personal tax deduction increases 7% next year, going from $12,950 to $13,850 for individuals and from $25,900 to $27,700 for couples. The HSA healthcare flexible spending account amount will go up from $2,850 to $3,050. All the marginal tax brackets have been adjusted 7% higher to reflect higher inflation. All these changes will help taxpayers keep more of their income.

Higher Estate Tax Limit and Annual Gift Change

Individuals will be able to transfer $12.92 million to their heirs tax-free during their lifetimes. The old amount was $12.06 million. This is a 9.3% increase. Combined couples can give away $25.84 million in 2023. However, this estate tax law is set to revert back to $5 million adjusted for inflation on January 1, 2026, when the 2017 tax cuts expire.

The annual tax-free gift increases from $16,000 to $17,000 next year. Married couples will be able to give away a total of $34,000 a year tax-free. These gifts can be a great way to reduce the size of your estate, particularly if you make them on an annual basis.

Higher 401k and IRA Contribution Limits

There is a 10% increase in the amount of money people can contribute to their 401k(s) in 2023. The limit for 401ks last year was $20,500; in 2023, it will go up to $22,500. The IRA limit will increase by 8% or $500 (from $6000 to $6,500). If you are over 50, the amounts are even higher: $7,500 from $7,000 last year.

Three-Month Treasury Bills Yield 4%

You haven’t been able to earn 4% on short-term treasury bills since 2008. Today, because of the much higher Fed Funds rate, the Federal government is paying 4% on 3-month treasury bills. A year ago, it was practically zero. If interest rates continue to rise, you can reinvest at a higher rate or get your money back when these bills mature. If you want to have 6-9 months of cash in reserve, treasury bills are a great alternative now. Cash is no longer trash.

It’s not all bad news heading into the new year. These inflation-adjusted changes and higher short-term treasury rates are a real benefit to Americans. And suppose the Federal Reserve is successful in bringing inflation down from 8.2% today to a more manageable level in 2023. In that case, we could potentially see a relief rally in both the stock and bond markets and a stabilization in mortgage rates.

READ — Choose Your Own Adventure: What’s Your Investment Path?


Important Disclosure:

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.

Categories: Business Insights, Finance, Web Exclusives