For some, fall is fantastic for its colors. For others it’s football, October baseball, or the few weeks when basketball overwhelms sports fans with viewing choices. Farmers bring in the harvest which we all celebrate with festivals and fairs.
For us financial planning aficionados, fall is all about open enrollment and a look to next year’s numbers. This year’s harvest, fertilized with high inflation, is bountiful.
A Big Raise
Let’s start with the big one. Nine in ten Americans are getting a raise next year of 8.7 percent in 2023.[i] That’s the amount Social Security benefits are increasing.
Wait, I’m not collecting, you may react. Will I still get the increase? The answer is yes. It’ll be baked into your future benefit.
It’s an annual click on your benefit’s ratchet. Rest assured that when it’s time to collect, the benefit will be at least 8.7 percent larger than it would have been without 2022.
Senior Bonus
For seniors the news gets a little better. A common complaint I hear is that what Social Security gives with its COLA, its cousin Medicare takes away with a premium increase.
Not next year. Not only is Medicare not raising its Part B base premium, but it’s decreasing the premium by $5.20 from $170.10 to $164.90 a month.[ii]
Take an average couple with 2022 Social Security benefits of $1,681 each. The benefit bump to $1,827, combined with the premium giveback, will produce $302 a month, pretax.[iii] That’s enough to cover the cost of a few 18-packs of eggs if the store is nearby.
The Taxes of Our Future
When it comes to taxes, bigger here is better. How can that be, you may ask?
We’re focusing on standard deductions and the size of the tax brackets.
Let’s stay positive and mine some nuggets of good news—like those provided by the IRS’s mandatory adjustments to more than 60 tax provisions.
2023 inflation adjustments will increase the standard deduction by $1,800 to $27,700 for married couples (and by $900 to $13,850 for single filers). The senior bonus jumped from $1,350 to $1,500 per person. The combined amount that a couple over 65 can earn before paying any taxes will be $30,700.[iv]
The Bracket Escalator
This table previews the actual changes in the tax brackets. If you want some good news in these dark days, rough out an estimate of how much this may save you in 2023.
[i] 96 percent of Americans will receive Social Security Benefits at some point in their lives. Kevin Whitman, Gayle L. Reznik, and Dale Shoffner “Who Never Receives Social Security Benefits? Social Security Bulletin, Vol. 71, No.2, 2011. Inflator from Social Security Administration press release.
[ii] Center for Medicare & Medicaid Services Fact Sheet, “2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts,” September 27, 2022. https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
[iii] Data from the Social Security Administration Fact Sheet attached to SSA press release of October 13, 2022 release. https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf
[iv] IRS provides tax inflation adjustments for the tax year 2023, October 18, 2022. https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
Go ahead, open your 2021 1040 and focus on line 11. This is your adjusted gross income (AGI), which also stands for all goes in.
If you’re one of the estimated 90 percent of Americans who now use the standard deduction,[i] place that on line 12c and then follow the instructions on line 14, which simply says subtract your deductions from your AGI. That’s your taxable income. Apply that to the brackets. Feel free to contact us if you want help.
Each of us is unique, of course, but I’d like to note a sweet spot. In general, hanging out in the 12 percent tax bracket puts a person in a tax-friendly place. If you’re under 65 and married, you can do that with AGI up to $117,150 in 2023.[ii]
[i] Lauren Ward “Standard deduction vs itemized deduction: Pros and cons, and how to decide,” Bankrate.com October 4, 2021. https://www.bankrate.com/taxes/standard-or-itemized-tax-deduction/
[ii] Calculations from IRS data cited in note 4.
First, the table means that, on average, one must give Uncle Sam only $0.09 cents on the dollar at most. In other words, depending on your state of residence, you may get to spend up to $910 for every $1,000 of your AGI if you’re retired and no longer funding Social Security and Medicare through FICA.[i]
Second, your capital gains and dividends are taxed at my favorite rate: 0 percent. This is how you turn an investment account into the tax equivalent of a Roth IRA.
Putting It into Dollars
A 66-year-old couple with an AGI in 2022 of $120,000, taking the standard deduction, will have taxable income of $91,400 and owe an estimated $11,342 in federal taxes. This is an average rate of 9.5 percent.
In 2023, this couple will pay an estimated $10,276 on taxable income of $89,300. That’s a savings of $1,066. As I said, it’ll help offset the high price of poultry products.
[i] Earned income is also subject to taxes to fund Social Security 6.20 percent and Medicare 1.45 percent. These are often referred to as payroll taxes. See the Social Security Administration Fact Sheet attached to SSA press release of October 13, 2022 release. https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf
Save More, Pay Less Tax
Speaking of saving, it’s going to be easy for working Americans to do more of it in a tax-favored manner in 2023.
One of the most effective ways to drive down AGI is to increase contributions to pre-tax retirement plans.
One of the best ways to keep taxes down in retirement is to contribute to Roth or back-ended retirement plans.
Health Savings Accounts accomplish both goals and create a pool of money for health expenses.
The MTV Solution
Like Billy Idol’s 1983 hit Rebel Yell, 2023 will allow you to do More! More! More!
If employed, you can put more into your workplace retirement plans. Contributions limits will jump by $2,000 to $22,500 for those under 50, with a catch-up of $7,500 for those over 50.
Roth and traditional IRA contribution limits will increase by $500 to $6,500, with another $1,000 for those over 50.[i]
Health Savings Accounts are set to bounce to $3,850 for individuals, with $1,000 to catch up for those over age 55.[ii]
The government restricts Roth IRA contributions if people make too much money. These caps are increasing as well.
In 2022, Roth contributions were prohibited once an individual earned $144,000 for taxpayers filing as single or head of household and $214,000 for couples. In 2023, these caps will increase to $153,000 and $228,000.[iii] (If you notice a penalty for being married, you are not delusional.)
Give Back May Be Good Sign
These jumbo boosts are one layer of silver linings on this year’s inflation clouds. Another layer, which I examined in my June 2022 article The Unicorn[TK(1] , is the outsized rate Uncle Sam was forced to pay on its Series I Bonds when it let inflation get out of control. This rate adjusts every six months based on the most recent three-month trend in inflation.
The bad or perhaps good news: this rate will drop from 9.62 percent annualized to 6.42 percent annualized for bonds purchased after November 1, 2022.[iv] We can only hope that this marks the beginning of the end of our post-Covid inflation. If prices stabilize, this year’s bumps will prove to be a one-time windfall. We can be grateful for small blessings.
Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.
Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
[i] 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500 IR-2022-188, October 21, 2022 https://www.irs.gov/pub/irs-drop/n-22-55.pdf
[ii] IRS.gov https://www.irs.gov/pub/irs-drop/rp-22-24.pdf
[iii] See note 4.
[iv] Medora Lee, “Buy I bonds now to lock in a record 9.62% for 6 months. On Nov. 1, the rate drops to 6.48%,” USA Today, October 20, 2022. https://www.usatoday.com/story/money/personalfinance/2022/10/20/i-bond-rate-drop-from-record-high/10536818002/
[TK(1]CRN202504-2238704
The Unicorn