With inflation (CPI) running a hot 8.3% for the twelve months ended in August, the Federal Government is busy adjusting numerous spending & tax parameters for the new year. Social Security is leading the way with a 8.7% cost-of-living adjustment for 2023.
Here are some of the other changes due to inflation:
IRS tax bracket “break points” are going up 7.0%, on average.
The standard deduction will now be $27.7K, up 6.9%.
The IRS exemption for financial gifts is rising to $17K, up 6.4%.
IRA contribution annual limits will be $6.5K, up 8.3%. This is the first increase since 2019 for IRAs.
Healthcare Flexible Spending Account limit will rise to $3.05K, up 7.0%.
The IRS Estate Tax threshold is rising to $12.92 million dollars in 2023. That’s about a 7.1% increase from last year.
All of these increases represent 35-40 year records. We haven’t had inflation like this since the early 1980s. We are truly seeing the worst inflation in the last 40 years – if you believe the veracity government’s inflation calculations!
You’ll note that other than Social Security, none of the other changes seem to keep up with inflation. Where tax & savings changes don’t keep up with the cost-of-living, it’s the federal government giving themselves a little raise, without changing any laws, by generally exposing greater amounts of income to higher tax rates.
That extra margin seems small, but it becomes significant when high inflation happens year-after-year, as it now seems to be happening. Last year, when the CPI was 7.0%, most of these changes were in the 3% range. This tax & savings “slip” is something few retirees would have planned for.
Are you surprised by the changes coming for 2023?
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MrFireStation 
No error, misstep, and malfeasance of our federal government surprises me anymore. When they are not busy feathering their own partisan nests, they are busy stoking financial overspending, overtaxation, and under delivery. In any other career, they would be fired. In lifetime sinecures burrowed in the beltway, they point fingers, defer blame, reject reason, justify themselves and their parties via “news” and cry havoc with nary a worry about costs. We, the people, can take pride for giving them job security despite enduring abject failures.
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In light of the partisan acting government agencies that aren’t supposed to be partisan, I am really hoping that 2024 brings us a President who has no trouble saying “You’re Fired” to whole government agencies.
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Both of the two candidates for President will come from the two ruling parties. Neither will be interested in doing anything outside of their party’s own self-interest. We, the people, remain observers in a government of the government, by the government, and for the government.
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Yes, the government exists primarily for itself at this point. I’m guessing Lincoln’s vision of a government “by the people & for the people” went out about the same time as buckle shoes.
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I wish too, but I don’t think any of the candidates will actually do that. Only the Paul’s (Ron & Rand) and Perot have ever gotten as far as even proposing that on a debate stage and they were roundly cast as idiots by the rest of their parties & the media.
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“Sinecures” – what a great word of the day! “A position requiring little or no work but giving the holder status or financial benefit.” I hadn’t heard that before, but am glad someone invented it!
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There was a civil serpent ‘working’ in his government office. One day he opened a file drawer that hadn’t been opened in 30 years and he found a corked bottle inside.
He pulled the cork out and genie appeared, who gave him three wishes.
For his first wish, the civil serpent wished for a beach front mansion on Carbon Beach. And poof he was instantly transported into his mansion on Billionaires Row.
For his second wish, the civil serpent wished for a trophy wife and poof a trophy wife instantly appeared by his side.
For his third wish, the civil serpent wished that he would never have to work again for the rest of his life and poof he was instantly transported back to his government office.
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You had me at “civil serpent”!! 🙂
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I saw the same sort article over the weekend and immediately concluded that the government has short sheeted us again. They have been doing this for at least the last four decades. The situation is worse the numbers in the difference between the 8.3% inflation rate because the real number is likely in the teens.
Another area where numbers really take a toll are tax credits with phaseouts such as the American Opportunity Tax Credit not being adjusted at all for inflation. The taxability threshold for Social Security has not been adjust since 1984. The income threshold for the Alternative Minimum Tax hasn’t been adjusted since 1969. The maximum Home Mortgage Interest Deduction has not been adjusted since 1986.
Many of the above mentioned tax gimmicks were originally sold to the public as taxing the rich. By not adjusting phaseouts and thresholds, people in the Middle Class are now paying rich person’s tax rates. This is how taxes became my household’s number one budget item. It was not this way in the 1980s.
Ending on a less bad note, the maximum 401-K Individual Contribution for an over 50 was raised to $30,000 from $27,000, which is a 11.1% increase. If you have self-employment 1099 income and want to reduce your current taxable income, I highly recommend setting up a Solo 401-K which next year will allow you to contribute $30,000 as your individual contribution and another 20% of your gross profit after subtracting half of the self-employment tax. If you wife helps you with your business, you can contribute the same amount for her as well. Vanguard Small Business Services really makes setting up a Solo 401-K easy.
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Solo 401K is on my list of things to discuss with our accountant next month. We have a Self-Employed Pension, but I’m not sure what the differences are. Will find out!
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Assuming you meant a SEP-IRA. I will define Self-Employment Net Income as gross profit minus 1/2 self employment tax.
The contribution limit for a SEP-IRA in 2023 will be $66,000. However, you can only contribute 25% of your SE Net Income. So it takes $264,000 of net income to max out at $264,000.
For Solo 401-Ks, the 2023 maximum contribution limit for over 50 is $73,500. You can contribute as your individual contribution $30,000, up to 100% of your SE Net Income . You can also contribute up to 20% of SE Net Income as the employer’s contribution. Maxing out the $73,500 for just yourself would require $217,500 in SE Net Income. You can save even more if you contribute on behalf of your wife as well.
The advantage is being able to save a larger percentage of your income.
The final bit is that setting up a Solo 401-K can appear daunting because of the requirements to draft and adopt 401-K Plan Adoption and Trust Plan Agreements, that typically are provided by a third party for a fee. Vanguard Small Business retirement services will interview you over the phone and will produce the required documents that you have to sign without any additional fees. Took me less than a half hour to setup.
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Sorry, yes, SIMPLIFIED employee pension. I’ll check out the Vanguard service – that sounds useful, although I only really have board service income. I stopped doing any consulting with the CV19.
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I earn about $35,000 consulting each year. We have plenty of pension and social security income thus there is no “need” of the consulting income, I do it for intellectual stimulation and to share knowledge with younger people.
I don’t add to IRA’s or set up a SEP, because I won’t be in a smaller income tax bracket when at age 72 I will be required to take distributions from tax deferred accounts. I might as well pay the possible lower tax rate now rather than set up yet another retirement income account while I am in retirement.
I have to say that it is refreshing to read this blog as opposed to the local political drivel. We have on the ballot $850M bonds to repair or build facilities in our Community College District paid for by property owners, an extension of the Library District tax so that local government can spend library money on other things, and a rent control measure which would create a rent control board of council appointees who will be paid $48,000 per year for a part time board position in a city in which council members receive a stipend of $15,000. Baby boomers better get out and vote as the socialistic young have loud voices
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We don’t get many referendums on the ballots in MN. Our system doesn’t make those easy. I guess that saves us from all of the “political drivel” that accompanies those, but I know the politicians just do what they want without our input. 🙂
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The propositions can be dreadful because they are often worded in a manner that is designed to cause one to vote the opposite of the way they think they are voting. Layer on false advertising designed to trick low information voters into voting for something with the promise of freebies.
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I am voting NO on every single Proposition. The irony of sacking the local property owners for a Community College is that very few of the local students go to the local CC.
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In Europe we had 100% daily inflation. So if you change 100$ today tomorrow you can’t buy even egg, but if you change 50 cent’s daily you can eat.
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Yikes. Was that around the time of WWII? Or, more recently in some countries?
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