Econ Outlook: Tiny Rays of Light are Peeking Through Inflationary Clouds
2022 has (somewhat) unkindly delivered us a steady diet of dreary economic news. Higher interest rates, continuing inflation, disheartening declines in investment and retirement portfolio balances, and so on. But there's hope on the horizon. Let's take a look at bad, good and promising indicators that, like tiny rays of sunshine, could help to brighten our economy - and financial outlooks - in the next few months. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Bad: Rate Hike
I like getting the bad news out of the way first. So here goes...
Despite the fact that the Dow Jones Industrial Average (DOW) gained 14% in October - its best month since 1976 - the Fed still increased interest rates .75% in November. This benchmark rate is the highest it's been since 2008, which influences all sorts of borrowing costs and causes folks to pay more for credit cards, auto loans, mortgages, etc.
On the flip side, CD, bond, and money market account owners are finally enjoying a bit of meaningful interest income from their cash and near cash investments. That is, if they’ll finally divorce themselves from those bank savings accounts that continue to pay near-zero interest rates.
Good: SS Increase
A significant and welcome increase in Social Security checks will be forthcoming in 2023. This is very good news for the older folks among us.
Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans will increase 8.7% in 2023. This is the largest cost-of-living adjustment (COLA) since 1981. The new COLA will start for over 65 million Social Security beneficiaries in January 2023. Increased payments to more than 7 million SSI beneficiaries will begin on December 30, 2022.
By the way, Medicare premiums are drifting downward (if only momentarily) while Social Security benefits are increasing, which will provide many with additional peace of mind. However, another adjustment that takes place in January will be the maximum amount of earnings subject to the Social Security tax – an increase from $147,000 to $160,200. Uncle Grabby just can’t help himself when it comes to taking a few more of your hard-earned dollars.
Promising: IRS Updates
The IRS has published its own annual inflation updates for 2023 tax rules and regulations. It's not very entertaining reading material, but does feature some potential financial relief. These are tiny points of sunlight in the otherwise dark shadows of 2022.
NOTE: The taxable income ranges in each of the tax brackets also adjust annually. Go to the applicable IRS tax rate tables to determine how this might affect your tax bill as well. Take advantage of each item that impacts you directly.
Here's a summary:
2023 Standard Deduction Amounts: Single or married filing separately: $13,850; Married filing jointly: $27,700; Head of household: $20,800. The additional standard deduction for folks who have reached age 65 (or who are blind) is $1,500 for each married taxpayer or $1,850 for unmarried taxpayers.
Roth & Traditional IRA Contribution Limits will increase to $6,500. The catch-up contribution limit for people 50 or over does not get inflation adjustments and will remain at $1,000.
401(k), 403(b), 457(b) Contribution Limits: The salary deferral limit for 401(k) and other similar plans will increase to $22,500.The catch-up contribution limit for 401(k) and other similar plans for people 50 and over will increase to $7,500.The maximum possible contribution for defined contribution plans (e.g., for a self-employed individual with a sufficiently high income contributing to a solo 401(k)) will increase to $66,000.
Health Savings Account Contribution Limits: For 2023, the maximum HSA contribution for somebody with self-only coverage under a high deductible health plan is $3,850. The limit for someone with family coverage under such a plan is $7,750.The HSA catch-up contribution limit for people 55 and over is not inflation adjusted; thus, it remains at $1,000.
Long-Term Capital Gains and Qualified Dividends Tax Rates: 0% tax rate if they fall below $89,250 of taxable income if married filing jointly; $59,750 if head of household; or $44,625 if filing as single or married filing separately. 15% tax rate if they fall above the 0% threshold but below $553,850 if married filing jointly; $523,050 if head of household; $492,300 if single; or $276,900 if married filing separately. 20% tax rate if they fall above the 15% threshold. Per the tax code, qualified dividends are ordinary dividends that meet specific criteria to be taxed at the lower long-term capital gains tax rate rather than at higher tax rate for an individual's ordinary income. The rates on qualified dividends range from 0 to 23.8%.
Annual Gift Tax & Estate Tax Exclusion: For 2023 the annual exclusion for gifts will be $17,000. The estate tax exclusion will increase to $12,920,000 per decedent.
Pass-Through Business Income: For 2023, with respect to the 20% deduction for qualified pass-through income, the threshold amount at which the “specified service trade or business” phaseout and the wage – or wage & property – limitations begin to kick in will be $364,200 for married taxpayers filing jointly…and $182,100 for single taxpayers, people filing as head of household, and for married people filing separately.
The Alternative Minimum Tax exemption amount is increased to $81,300 for single people and people filing as head of household; $126,500 for married people filing jointly; and $63,250 for married people filing separately.
Without these annual Social Security and IRS inflation adjustments, particularly in times like right now, our income would suffer and our tax bill would increase even more. Individually, they may not amount to much, but collectively they make a difference in our quality of life.
Meanwhile, keep on trucking. This Bear, too, will go into hibernation one day.