With inflation in 2022 hitting levels that haven’t been seen in decades, many people have experienced challenges related to their personal finances this year. The cost of food, gas, housing, and all the other necessities of life have gone up 10% or more in the past 12 months, but wages on average have only increased by 5% in the same period.
Fortunately, there is good news. Not only is the pace of rising inflation starting to slow down, but there are also a number of government initiatives taking effect in 2023 that will help provide some relief from higher prices.
Here is a summary of some of the changes coming next year that will help the personal finances of many people. Not every change will impact every person, but just about everyone will benefit from at least one or more items on the list.
Virginia Minimum Wage Increase
The first item on the list is actually the result of a law passed in 2020 before inflation started increasing. The law scheduled a series of raises to the minimum wage in Virginia, and the next raise on the schedule takes effect January 1st, 2023. It increases the minimum wage by $1, making it $12 starting on that date.
That means that a full-time worker making minimum wage would make about an additional $160 every month—not an insignificant amount for someone living paycheck to paycheck.
New Tax Brackets
While the minimum wage increase only directly affects low-wage workers (and small businesses who hire them), another change starting in January of 2023 affects even the wealthiest Americans. That would be an increase in the taxable income thresholds of all federal income tax brackets—even the top tax bracket of 37%.
This means that everyone who pays income taxes in more than one bracket will see more of their earnings taxed at a lower rate starting in 2023. You can see a list of all of the updated brackets on the IRS website.
Standard Deduction Changes
In addition to the top amounts of all tax brackets, the IRS is also increasing the standard deductions for both single and joint tax filers in 2023. The standard deduction for single filers will increase by $900 to $13,850, and the deduction for married taxpayers filing jointly will increase by $1,800 to $27,700.
In order to see an immediate benefit in January of 2023 from the changes to the tax brackets and standard deduction, workers who have taxes withheld from their paycheck by an employer will likely need to make adjustments to their withholding amounts. The IRS has a withholding calculator on their website to assist in estimating the correct amount. If no adjustments are made, workers won’t see the benefit from these changes until they file their 2023 tax returns in 2024, at which time they would get a refund if appropriate.
Social Security Cost-of-Living Adjustments
Senior citizens who receive payments from the Social Security program will see an 8.7% increase in their benefits starting in January. This cost-of-living increase is tied to inflation and is the largest annual increase that any beneficiary alive today has seen.
Increased 401(k) Contribution Limits
Another IRS increase tied to inflation relates to the amount of pretax money that people can contribute each year to a 401(k) retirement plan. In 2023 the amount will increase to $22,500 (up from $20,500 in 2022). Other retirement plans will also have higher contribution limits in 2023.
Other Possible Changes for 2023
Inherited IRA Distribution Changes
A proposed rule at the IRS would, if it takes effect, change withdrawal requirements for people who inherit an IRA from someone who is not their spouse. In short, the rule would require annual distributions for 10 years following the IRA owner’s death, with the final distribution emptying the account. This rule has not yet been finalized, but if it does become policy, it could take effect in 2023.
Student Loan Forgiveness
The last item on our list is included in the “possible changes” section even though it has already been passed into law, due to the fact that it is being challenged in court by six Republican-led states. This is the student loan forgiveness program included in the Inflation Reduction Act, which would allow people who earned less than $125,000 in 2020 or 2021 (or married couples who earned less than $250,000) to have up to $10,000 worth of federal student loans forgiven.
Although many applications for the program have been accepted, recent court decisions have put a stop to the acceptance of new applications as of the publication of this post. Things could easily change if a higher court reverses decisions made by a lower court, so check the latest developments to see where the program stands if you are eligible.
Taken together, all of the items above could represent a significant change in the finances of many American households. It can be difficult to keep track of changes to personal finances and tax laws in any year, but that is even more true during times of uncertainty and volatility. That’s yet another reason to seek the help of a CPA to help you understand how any changes impact you personally and ensure that you maximize any benefit you can get from them.