How to Plan for the IRS & SSA Policy Changes

Rising costs and high inflation are changing how much we pay for things. Federal organizations such as the Internal Revenue Service and the Social Security Administration are updating their policies to combat the squeeze on American wallets. These include an 8.7% increase in Social Security Benefits, updated tax brackets, and significantly increased deferral options on 401ks and IRAs.

Social Security’s Cost-of-Living Increase

Starting in January, the Social Security Administration is increasing benefits with a cost-of-living adjustment of 8.7%. The average monthly benefit will increase by about $140. Over 70 million Americans receive either Social Security, Supplemental Security, or both. If you are one of those people, you can log into your My Social Security account in December to review your specific notice and how much your income will increase. If you have not opted out of mail notices, you will also receive a paper copy in the mail.

According to William Coxe, Private Client Advisor, “The Social Security Administration’s announcement of an 8.7% COLA increase for 2023 is the highest in 40 years. This tops the 5.9% increase in 2022. Finally, we are seeing some good news about inflation, with this 14.6% increase in 2 years.”

“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room. This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned,”

Kilolo Kijakazi

Acting Commissioner, Social Security Administration

Tax Law Changes

Updated Tax Brackets

The IRS has updated the tax brackets and standard deductions for 2023. The tax rates will remain the same. The tax brackets increased by about 7%.

Even if this does not put you in a higher bracket, this change can impact you by increasing the amount of your income that will be taxed at a lower rate.

Tax Rate 2022
Single
2023
Single
2022 Married Filing Jointly 2023 Married Filing Jointly
37% for incomes over: $539,900 $578,125 $647,850 $693,750
35% for incomes over: $215,950 $231,250 $431,900 $462,500
32% for incomes over: $170,050 $182,100 $340,100 $364,200
24% for incomes over: $89,075 $95,375 $178,150 $190,750
22% for incomes over: $41,775 $44,725 $83,550 $89,450
12% for incomes over: $10,275 $11,000 $20,550 $22,000
10% for incomes under: $10,275 $11,000 $20,550 $22,000

Increased Standard Deductions

Standard
Deductions
2022 2023
Single $12,950 $13,850
Married * $25,900 $27,700

* Married, filing jointly

Updated Tax Rate for Capital Gains

Tax Rate 2022
Single
2023
Single
2022
Married*
2023
Married*
20% for incomes over: $459,751 $492,301 $517,201 $553,851
15% for incomes over: $41,676 $44,626 $83,351 $89,251
0% for incomes under: $41,675 $44,625 $83,350 $89,250

Higher standard deductions lower your taxable income. (Taxable income is your adjusted gross income minus either standard or itemized deductions, whichever is greater.) This may push you into a lower tax rate for capital gains, which has also been updated for 2023.  

If your joint income after deductions is less than $83,350, you will fall into the 0% tax bracket, allowing you to realize gains without a tax penalty. Of course, if your income is higher, you may want to look at utilizing tax-loss harvesting to offset your taxable gains.

The IRS has implemented several other updates to help offset rising costs. These include increasing estate exclusion amounts, the annual gifting exclusion, and contributions to health flexible spending arrangements and medical savings accounts. To learn more about how these changes may impact your tax bill in 2024, you can visit the IRS’s website. We also encourage you to work with a tax professional and your advisor to be sure you can plan for the next year with confidence.

Retirement Plan Increases

In addition to the increased tax brackets and deductions, the IRS has also upped the contribution limit for 401(k)s and IRAs in the largest dollar increase since the limits began being indexed to inflation in 2007.

401(k) plan limits are increasing by $2,000 from $20,500 to $22,500.

IRA contribution limits are increasing by $500 from $6,000 to $6,500.

This almost 10% increase is a great opportunity for individuals who are contributing to 401(k) retirement plans to look for options to increase their contributions and bolster their savings.

Overall, these changes are an ideal time to reevaluate saving and spending habits. If your Social Security income is going to increase, it might provide the opportunity for you to slow withdrawals from another income stream. If you can contribute more to retirement this year, it may be helpful to talk to your financial advisor about how those higher savings could pay dividends in retirement.

Small details like retirement withdrawals, tax brackets, and gift exclusions are part of a solid financial plan. If you do not have a plan in place, make it a priority to call your advisor and discuss how to start the process. You can read up on what creating a plan looks like here.

Greenwood Capital’s advisors focus on keeping track of the details that affect their clients’ plans, including checking in regularly to account for various life changes such as a new baby or moving across town. Meanwhile, our investment committee continues to monitor global headlines and economic data as they discuss the market in 2023 and beyond.

We are committed to setting up our clients for success by reacting to changes that occur on a global, national, regional, and even personal level.

Greenwood Capital is an SEC registered investment advisory firm. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on solely for tax, legal or accounting advice. The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.  The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.

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